THE baht broke below the 40-to-the-dollar level yesterday and Thai stocks soared 8.17
per cent in response to US signals that it would cut interest rates for the first time in
almost three years.
But analysts cautioned that hopes of a Thai recovery on the back of the US interest
rate cuts are likely to be premature since the local economy, which is expected to
contract by 7-8 per cent this year, will need a rigorous stimulus package to prevent it
from sliding deeper into recession.
''I don't think the US rate cut will help the Thai economy that much since we've got
problems of our own, although it might help to reduce interest rate differentials,'' said
a former governor of the Bank of Thailand.
''What we need now is a stimulus plan, which must be implemented with a boost in
exports. Export earnings will help expand the monetary base, and thus would genuinely
improve liquidity in the financial system,'' he added.
In testimony before the Senate Budget Committee on Wednesday, Alan Greenspan, the US
Federal Reserve Board chairman, hinted at a possible rate cut when the Fed policy-makers
meet next Tuesday, saying that world leaders needed to be sensitive to deepening signs of
global distress.
He was quoted as saying that the central bank was ready to act to prevent the widening
global turmoil ''from really spilling over and creating some very significant difficulties
for all of us''.
The baht strengthened significantly yesterday gaining 1.88 per cent to trade between
Bt39.71 and Bt39.77 to the US dollar, against Wednesday's Bt40.47, before closing at
Bt39.80. The downward trend in interest rates also helped boost equity prices,
particularly energy and telecom stocks, in a market that has been traditionally
liquidity-driven.
Thai interest rates have been falling sharply over the past month, with ample liquidity
but without much actual lending due to concerns over the growing non-performing loans in
the system. Bangkok Bank yesterday announced it would cut its prime rate by 0.25 of a
percentage point to 14.50-15.25 per cent, effective next week.
Andy Xie and Stephen Jen of Morgan Stanley Asia said the impact of the US interest rate
cuts on Asia, excluding Japan, would be limited as it would not automatically lead to the
flow of liquidity back into the region.
They said that normally, liquidity created in the G-7 countries can be channelled
through to Asia through interbank lending, direct lending to Asian corporates or outright
takeovers and government lending. But banks in Asia are in a shambles with rising
non-performing loans, which has created overhanging debt and a severe liquidity trap, they
said.
Companies aren't likely to get fresh liquidity from the US or other G-7 countries
because they ''are already highly geared and facing declining profits or losses'', they
said.
Government borrowings are more viable given that premium risks of the emerging markets
are so high that lower interest rates in the US or other G-7 countries might have limited
benefits, they said.
One bright spot in the hopes for US rate cuts lies in exports for Thailand and other
Asian countries. ''Rate cuts by G-7 governments could, by boosting asset prices and
reducing savings, increase demand substantially for Asian goods in Europe and the United
States,'' Xie and Jen said.
Dr Jim Walker of Credit Lyonnais Asia Ltd was quoted by Dow Jones as saying that
Thailand and South Korea are nearly bottoming out, believing they will be the first
countries to experience a recovery.
Interest rates are also in focus, said Walker, noting that when rates edge lower
without compromising the exchange rate, that will be a sign that capital flight has
abated.
''We're seeing signs of that in Korea and Thailand,'' he said.
He said an expected cut in US interest rates could further stabilise some countries by
''mitigating the downturn forces'' but wouldn't correct underlying problems.