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Morgan Stanley maps out a route to recovery


THAILAND'S macro-economic improvements will depend on its ability to maintain a balanced budget policy, narrow the current account deficit, boost two consecutive months of year-on-year export growth and increase the market forces to resolve the property and finance sector problems, said Morgan Stanley strategist Nikhil Srinivasan.

These components are part of a road map Srinivasan and his Morgan Stanley associates have drawn up in their strategic country report on Thailand, which investors will be monitoring closely over the next eight to 10 weeks. They will be looking for signs of the improvements and indicators of the best time to buy Thai equities.

He said investors welcomed the Thai government's attempt to maintain a balanced budget policy in the face of declining tax revenues and a slowing economy. There is a consensus amongst the international community that Thailand cannot afford to run a current account deficit equivalent to 8 per cent of GDP while facing flat export growth.

More importantly, Srinivasan added, success in closing the fiscal budget will quickly relieve the pressure on a baht devaluation, although fundamentally the Thai currency is not overvalued.

The announcement by the Bank of Thailand tomorrow on key economic indicators in the month of December 1996 will be crucial to any hopes of a stock market recovery.

''On top of this is the Thai government's US$500 million (Bt13 billion) Yankee bond issue. If it goes well, it will help bring confidence to the market," Srinivasan said.

At this point, Srinivasan said, confidence must return if Thailand hopes to stabilise the baht exchange rate and set the stage for interest rates to come down. With real or inflation-adjusted interest rates at 8.5 per cent, the highly leveraged Thai corporate sector has been calling for lower rates to help them weather the slump. However, the Thai banking authorities have been forced to keep interest rates high to defend the baht.

The high interest rate environment will reduce Thailand's gross domestic product (GDP) growth this year from Morgan Stanley's earlier forecast of 6.6 per cent to 4.8 per cent. It projects 1997 exports to grow by 9 per cent this year, against zero per cent last year.

''We expect the growth of exports to come from a modest rebound in agricultural exports, sustained strong growth in electronics and machinery exports and a lesser decline in exports from Thailand's sunset industries," Srinivasan said.

Srinivasan expressed his confidence in the Bank of Thailand's ability to manage the problems of the property and finance sectors. The finance sector has extended 25 per cent of its total loans to real estate developers.

Srinivasan said the best way to tackle the problems in the property and finance sectors is to allow market forces to work. This can be done by bringing sound projects to the market and selling them at more realistic prices.

Although there is little earnings momentum in the Thai stock market, investors are paying more attention to improvements in macro-economics. Srinivasan suggested that long-term investors follow his road map and consider weighing into the market as they see signs of improvement.

''While there is still a downside risk to the index based on more expected negative corporate news, the reward profile for certain stocks is looking attractive," it added.

Assuming that conditions are met, Morgan Stanley believes that by the end of the year the SET index should hover around 1,000 amid hopes for a better 1998.





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