"Foreign money flows in because of the higher interest rate. If a bubble bursts, everything that we see as good will come to an end or will not happen," Virabongsa Ramangkura, chair of the Bank of Thailand, warned yesterday.
The massive inflow of foreign capital has caused the stock market index to approach the 1,600-point mark. Also, more than 15 per cent of government bonds are now held by foreign investors, said Virabongsa, who is also chairman of the government-appointed Strategic Committee for National Reconstruction and Development.
All parties should work together to find a way to prevent an economic bubble from forming, given Thailand's exposure as an open market.
However, the central bank would probably not lower the policy interest rate to stem the flood of foreign capital, he said.
Fitch Ratings said that despite recently upgrading Thailand's sovereign rating, it will keep a close watch for overheating of the economy without prompt corrective policy action, as well the possibility of renewed serious political instability.
At the company's "Global Economic Briefing", Andrew Colquhoun, head of Asia-Pacific Sovereigns, gave an overview of the Thai economy.
He said the upgrade of the sovereign rating to "BBB+" from "BBB" on March 8 reflected macro resilience underpinned by a strong policy framework and greater confidence in the area of political stability.
The global sovereign-credit picture remains one of a narrowing differential between the higher-income economies and emerging markets. This reflects both a deterioration in high-income sovereigns' credit profiles and fundamental improvements in many emerging markets, he said.
There was always a debate about the correct policy path for Thailand, but if Fitch saw that inflation was continuing to accelerate, the trade deficit was expanding, lending increasing very rapidly, and that asset and stocks prices were rising, the economy could be overheating, he said.
Overheating without appropriate corrective action from the regulators would affect economic stability and the financial sector, he warned.
Yet, if the government could manage the public debt better than expectations, the country's ratings would benefit as well, Colquhoun said.
Rebalancing was important, he said, adding that economic growth with an imbalance in terms of higher inflation, higher lending growth and an increased trade deficit would put pressure on the country's rating.
Colquhoun said that even though Fitch was upbeat about Thailand's public finances, macroeconomics and external finances, which are its strengths, the status of the Kingdom's structural issues was still a weakness.
Structural issues include the per capita income, the health of the banking system and tangible political instability, he said, adding that he did not think that political tension in Thailand would go away completely.
Finance Minister Kittiratt Na-Ranong said he saw no signs of foreign investors speculating in the property market. He was responding to a concern by the Asian Development Bank over possible bubbles in the sector following an influx of funds.
Sompop Manarungsan, president of the Panyapiwat Institute of Management, said the baht could strengthen to 25-26 against the US dollar within a couple years due to strong fundamentals. He was speaking at a seminar on the "Baht's strengthening: impact and solution", hosted by Charoen Pokphand Group.
Sompop said the baht was expected to be stronger this year. Thai enterprises should invest more overseas to offset lower returns due to the baht's strength, as well as ensure competitiveness with strong inflow of investment from Chinese and Japanese investors. To offset losses from the baht, he suggested: more value-added products, more variety in products, more markets, more investment-based, and more currencies for trade.-Asia News Network (March 19, 2013)
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