China’s weakened economy set to impact Thailand and all Southeast Asia

Chris Bassett on September 9th, 2015 with

China Economy Slowdown

For the last seven years, since the beginning of the Global Financial Crisis, it is arguable that the world’s second-largest economy, China, has been paramount and crucial in keeping the wheels of industry ticking over.

Certainly China has had a huge and growing influence on Thailand and its Southeast Asian neighbours. As has been noted, ‘Faced with falling exports and deflation risks, it suited much of Asia to let their currencies drift lower, until China’s abrupt devaluation triggered a tide of volatility that is upsetting not just their currency management but also their growth strategies. [1]

Foreign Exchange China

An advertisement poster promoting China’s renminbi (RMB) or yuan , U.S. dollar and Euro exchange services is seen outside at foreign exchange store in Hong Kong, China August 13, 2015. REUTERS/Tyrone Siu

On 11 August the Chinese central bank devalued the yuan by two percent. For many pundits this was evidence the Chinese economy is struggling and across the world it caused a panic that suggested a currency war was not far off.

For Thailand, and Southeast Asia, the possibility of such a ‘war’ has raised the ghosts of the 1997 Asian Financial Crisis at a time when the Thai economy in particular is finding it hard to gather any kind of meaningful momentum.

Since the Chinese devaluation, Asian currencies and stock markets have fallen to multi-year lows. This, in turn, has had negative effects on the global stage, especially as it relates to commodity prices, which have dropped dramatically in recent weeks.

For Thailand, the currency freefall not only awakens memories of 1997, but more recently the fall in the Russian ruble, which has since seen tourist arrivals from Russia and its satellite states drop to a trickle, at least in the short term. The European winter will give a better indication of where Thailand and Southeast Asia sits with the average Russian planning his o he holidays.

The sliding Chinese currency ‘threatens a destabilising flight of capital, sharp market swings and a spike in the cost of funds. [2]

Thailand’s central bank has deferred rate cuts, which would have put further downward pressure on vulnerable currencies, but this will mean growth and stimulus plans are likely to take a back seat for probably the rest of this year and into 2016.

While-ever markets remain as volatile as they are, both across Asia and much of the rest of the world, central banks are not in a position to cut rates further. If anything, chances are that interest rates will need to rise, even if only by  small increments, certainly in Indonesia and Malaysia to prevent any kind of currency sell-off becoming a so-called ‘rout’.

The highly-rated Citibank has already cut its Asian growth forecast for 2015 by 0.1 percent to six percent, primarily because of the volatility associated with China’s weakening of the yuan, as well as its slowing growth. Citibank also cut its forecast for Thailand’s growth to 2.7 percent, down from 3.5 percent.

The Thai central bank and financial pundits have admitted its economy will be weaker than previously hoped when 2015 commenced and welcomed depreciation in the baht as a remedy. The Bank of Thailand voted to keep rates steady in August, alluding to the volatility in the financial marketplace as one of the factors in that decision. The result was the Thai baht hit its weakest levels since 2009 in August, and it’s notable that most of the eight percent or so drop of the baht in relation to the US dollar has occurred in July and August.

The question now is whether Thailand’s financial markets are prepared to view the weakening baht as welcome depreciation or unwelcome volatility.

Given the looming advent of the Asean Economic Community (AEC) there is a question arising in some areas asking whether the central banks across the region and even the wider Asian marketplace could better coordinate their financial policies and be more proactive in using their trillions of dollars in currency reserves to defend their currencies. [3]

They are definitely on the defensive, but should they be looking to mount a strong versus or weak defence? Should they coordinate and drive rates up, thereby making it very expensive to hold short-term positions? No one knows, and in the meantime the marketplace and business confidence remains very much in a state of flux. 

Health care fund launch in the face of the currency battle

While it looks as though much of the business sector in Thailand is taking a cautious approach, SCB Asset Management Co (SCBAM), an affiliate of the powerful Siam Commercial Bank (SCB), launched a health care fund in August. With a total value of 10 billion baht, the units went on from 25-31 August 2015.

Called the SCB Global Health Care (SCBGHC) fund, it will be investing in global health care companies. Given that most countries across the world, and certainly those in the developed and developing nations, have ageing populations the management of SCBGHC suggest this demographic will spend three times more on health-related products and services than any other group.

SCBGHC expects new innovations and technology in the industry will help companies increase sales revenue growth. [4]

SCB Bank Thailand

Image taken from SCB Bank website September 2015

According to the company website, SCBAM was established in March 1992 as an affiliate of the Siam Commercial Bank, which is currently the third-largest lende in Thailand.

As at the end of July this year, the company’s net asset value under management had reached 1,041,349 million baht. The company noted that previously health care stocks have been defensive stocks, but over the past five years the yield from the health care index has been higher than the stock share index. As an example, in 2011 the MSCI Health Care Index had yield at 9.5 percent while the MSCI World Index had actually been in negative territory at minus 5.5 percent.

That figure alone gives a very clear indication of just how strong the worldwide healthcare sector has become as the so-called Baby Boomer generation retires.

[1] http://www.dealstreetasia.com/stories/currency-volatility-upsets-asian-growth-plans accessed 1/9/15

[2] ibid.

[3] ibid.

[4] http://www.dealstreetasia.com/stories/thailands-scbam-launches-278-8m-health-care-equity-fund accessed 1/9/15

Newsletter Sign-up