The case for and against pegging the baht · 2018. 8. 7. · 3 FX market monitor: Recalibrating...

1

KBank Multi Asset Strategies

Recalibrating USD/THB target

Our baseline projection USD/THB at the end of 2018 is now revised

upward to 33.00 from 32.00, while we estimate that the level could

peak during the third quarter at around 34.0 as the trade war

tension is expected to continue

On outlook of global trade tension, Economic impacts from trade

war likely negative on both sides, hence, we do not expect to see a

full-blown trade war going forward.

The Thai government bond yield curve flattened in July as the

possibility of BOT rate hike increased while trade tension has been

pressuring the Thai long-term bond yield

The UST yield curve is flattest in a decade, raising a concern over

the invert yield curve and consequently crisis, however, we expect

the curve to bear flattened without an inversion

Recent pick up in domestic demand during 1H18 spurred the

question whether it is time for the MPC to start tightening cycle

By contrast, we remain of the view that the BOT will keep policy

rate unchanged due to the three reasons discussed subsequently

KResearch expected that the Thai economy will grow 4.2%YOY in

Q2/2018

KSecurities lower the 2018E SET Index target to 1,805 (from 1,898),

we remain upbeat on the Thai market on the back of positive

economic momentum, improving bank asset quality and more signs

the provincial economy is stabilizing

Currencies moves against US dollars Dollar index and USD/THB

Source: Bloomberg, KBank Source: Bloomberg, KBank

-8.0

-6.6

-5.9

-5.5

-5.2

-4.2

-3.7

-3.4

-3.2

-2.4

-2.4

-0.6

1.2

3.5

-10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0

INR

IDR

PHP

KRW

CNY

GBP

EUR

CAD

TWD

SGD

THB

MYR

JPY

DXY %YTD

86

88

90

92

94

96

98

100

102

104

30

31

32

33

34

35

36

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18

USD/THB US dollar Index (DXY), RHS

Strategies

Macro / Multi Asset

August 2018

Kobsidthi Silpachai, CFA –Kasikornbank [email protected] KResearch [email protected] KSecurities [email protected]

Outline FX market monitor 2

Fixed income monitor 12

BOT rate review 19

Economic monitor 22 Equity market monitor 26

“KBank Multi Asset

Strategies”

can now be accessed on

Bloomberg: KBCM

Disclaimer: This report must

be read with the Disclaimer

on page 40 that forms part of

it

2

FX market monitor: Recalibrating USD/THB target

Our baseline projection USD/THB at the end of 2018 is now revised

upward to 33.00 from 32.00, while we estimate that the level could

peak during the third quarter at around 34.0 as the trade war

tension is expected to continue

In short-term, USD/THB to increase further as volatility continues to

rise on the US tariffs threats and retaliation from other countries

and increasing global interest rate environment. This could send

USD/THB to 34.0 by the end of Q3 2018.

In the longer term, we maintain our view that the Thai baht is

fundamentally supported by the macroeconomic factors including,

strong exports and massive inbound tourism

On outlook of global trade tension, Economic impacts from trade

war likely negative on both sides, hence, we do not expect to see a

full-blown trade war going forward.

Fig 1. Thai Balance of Payments

Source: Bloomberg, KBank Note:*average GDP from previous year

Balance of Payment (BOP) Unit 2016 2017 Dec-17 Jan-18 Feb Mar Apr May Jun

Exports fob USD mn 214,251 235,072 19,858 19,914 19,817 22,057 18,948 22,311 21,755

Imports fob USD mn 177,711 202,677 18,288 18,583 17,528 19,042 18,714 19,616 18,880

Trade Balance USD mn 36,539 32,395 1,570 1,331 2,289 3,015 234 2,695 2,875

Services, Primary income & Secondary income

USD mn 11,698 16,860 2,063 3,159 3,149 2,016 1,129 -1,736 1,208

Current Account Balance USD mn 48,237 49,255 3,632 4,491 5,437 5,031 1,364 958 4,084

Financial Account (FA) USD mn -21,023 -19,106 -5,980 4,198 -3,640 -3,332 -148 65

FA: Direct Investment USD mn -10,346 -12,348 -4,493 725 -613 -264 162 541

FA: Portfolio Investment USD mn -2,798 -2,568 -661 900 -2,110 -1,036 -1,401 -1,243

FA: Other Investment USD mn -7,879 -4,191 -827 2,573 -917 -2,033 1,091 767

Net errors & omissions USD mn -14,383 -4,051 1,313 281 -1,146 1,272 -327 -970

Overall Balance USD mn 12,845 25,957 -1,176 8,969 40 2,971 888 54 -5,285

CA/GDP* % 12.0 12.0 10.6 11.8 14.3 13.3 3.6 2.5 0.1

DI/GDP % -2.6 -3.0 -13.1 1.9 -1.6 -0.7 0.4 1.4

Portfolio/GDP % -0.7 -0.6 -1.9 2.4 -5.6 -2.7 -3.7 -3.3

Kobsidthi Silpachai, CFA [email protected] Peerapan Suwannarat [email protected] Warunthorn Puthong [email protected] San Attarangsan [email protected]

3

FX market monitor: Recalibrating USD/THB target

Our baseline projection USD/THB at the end of 2018 is now revised upward to 33.00 from 32.00, while we estimate that the level could peak during the third quarter at around 34.0 as the trade war tension is expected to continue, causing the US dollar to rise. However, the tension is likely to fade over time. In short-term, USD/THB to increase further as volatility continues to rise. We expect Thai baht to remain under pressure for an extended period of time, sending USD/THB to 34.0 by the end of Q3 2018 on the following reasons.

President Trump tariffs threats and retaliation from other countries could lead to global trade slowdown, causing sell-offs from export dependent economies in Asia like Thailand, South Korea, Taiwan, and Malaysia, hence, weighing on these currencies. Moreover, Thai baht could weaken more significantly if China responds to the US’s threat by devaluing its currency. Recent statistics show that China is Asia’s primary trade partner e.g. for Thailand, China’s share increased from 6% to 14%, and underscores why most Asian currencies need to move with the yuan given this status of China.

1) In addition, based on previous episodes of heightened volatilities in 2013 and 2015, risk events had caused massive outflows from Thai financial account and sending USD/THB to higher level over 3-4 months period before the correction took place (Fig. 2). The episode when China devalued its currency by 1.9% to 6.2298 on a dollar in August 2015, causing Thai baht to depreciate by 8.7% and SET index plummeted by more than 10%. The Thai market is now on verge of collapsing to the likes in which could send USD/THB to reach the level of as high as 34.0 by the end of the third quarter.

2) USD/THB has been moving in-line with USD/CNY quite strongly in recent

years (Fig. 3) as the Thai economy has been closely tied with China. In 2017, China was the largest exports destination for Thailand, taking more than 12% of total export. Also, on Thai tourism industry, spending from Chinese visitors has been important source of income for Thai tourism industry (28.8% of total revenue in 2017). Therefore, to maintain price competitiveness, the Thai baht need to move closely with the yuan. We estimate that it is possible for the USD/THB to stay above 34.0 if the yuan manages to reach 6.8-6.9 on a dollar.

Fig 2. Thai market reactions on major risk events Fig 3 Thai baht moved in-line with Chinese yuan


Risk events

USD/THB

trough to

peak USDTHB SET

TH 10Y

Govt

yield

(bps)

BOT

rate

(bps)

US

dollar

(DXY)

Fed Taper tantrum

(May 2013)

4 months

(23Apr-6Sep)12.5% -13.8% 100 -25 -1.1%

CNY devaluation

(Aug 2015)

3 months

(22Jun-2Oct)8.7% -10.5% -15 0 1.6%

latest

(Apr 2018)(30Apr-) 5.5% -4.4% 27 0 3.0%

6.1

6.3

6.5

6.7

6.9

7.1

30

31

32

33

34

35

36


USD/THB USD/CNY (RHS)

Impacts

USD/THB

Lower bound 2 6.40 31.87

Lower bound 1 6.55 32.74

Baseline 6.70 33.62

Upper bound 1 6.85 34.20

Upper bound 2 7.00 35.36

USD/CNY

scenarios

4

Apart from rising global risk, increasing global interest rate environment, led

by sequential policy rate increases by the Fed, would push USD/THB upward.

We have now expected the Fed to raise rates by 2 more times, given more upbeat

outlook on the long-term US treasury yield and the impact of trade policy is unlikely to

severely hit the US consumer confidence, at least in the near future. The market has

been pricing-in further Fed Fund rate increases this year by 2 more times

(September and December 2018) . The market implied probability of rates hike was

just under 90% for September FOMC meeting. This was in-line with what the Fed’s

path of Fed Fund rate projection in June.

In contrast, pressure on the BOT to raise rate, following the Fed Fund rate increases

remains small. This is due to the fact that (1) Thai GDP growth remained in the early

stage of recovery in consumption and investment. (2) Thai inflation remained at low

level at 1.46% in July from 1.38% in the previous month and the core inflation which

reflects domestic price pressure was lower by 0.04pt to 0.79% in July. (3) Also, the

current account surplus, large international reserve assets, and relatively lower

foreign holding in bond market are likely to insulate the market from facing major

outflows in adverse global economic conditions. Hence, no policy rate move by the

BOT is justified given current economic condition and unlikely to cause depreciation

pressure on Thai baht to be aggressive.

USD/THB is likely to face upward pressure, at least in the short-term, as the Fed

continue to raise Fed Fund rate while BOT is to keep policy rate unchanged, adding

to the policy rate differential between the US and Thailand to widen (Fig. 4). The

portfolio outflows from Thailand, following albeit at a smaller magnitude relative to

other emerging markets, would cause Thai baht to depreciate further

Fig 4. Market expectation about policy rate moves for the US and Thailand

Source: Bloomberg, KBank

In the longer term, we maintain our view that the Thai baht is fundamentally

supported by the macroeconomic factors including, strong exports and massive

inbound tourism. Thai exports growth remained strong at 8.19%YoY in June (Fig. 5).

2.00

2.25

2.50

3.00

1.50

1.75

2.00

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

FFR Upper bound Consensus forecast for FFR

BoT rate Consensus forecast for BoT rate

%

5

This brought the trade surplus to USD 1.579 billion, recorded the largest surplus since

December 2017. We expect Thai exports to grow at 8.8% this year at the back of strong

global demand, despite the impact of global trade tension on global trade volume. Given

the pace of numbers of inbound tourists coupled with a seasonal factor, we might see

total inbound tourist arrival up to 40 million in this year or 11.9% higher than the previous

year (Fig. 6). Rising imports from stronger domestic investment outlook is likely to be in-

line with exports growth and the impact of higher oil price on the import bill is expected to

be marginal, going forward. The current account balance is unlikely to turn to the

negative territory and, thus, should keep the demand for Thai baht intact. In addition, on

capital flows, return of portfolio inflows remains to be expected, albeit at a lesser

magnitude than previously thought. Certainty around election in Thailand, potentially in

the first half of 2019, would attract foreign flows to stock markets. Also, the Thai current

account surplus, favorable external stability as well as stable policy rate outlook would

still attract capital flows to the Thai bond market as pressure from global trade tension

ease.

Fig 5. Contribution to Thai export growth (%YoY) Fig 6. Contribution to Thai import growth (%YoY)

Source: Bloomberg, CEIC, Reuters Eikon, KBank Source: Bloomberg, CEIC, Reuters Eikon, KBank

Trade war update

Volatility spike in the global financial markets is expected to carry forward on the back of intensifying tension over the trade spat between the United States and China. Since the start of 2018, the White House has officially implemented series of trade protectionism against other countries, such as imposing tariffs on the import of steel and aluminum, citing national security as a reason to do so. The trade tension escalated significantly on the recent tariffs on Chinese goods worth of USD 34 billion along with the unveiling of additional lists covering USD 200 billion (Fig. 7). This has raised markets concerns over whether the trade war between the two largest economies would escalate.

-12

-8

-4

0

4

8

12

16

2016 2017 2018

ASEAN 5 China EU27 Japan South Korea U.S.A Others

%YoY

-10

-5

0

5

10

15

20

25

30

01/17 03/17 05/17 07/17 09/17 11/17 01/18 03/18 05/18

%YoY

ASEAN4 Asia North China Japan Europe

USA Oceania Middle East Other

6

Fig 7. Imports tariffs threats on China Fig 8. China Balance of Payments

Source: Bloomberg, KBank Source: CEIC, KBank

Economic impacts from trade war likely negative on both

sides

Costs to US economy on rising producer prices and retaliatory measures from

trading partners are likely to outweigh the benefits that producers and consumers

shift to domestically produced products. On steel and aluminum, they are important

raw material for autos, airplanes, and appliances made in the US. Construction sector,

oil, and utility industries also require them for building plants. The rising input prices of

producing goods and construction would put cost pressure on firms, lowering sales, and

risking job losses. Meanwhile, steelmakers would benefit from the price increases and as

firms convert their steel purchase from external suppliers to domestic ones.

We still estimate net gain to be negative as (1) the Steel industry is accounted for 2.7% of

US industrial production, while impacts on input costs to other industries are wide

spreading to the rest of the industries. Also, (2) rising consumer prices would weigh on

consumption, albeit not significant as the US also relies on fiscal boosts on corporate and

consumer tax cuts which would help support domestic consumption. (3) Positive impact

of the US imports tariffs on Chinese products on the US economy is likely to be less

acute as the US producers do not necessarily have to rely on domestically produced

goods. In other words, they could shift their purchase from China to other suppliers

outside the US, given that the US domestic prices are generally higher than other

economies with lower cost of production.

In 2003, the US, under the Bush presidency, imposed imports tariffs of nearly 30%

on steel imported from Europe, Asia, and South America. The impact of the tariffs

measure was negative as it showed that the cost to the economy outweighed the

gain to steel industry. The action has prompted the EU to impose USD 4 billion worth of

trade sanctions against the US. The steel imports tariffs has caused the employment to

fall by an estimated 200,000 jobs on the increased costs in non-steel manufacturers in

early 2003, which exceeded total employment in steel industry of 187,000 in December

2002.

In China, tariffs imposed on Chinese goods are likely to pose further drag on

Chinese narrowing current account surplus. Chinese current account surplus has

been lower over the past 2 years (Fig. 8), mainly due to the increased services outflows

i.e. on the outflows of tourist spending, as well as rising imports as consumption

526

34

16

200

276

0

100

200

300

400

500

600

Total(4.4%GDP)

July(0.4%GDP)

secondresponse

(1.7%)

Third response(2.5%GDP)

Trump's threats on China (USD billion) 2014 2015 2016 2017 Q3 17 Q4 17 Q1 18Current Account 236 304 202 165 34 62 -34

Goods 435 576 489 476 120 141 52

Exports 2244 2143 1990 2216 568 621 529

Imports -1809 -1567 -1501 -1740 -448 -480 -477

Services -214 -218 -233 -265 -69 -60 -74

Primary Income 13 -41 -44 -34 -14 -17 -10

Secondary Income 1 -13 -10 -11 -3 -2 -3

Financial Accounts -169 -92 28 57 14 4 73

Direct Investment 145 68 -42 66 9 44 55

Portfolio Investment 82 -66 -52 7 38 -11 10

Other Investment -279 -436 -322 75 -2 4 34

Trade balace with US 343 366 347 376 103 101 91

Exports to US 124 116 116 130 32 39 32

Imports from US 468 483 463 505 135 141 123

7

expanded. We expect the balance of payments to edge lower as China could exports

less good to the US. On the less extreme case, USD 50 billion of products of the US

imports from China would be targeted (USD 34 billion out of 50 has become effective).

This accounted for only 0.4% of Chinese GDP (Fig. 9), which we estimate that the impact

to Chinese economy remains minimal. However, if the range of products expands to USD

200 billion, this would account for 1.7% of Chinese GDP. More than half of overall over all

US imports from China (based on 2017 value) would be targeted. The US has been an

important exports market for China, taking 23.2% of total Chinese exports in 2017. The

major exports products to the US such as electrical machinery, machinery, and furniture

rely heavily on the US market, the share of China’s exports in each products ranging from

25% to almost 40%. In the more extreme case, tariffs on US imports from China would

have significant implication to China’s and Asia’s exports outlook and economy.

Fig 9. Chinese major exports products to the US

Source: Trademap,IMF, KBank

In Asia, the magnitude of the impact is likely to be different across economies,

depending on the intensity of trade linkages to Chinese economy and China’s

supply chains. Exports of most Asian countries rely on Chinese market, both on

production side and consumption side. Exports reliant on Chinese market ranged from

9% of ASEAN 6’s exports to as high as 27% of total exports for Taiwan (Fig. 10). On

supply change linkages, country that exports intermediate goods would be affected

directly by Trump’s tariff, while country that exports more of consumer would be affected

by Chinese economic slowdown, while its magnitude is would be relatively less and we

still expect the Chinese government to keep solid domestic demand intact.

On supply chain linkages, we estimate that if the US imposes tariffs on a wide-

range of imported products from China, the impact would spread to other Asian

economies including Taiwan, Malaysia, Singapore, and Korea. This reflects the

fact that a large chunk of their exports are used as inputs for Chinese

manufacturers to produce machinery, electrical machinery, and transport

equipment to serve the US market (Fig, 11). Meanwhile, Thai exporters are likely

to be affected but at a small magnitude as they are less exposed to Chinese

export of electronics, machinery products, and transport equipment to the US

market. Considering from the accounts of the trade in the value added term, we

could calculate the value of imports that China used specifically for the exports to

the US. We found that Thai exports are relatively less exposed to US market

through China’s exports as a share of Thai GDP (0.9% of GDP), and especially

less exposed if we only consider the targeted product in machinery and electrical

machinery (0.2% of GDP).

unit

Total

products

Electrical

machinery Machinery Furniture

apparel,

accessorie

s, toys,

and sports Plastic Vehicles

Article of

iron or

steel

China exports to US USD billion 526.2 150.0 112.4 34.8 70.0 17.6 15.6 12.4

% of total China exports % 23.2 25.0 29.4 38.8 28.1 24.9 23.1 21.6

% of China GDP %GDP 4.4 1.2 0.9 0.3 0.6 0.1 0.1 0.1

of which USD50 billion %GDP

of which USD200 billion %GDP

Thai exports to China USD billion 29.4 3.2 3.5 0.1 0.1 2.9 1.2 0.3

Thai exports to US USD billion 26.5 5.7 6.9 0.2 1.1 0.6 1.1 0.7

0.4

1.7

8

A slowdown in Chinese economies is expected to affect most Asian economies.

China trade slowdown could be expected as revenues of Chinese exporters are

likely to be hit by the US trade tariff. In addition, Chinese retaliatory measure i.e.

through the Chinese tariffs on soybean imports from the US could also have

impact on domestic price of animal feeds, hence Chinese domestic food prices.

As a result Chinese domestic demand could soften. However, we do not expect

the trade tension to derail Chinese economy as Chinese authority would be able

to use fiscal policy and monetary policy to support the affected industries and

boost domestic consumption. The PBOC has cut banks' Reserve Requirement Ratio (RRR) by 2 times this year to 15.5% for large banks in which it could lower

the RRR further if the economy is to slow. We expect that the Chinese

government remains likely to achieve its growth of 6.5% for 2018.

Fig 10. exposures to China VS exports to the World (%GDP)

Source: Trademap,IMF, KBank

Fig 11. Linkages in China's exports to US (%GDP)

Source: TiVA OECD, KBank

811

14 17 1717

20 2024 25 25 25 26

3236 37

3944

49 5255

69

1 3 3 37

16

1 38 7

1 15

2

12

3 59 9

27

1723

11

2

0

20

40

60

80

US

Bra

zil

Japa

n

Indo

nesi

a

Aus

tral

ia

UK

Phi

lippi

nes

Fra

nce

Rus

sia

Chi

le

Sou

th A

fric

a

Can

ada

Italy

Sau

di A

rabi

a

Eur

o ar

ea

Kor

ea

Ger

man

y

Sw

itzer

land

AS

EA

N6

Tha

iland

Tai

wan

Mal

aysi

a

Vie

t Nam

Sin

gapo

re

Hon

g K

ong

Exports to world (%GDP) Exports to China (% of GDP)

161115112

0.3 0.5

0.9 0.91.1 1.1

1.7 1.71.8

2.5

3.6

0.1 0.10.3 0.2 0.3 0.2

0.4

1.3

0.4 0.50.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Indonesia Vietnam Japan Thailand Hong Kong Philippines Korea China Singapore Malaysia Taiwan

Domestic Value added embodied in China's exports to US (%GDP)

Total Major machinery, electrical machinery, and transport equipment

9

Should we expect to see a full-blown trade war?

Ongoing trade protectionism between the US and China will absolutely have an impact

on the global economic recovery. According to its recent report, the International

Monetary Fund projected that trade war would likely cost the global economy by 0.5% or

USD 430 billion in 2020. However, the following reasons explain why we don’t expect to

see a full-blown trade war going forward.

When mathematics meet politics: Game theory and trade dispute. Let first

begin with the simple understanding about the current situation and whether who

will be the winner and loser of this looming trade fight. It is quite interesting to

employ the Game Theory to describe strategic trade policies from the US and

China assuming that both are rational decision-makers. The tree below

demonstrates the payoff of each player’s trade policy in a sequential game

setting. By construction, the US is the first mover of the game with two available

actions, impose tariffs (T) or maintain free trade (F). Same strategies apply to

China. If the US were to impose tariffs on Chinese goods, China will apply the

same strategy and the welfare received from trade is 2 for both. On the other end

of the spectrum, if the US were to maintain free trade with China, both countries

would receive higher payoffs (4 for each). As a result, it shows that coordination

will lead to a higher welfare for both while ongoing trade war between the two

nations will highly likely lead to a lose-lose game.

Fig 12. Trump’s trade war game

Source: The Student Economic Review Vol. XXXI, Author: Jake Mccgwire

In reality, trade protectionism will directly have an impact on both parties and also

on other small economies which have strong ties to these two countries through

trade linkage. Regarding the fact the global economies are closely synchronized,

we believe that the US will not act irrationally by deteriorating the global trade

environment as it will also jeopardize the US economy itself as reflected in Fig. 8

that the US economic growth has been moving in tandem with the expansion of

the world economy. In addition, Fig. 9 addressed that the ratio of personal

expenditure to GDP in the US accounts to almost 70%, suggesting that the US is

fundamentally relying so much on the imports from other countries.

10

Fig 13. US economic growth and world trade

Fig 14. Personal consumption ranking

Source: CEIC, KBank Source: CEIC, KBank

American firms are also depends on international markets. Given the fact

that the US economy benefits from international trades and investment, it seems

almost impossible that a full-blown trade war would actually happen. By looking

at the components in the Dow Jones Industrial Average, it is quite obvious that

revenues of the US companies are from outside the domestic market (Fig. 10). In

particular, about 20% of Apple Inc’s revenues were from China. Moreover, given

the fact the Americans park portions of their savings in the pension fund, US

stocks look set to pare loss as trade uncertainty prolongs in which we believe

that this is not what Trump would want to happen. The rationale why Trump is

still playing games with the world trade is because the US stocks has performed

well relative to stocks on the other markets (Fig. 11).

Fig 15. Share of revenues outside the US

Fig 16. MSCI Index


Trump’s tariffs would hit hardest in his political heartland. In July 6, 2018,

the US has officially kicked-started protectionist policy by imposing tariffs worth of

USD 34 billion on the Chinese products under “Made in China 2025”, covering

goods ranging from major machinery, electrical machinery and transport

equipment. Minutes after the Trump administration began its trade war, Beijing

responded with levies on a similar amount of US farm exports like soybeans,

beef and sorghum. China’s retaliatory measures mainly target goods and jobs in

parts of the US that voted for Trump in the 2016 election (Fig. 13). And given that

soybeans and other agricultural products are among US’s major export to China,

-30

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-10

0

10

20

30

00 02 04 06 08 10 12 14 16 18

-4

-2

0

2

4

6

8

Word exports (% YoY), 4qma, left US real GDP (% YoY), 4qma, right

69%

39%

56%53% 66%

54% 64% 61% 58% 58% 58% 66% 49% 53% 58%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Un

ited

Sta

tes

Ch

ina

Jap

an

Ge

rma

ny

UK

Fra

nce

Bra

zil

Italy

Ca

na

da

Au

stra

lia

Sp

ain

Me

xico

Ko

rea

Ru

ssia

Ind

on

esi

a

Private consumption expenditure (USD billion), 2016

65%62%

59% 59% 58% 58% 58%55% 54% 53% 52%

50% 48%43%

37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

McD

onal

ds

MM

M

Nik

e

Che

vron

Coc

a-C

ola

Pro

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&G

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e

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ing

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erpi

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a

IBM

Mic

roso

ft

John

son&

John

son

Uni

ted

Tec

nolo

gies

Gol

dman

Sac

hs

Revenues outside the US in 2017

40

60

80

100

120

140

160

180

200

Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

200

400

600

800

1000

1200

1400

US Europe Asia Pacific Emerging markets, right

11

we thus expect the two nations to finally settle with the trade disputes as

continuing tension would hurt Trump’s voter base the most.

Fig 17. Farmers carried Trump to White House

Fig 18. Top soybeans producing states

Source: US Bureau of Labor Statistics, CNN, KBank Source: USDA National Agricultural Statistics Service, Mapchart, KBank

Donald Trump’s foreign policy: “America First”. As a former successful

businessman, Trump will try so hard to act at the best interest of his voter base

as he previously pledged to make America great again under the “America First”

campaign which emphasizes on nationalism. Obviously as we’ve seen so far,

most of his moves in the international stage such as withdrawal from the Trans-

Pacific Partnership (TPP), renegotiation of the North American Free Trade

Agreement along with the recent inconclusive result in the G-7 meeting has

aimed to strengthened his negotiating power and somehow Trump might prefer

to have bilateral instead of multilateral deals with other countries. All in all, we still

believe that most of Trump’s policies are in-line with what he previously promised

with his supporters and we expect Trump to pursue all the threats as long as he

still gains more popularity prior to the mid-term election in this coming November.

Meanwhile, we still expect that a full-blown trade war is highly unlikely to take

place as it would certainly yield disastrous outcomes to everybody involved.

Fig 19. Trump’s gaining more popularity


..

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

28% 38% 48% 58% 68%

Republican

Democrat

35

37

39

41

43

45

47

49


Real clear politics Trump job approval poll

average

Trump vote share in 2016 election

Sh

are

of

farm

em

plo

ymen

t

12

Fixed Income Monitor: Trade tension pressuring Thai yield

curve while concern over US invert yield curve weigh higher

The Thai government bond yield curve flattened in July as the

possibility of BOT rate hike increased while trade tension has been

pressuring the Thai long-term bond yield

The UST yield curve is flattest in a decade, raising a concern over

the invert yield curve and consequently crisis

In a case of the US, an invert yield curve generally happens 6-30

months ahead of the crisis and invert yield curve could be

predictable as the Federal Reserve is a key driver of the event

However, on our perspective, the UST yield curve in a near term

will bear flattened without an inversion. The spread between the 2

year and 10 year bond yield could remain near current levels at

around 25-35 bps

Thai bond yield development in July

The Thai government bond yield curve flattened. In the month of July, the movement

of Thai bond yields was greatly impacted by the escalation of trade spat between the US

and China and concern over the BOT’s forward guidance change. Overall, the bond

market of Thailand registered a net outflow of THB 7.36 billion in July, mainly from the

short-term outflows. The 2-yr yield added 6 bps to 1.76% in July on the market’s belief of

the possibility that the Bank of Thailand will avert from its accommodative policy after the

economic indicators during the second quarter continued to post the strong footing. The

5-yr yield also rose by 9 bps to 2.21% during the same period. By contrast to the shorter-

dated bonds, the 10-yr yield edged lower by 7 bps to 2.72%. The trade conflict between

the US and its trading partners remained to put a downward pressure on the long-term

economic prospect as investors, both foreigners and asset management companies

demanded secure returns from long-term bonds. As such, the 2-10 yield spread

narrowed down to the lowest level in 10 months at 96 bps.


13

Fig 20. Thai government bond yield curves


Fig 21. Thai yield movements and curve spread


The long-term Thai government bond yield moved with the US treasury (UST) yield

due to trade tension. However, in July, the impact of rising Japanese government bond

(JGB) yield crowded out the trade tension. The 10-yr UST yield increased with a spike of

10-yr JGB yield as the Bank of Japan widened the band from ±0.1% to ±0.2% from 0%.

The USY curve shifted upward across the curve and the 10-yr yield reached above 3%

once again in 2 months. However, the 2-10 yield spread dropped to 29 bps while an

average spread since 2000 is a lot higher at 137 bps, which made the UST yield curve

flattest in a decade. Even though the yield curve had not yet inverted, it is noteworthy to

monitor such situation.

Fig 22. US treasury yield curves


1.551.76

1.922.09

2.212.34

2.472.58

2.68 2.72

3.133.33

3.56

1.2

1.6

2.0

2.4

2.8

3.2

3.6

4.0

1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 15y 20y 30y

%

tenor

30-Jul-18

last month

beginning of 2018

End period 1y MoM bps 2y MoM bps 5y MoM bps 10y MoM bps 30y MoM bps Policy rate 2-5 spread 2-10 spread

May-18 1.49 13 1.56 13 1.98 20 2.69 19 3.33 17 3.50 37 107

Jun-18 1.49 0 1.55 -1 1.99 1 2.68 0 3.31 -3 3.60 42 109

Jul-18 1.49 -1 1.55 0 2.09 9 2.66 -2 3.26 -5 3.45 45 95

2.41

2.67 2.772.85 2.93

2.963.08

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1y 2y 3y 5y 7y 10y 20y

tenor

31-Jul-18

last month

beginning of 2018

%

14

Does the near US inverted yield curve foretell a recession?

Theoretically, an inverted yield curve is a leading indicator of economic recession.

This is because the situation where the long-term yield falls below that of the short-term

bond yields indicates that investors are pessimistic about a near-term economic outlook.

When people are afraid of placing their money on the risky assets like stocks, they tend

to hedge against their loss by demanding more and more long-term bonds to secure their

returns. A switch in demand from short-term to long-term bonds twists the yield curve by

increasing short-term bond yield and lowering yields on the long-term bonds. Thus, an

inverted yield curve reflects market anticipation on the economic performance and their

reaction upon their expectation. Once market expects recession, recession thus

happens, a sort of self-fulfilling prophecy.

The degree of recession prediction varies to the situation. In a case of the US, an invert

yield curve generally happens 6-30 months ahead of the crisis. In the two recent

crises, an inverted curve occurred 11 months before the 2001 crisis kicked-started.

Meanwhile, an invert curve in 2008 was an urgent alarming sign as the economic

recession occurred only 6 months after an inverted curve appeared.

Fig 23. 2-10 yield spread

Source: CEIC and KBank

The Fed, itself, is a source of an invert yield curve

In the case of the US, it is interesting that an inverted yield curve or a negative term

spread usually occurs when the Federal Reserve (Fed) accelerates its rate hikes

and not by market expectation as in theory. Before the subprime crisis in 2008, the

Fed continued to increase the Fed funds rate for 17 consecutive meetings, consequently

pushing up the Fed funds rate from 1.00% in June 2004 to 5.25% in June 2006. This is

similar to the crisis in 2000. The Fed funds rate was raised from 4.75% in June 1999 to

6.50% in May 2000 within 6 policy meetings. The decision caused the short-term yields to

move almost simultaneously with the Fed rate hikes while the long-term bond yields

remained stagnant, eventually causing the yield curve to invert (Fig 5).

15

Fig 24. US 2 year and 10 year treasury yields

Fig 25. Crisis event, inflation and Fed Funds rate

Source: CEIC, KBank Source: CEIC, KBank

The major rationale for the Fed’s decision is to stop hyperinflation1. According to

the Fed’s dual mandates, the US monetary policy aims to reach full employment together

with 2% medium-term inflation. A zero unemployment rate is unrealistic and the level of

full employment is not specified while the inflation target is tangible. The Fed seems to be

tying its monetary policy with inflation. The Fed funds rate strongly moves together with

inflation (Fig 6) with a correlation of 74% while employment had rarely been the matter of

Fed policy with a tiny correlation of 5%. Thus, the employment could only determine a

starting point of the series of the interest rate hike while the inflation indicates how far the

Fed’s rate will go. In the meantime, the Fed still abides by its norm. The Fed Funds rate

has been raised since 2015 when inflation began to escalate.

Unfortunately, the source of inflation picking up during each period was different. In the

latest crisis in 2008, hyperinflation originated from a spike of global oil price and domestic

housing price. Nevertheless, only acceleration in oil price drove inflation in the 2000

crisis. This confirms that the source of each crisis is unique. It also implied that inflation is

only one among several characteristics of economic environment prior to the crisis.

Inverted yield curve: sooner or later?

Answering this question could probably determine a chance of the US recession and the

Fed might be the right person to answer. However, on our perspective, the UST yield

curve in a near term will bear flattened without an inversion. The spread between

the 2 year and 10 year bond yield could remain near current levels at around 25-35

bps. There are 4 key supporting factors and 1 risk as follow.

(1) More optimism on short-term outlook than the longer-term one

Both the Fed and the markets see brighter growth in the short-term. Recently, the

Fed expects to see higher growth acceleration in 2018 on the back of higher

domestic demands as the unemployment rate is revised down even further.

Meanwhile, inflation outlook brightens. The market estimation also shows similar

results. This encourages us to agree with the latest Fed’s signal to continue raising

interest rate by 2 more times this year, which could push short-term bond yield up

going forward. In contrast, the movement of the long-term yield usually lies on

longer-term economic outlook. Apparently, the estimated numbers reveal that both

the Fed and investors expect to see economic growth to slow in 2020. Moreover,

the market even downgrades the growth rate to 1.8% in 2020 from 2.1% estimated

1 Hyperinflation is the situation in which the economy faces very high and typically accelerating inflation.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

bps

10 year bond yield

2 year bond yield

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

-4.0

0.0

4.0

8.0

12.0

16.0

20.0

24.0

62 66 70 74 78 82 86 90 94 98 02 06 10 14 18

Recession Inflation (%YoY) Effective Federal Funds Rate (%)

16

in March. A weaker expectation in the longer-term outlook could potentially

translate into to slower rise in the long-term yield than short-term ones.

Fig 26. Economic outlook by Fed and market

Source: Fed, Bloomberg consensus, KBank

(2) Wider budget deficits, larger amount of new bond issuance

Similar to Obama care, Trump financed large budget deficits from the tax reform by

issuing bonds. During the first half of this year, the US government borrowed its

budget deficit at the largest amount since 2010 at USD 652 billion. Besides, in this

year, the Congressional Budget Office estimated the deficit to reach 4.0% of GDP

again since 2014 due to tax reform and bipartisan budget spending. This will

increase demand for more funding. In 3Q18, the US Treasury plans to borrow

additional USD 78 billion through long-term bonds. As such, the long-term bond

yields will be pushed upward by higher bond supply in the market.

(3) Trade war as a political agenda

Obviously, Trump’s trade protectionism has a boomerang effect back to the US

producers due to China’s retaliation. Soybean farmers were adversely impacted

from 12.5% drop in prices since April, causing the government to aid them with

USD 12 billion transfers. Companies in the automobile sectors such as General

Motors and Harley-Davidson also slashed their profit due to tariff escalation.

However, the US decided to elevate the third phase of tariff to USD 200 billion

worth of Chinese goods from initial proposed 10% to 25%. Meanwhile, China

seems to be preparing for the fight with policy package to stimulate domestic

demand. Given indirect loss to their trade partners, both the US and China

economies will be adversely impacted as well.

On the other side, we observe that Trump gains political popularity from Americans

due to trade fight with China. According to Real Clear Politics, Trump’s job

approval has been improving significantly since the beginning of the year at 37.1%

to currently 43.3% due to materialization of trade protectionist policy. Trump seems

to move in right direction as Americans insist to support the policy against China’s

intellectual property theft despite of their economic damage. This will help secure a

political stability of Trump’s administration in the midterm election on November

6th. Therefore, we expect the trade issue will be faded after the end of midterm

election.

2018 2019 2020 Longer run 2018 2019 2020

GDP 2.8 2.4 2.0 1.8 2.9 2.5 1.8

as of Mar 18 2.7 2.4 2.0 1.8 2.8 2.5 2.1

Unemployment 3.6 3.5 3.5 4.5 3.9 3.6 3.8

as of Mar 18 3.8 3.6 3.6 4.5 3.9 3.7 3.8

Headline PCE inflation 2.1 2.1 2.1 2.0 2.1 2.1 2.1

as of Mar 18 1.9 2.0 2.1 2.0 2.0 2.0 2.1

Core PCE inflation 2.0 2.1 2.1 - 1.9 2.1 2.2

as of Mar 18 1.9 2.1 2.1 - 1.9 2.1 2.0

Inflation - - - - 2.5 2.3 2.2

as of Mar 18 - - - - 2.5 2.2 2.3

Market consensusFed

Note: Green is current number is better than last estimate and Red is vice versa

17

(4) Expect a lower spread between 2-year yield and Fed Funds rate

True, short-term yield actively responds to the Fed Funds rate. The historical data

since 2000 shows that the spread between the Fed Funds rate and the 2-year yield

is approximately 27 bps. However, markets usually price-in ahead of the Fed’s

action for almost a quarter. This could bring the spread above 50 bps. Once the

Fed takes action, the spread will fall back to a normal level. In this year, the market

is more responsive as it bets since the beginning of the year that the Fed could

raise the rate for 3-4 times in this year. The spread among them thus has been

staying above 50 bps. We thus expect the spread to drop after the Fed rate hike in

December. An expected fall in the spread will keep the short-term yield to rapidly

rise.

Fig 27. Fed rate and 2 year yield spread

Fig 28. Housing affordability and mortgage rate

Source: Bloomberg, KBank Source: CEIC, KBank

(5) Risk: Housing market as the biggest loser

Mortgage activities are vulnerable to a change in long-term interest rate as it is

directly linked to the loan rate. The Fed accelerated a pace of rate normalization

from 1 rate hike annually in 2015-2016 to 3 hikes in 2017. In 2018, the rate was

increased to 2 times. As a consequence, 15-year mortgage rate jumped by 60 bps

within half a year to 4.0%, dragging American housing affordability down significant

to a 19-year low level (Fig 9). This will also create a domino effect to other part of

economies as lower demand for big ticket item like houses could reduce

construction, construction materials, employment etc. Eventually, it would impair

the economic outlook and prevents further rises in the 10-yr UST yield.

Given all these factors in mind, we foresee the UST yield to be bear flattening BUT not

inverting in a near term. Our expectation is in line with the market expectation as shown

in figure below. Market expects to see really flatten curve during the next 5 years before

the curve starts inversion. We thus do not expect to see the recession anytime soon.

67

0

10

20

30

40

50

60

70

80

90

100

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

bps

Fed-2Y spread

156

4.1

2.0

2.5

3.0

3.5

4.0

4.5

150

155

160

165

170

175

180

14 15 16 17 18

Housing Affordability Index, 12MA

15yr mortgage rate (%), RHS

18

Fig 29. Implied 2-10 UST yield spread

Source: Fed, Bloomberg consensus, KBank

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23

2-10s implied

19

Reviewing Policy Rate Determinants

Recent pick up in domestic demand during 1H18 spurred the question

whether it is time for the MPC to kick-start tightening cycle

By contrast, we remain of the view that the BOT will keep policy rate

unchanged due to the three reasons discussed subsequently

However, the statement on this Wednesday would likely confirm

positive outlook of the Thai economy going forward

Is it time for a tightening cycle?

During the last few months, the markets have started to question whether it is time for the

Bank of Thailand (BoT) to end the long era of easing monetary policy, especially when

one of the committee voted in favor of a 25 bps increase in policy rate, addressing that

gradual improvement of the economy was sufficiently robust while suggesting that

keeping low interest rate for too long potentially causes the households and businesses

to underestimate shifts in financial conditions. In this sense, it is reasonable enough to

say that the BoT might need to reload (save policy space) during the better time just to

prepare for the future hard times.

Apparently, several central banks in Asia have already moved ahead with monetary

tightening cycle this year in the wake of rising interest rates globally. These include Bank

Indonesia, Reserve Bank of India, Bank Negara Malaysia and the central bank of

Philippines. Nonetheless, we remain of the views that the BoT will stay pat on the policy

throughout this year due to the following:

(1.) The Thai economy expanded more broadly during 1H2018. According to the

BoT’s monthly economic conditions, the report showed that the Thai economy

continued to gain further traction in June being supported by both internal and

external demands. On the domestic front, private consumption and private

investment in the second quarter accelerated from the preceding period. In line

with rising consumption, nominal farm income showed sign of improvement as it

rose to 6.2%YoY in the 2Q/18. On the external demand, merchandise export

expanded in almost all categories while the number of tourist arrivals continued

to increase albeit at a slower pace

Despite all mentioned accounts above may suggest that the Thai economy

expanded favorably, we are of the view that the economy is only on the early

stage of recovery as Fig. 1 demonstrates that recent growth still relies so much

on the external demand as suggested by the proportion of domestic demand to

overall export (Fig. 2). As a result, too early change in the monetary policy stance

might adversely affect both private consumption and investment level as a result

of higher financing costs.


20

Fig 1. Thailand economic conditions

Fig 2. Domestic demand to export index

Source: BoT’s monthly economic report, KBank Note: P = Preliminary data Source: CEIC, KBank

(2.) Financial stability remained sound. Ongoing trade spat between the two largest economies has raised concerns that there will be a large capital outflow from Asian countries, including Thailand, as Chinese Commerce Department recently threatened to impose retaliatory tariffs on imported goods from the US worth USD 60 billion. We expect that capital outflows from emerging markets will be selective depending on country’s specific characteristics. Suffice to say Thailand is among the least vulnerable economies as it possesses high level of current account surplus, high foreign reserves as well as relatively low level of external debt (Fig. 3).

In addition, as the US Federal Reserve is on the path for policy normalization and is scheduled to increase the policy rate by additional 2 times this year, some might expect foreign investors to sell Thai bonds as interest rate differentials widened. We remained to expect that all the fundamental factors argued above would prevent rapid flow out of Thailand. In fact, the bond market of Thailand recorded a net inflow of almost THB 100 billion since the beginning of this year and Fig. 4 addressed that capital inflows piled up since early 2010 stands to be a solid buffer for any possible financial volatility.

Fig 3. Financial stability by country

Fig 4. Foreign holding of Thai fixed income and stocks

Source: CEIC, KBank Source: Bloomberg, ThaiBMA, KBank

(3.) Headline inflation rebounded in July but inflationary pressure from core items seems to be less responsive. The latest release revealed that headline inflation rebounded to 1.46%YoY due mainly to a cost-push factor. The major positive contributor was an increase in prices of fuel, rice, flour and cereal products. By contrast, core inflation surprisingly pulled back in July. Excluding goods with high price sensitivity, core inflation which represents consumer

H1 H2 H1 Q1 Q2P

Private consumption index 1.8 3.3 3.6 2.9 4.2

Nominal farm income 15.7 -7.8 1.7 -2.3 6.2

Private investment index 0.8 2.3 3.3 2.0 4.6

Total export (BOP basis) 7.3 12.2 11.1 9.9 12.3

Total Import (BOP basis) 13.4 12.9 17.3 17.9 16.8

Current account (USD billion) 24.2 26.8 21.4 15.0 6.4

2017 2018

%YoY

60

70

80

90

100

110

120

06 07 08 09 10 11 12 13 14 15 16 17 18

Private consumption/Export Index, Jan 2006 = 100

Private investment/Export Index, Jan 2006 = 100

06/08/2018 Period IDR INR PHP MYR KRW THB SGD

CA bal (%GDP) Last 2018 -2.0 -1.5 -0.8 3.7 4.5 10.5 18.5

CPI forecast 2018 3.5 3.7 4.3 2.6 1.8 1.2 0.9

FX reserves (USD bn) Dec-17 130 409 82 104 389 203 280

Reserve to ST external debt Dec-17 2.7 4.2 5.7 NA 3.4 3.8 0.3

Reserve to GDP Apr-18 0.1 0.2 0.3 0.3 0.3 0.5 0.9

External Debt 2017Q4 34% 20% 23% 69% 27% 33% NA

Foreign holding govt debt (%total) Dec-17 39.8 4.6 NA 29.2 11.4 15.6 NA

Gov budget bal %GDP 2018 -2.5 -6.2 -1.1 -2.7 1.4 -1.7 1.5

Gov Debt %GDP 2018 29.2 67.1 33.2 54.2 38.3 39.6 NA

HH Debt (%GDP) Q4 2017 17.2 11.0 NA 67.4 94.6 77.5 58.4

603 629

727

111

-286-300

-200

-100

0

100

200

300

400

500

600

700

800

10 11 12 13 14 15 16 17 18 19

Thai government bonds, THB bn BOT bonds Thai stocks, est since 1999

21

purchasing power came in at 0.79%YoY in July, falling short of market expectation and the prior reading at 0.83%YoY.

Though the overall private consumption exhibits clear sign of improvement during the first half of the year, this doesn’t necessarily mean that income conditions of all Thai workers will enhance accordingly. Delving into details, spending on nondurable goods contracted in July despite of a solid expansion of consumer purchases of semi-durable and durable goods. This is rather implying that recent growth has yet to benefit consumers with low incomes. We thus weigh more on the possibility that the BoT will pay more attention to inflationary pressure arising from demand-pull factor which literally measures the wellbeing of the consumers. On the supply side, an agreement among members of the Organization of the Petroleum Exporting Countries (OPEC) to boost production turned out to put lower pressure on oil price from overshooting.

Fig 5. Contribution to Thai inflation (%YoY)

Fig 6. WTI Future Curve

Source: CEIC, KBank Source: Bloomberg, KBank

Looking forward to the upcoming meeting on Wednesday 6th

, we remain of the view that the BoT will keep policy rate unchanged at 1.50% but the statement would likely confirm the better outlook of the Thai economy. On the market response, investors seem to expect no policy shift as reflected by the movement of the THBFIX 6M which still hovers below the current level of policy rate. Moreover, based on the 3 criterion discussed above, the model using domestic output, core inflation, current account balance and nominal effective exchange rate to determine the policy rate suggests that the Bank of Thailand will stay accommodative on monetary policy in the upcoming meeting in order to support the rise of inflation toward target in a sustainable manner.

Fig 7. THBFIX 6M vs. BoT’s policy rate

Fig 8. Adjusted Taylor Rule Model

Source: Reuters Eikon, KBank Source: CEIC, KBank

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Infation target Food Transport Housing Alcohol Others Inflation

68.5 68.8

49.0 49.649.7 49.9 50.0 50.2 50.2

50.3 49.8 49.8 50.3 49.8 49.8

63.964.264.8

64.965.265.8

65.966.567.6 67.2

66.8

45.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

0 1 2 3 4 5 6 7 8 9 10 11 12

Today 1mth ago 3mth ago 6mth ago 1yr agomths forward

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

THBFIX 6mth BOT repo

0.0

1.0

2.0

3.0

4.0

5.0

6.0

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Actual Model

22

Economic Monitor

The Thai economy is expected to grow 4.2% YoY in Q2/2018

The impact of US trade prtectionism are starting to hit the economy

The second batch of US-China tariffs, if implemented, will affect US

consumers and become a litmus test for the popularity of US

protectionist policies

Units: %YoY, or indicated otherwise 2017 1Q-18 2Q-18 Apr-18 May-18 Jun-18 Jul-18 2018

Private Consumption Index (PCI) 2.6 2.9 4.2 4.8 4.5 3.4 3.6

· Non-durables Index 0.5 0.5 -0.1 0.2 0.2 -0.8 0.2

· Durables Index 8.0 6.3 10.4 9.9 9.5 10.7 8.4

· Service Index 7.1 7.2 7.0 8.0 6.7 7.0 7.1

· Passenger Car Sales 18.1 15.1 25.0 23.9 28.6 22.4 20.0

· Motorcycle Sales 5.2 1.0 -2.8 -2.3 -10.9 4.8 -1.1

Private Investment Index (PII) 1.6 2.0 4.6 5.4 2.6 4.0 3.3

· Construction Material Sales Index -0.9 -1.8 0.5 0.0 3.6 -0.8 -0.6

· Domestic Machinery Sales at constant prices 1.0 3.1 7.0 7.5 4.8 5.5 4.2

· Imports of Capital Goods at constant prices 3.2 2.8 6.6 10.3 1.5 8.8 3.9

· Newly Registered Motor Vehicles for Investment

5.7 3.0 6.8 13.5 4.4 5.3 5.3

Manufacturing Production Index 2.5 4.1 3.5 3.1 2.9 4.7 3.8

· Capacity Utilization 67.5 72.5 66.6 60.9 69.8 69.0 69.5

Agriculture Production Index 6.1 11.3 12.9 19.9 13.5 8.2 12.0

· Agriculture Price Index -2.8 -12.3 -5.9 -9.3 -4.8 -3.6 -9.2

No. of Tourists 8.8 15.4 9.1 9.4 6.4 11.6 12.5

Exports (Custom basis) 9.9 12.0 12.0 12.3 11.4 8.2 11.0

Price 3.6 4.7 4.5 4.7 4.7 4.2 4.6

Volume 6.1 6.3 5.8 7.4 6.5 3.8 6.1

Imports (Custom basis) 14.7 16.2 16.2 20.4 11.7 10.8 15.6

Price 5.8 6.6 7.2 6.4 7.3 7.8 6.9

Volume 8.4 9.0 6.7 14.0 4.1 2.8 8.2

Trade Balance ($ millions) (Custom basis) 13.93 1.70 1.76 -1.28 1.20 1.58 3.46

Current Account ($ millions) 49.28 14.96 6.41 1.36 0.96 4.08 21.37

Broad Money 4.3 5.4 5.4 5.4 5.3 5.3 5.4

Headline CPI 0.66 0.63 1.31 1.07 1.49 1.38 1.46 0.97

USD/THB (Reference Rate) 33.9 31.5 31.9 31.3 32.0 32.5 33.3 31.9

Sources: BOT, MOC, OAE, and OIE

Warat Niamsa-ing, KResearch [email protected]

23

Thailand Economic Update

The Thai economy is expected to grow 4.2% YoY in Q2/2018

At KResearch, we expects that the Thai economy will grow at a slower rate of 4.2% YoY in Q2/2018 due to high base effect of the previous year and a listlessly boost from government disbursement. However, overall economic recovery remains intact. Private consumption and investment show further improvement. Capacity utilization continues to edge upward amid solid export performance. Going forward, economic momentum should resume an upward trend in 2H2018 of 4.5% YoY, backed by fastened government outlays, improving crop outputs as well as recovery in farm income trend.

Fig 1. Key economic indicators

Source: BOT, OIE, KResearch

The Private Consumption Index (PCI) cooled down in June to 3.4% YoY, versus the 4.5% YoY reported for the previous month. The main contribution from this slowdown came from a drop in non-durable consumption as rising fuel costs deterred consumer from spending. However, consumer in durable good and service was rather stable. On the upside, the rise in motocycle sales offered a glimpse of hope for a revival in rural consumer spending in the future.

The Private Investment Index (PII) expanded 4.0% YoY in June due to increases in machinery and capital goods imports. However, the positive sentiment toward investment activities was limited somewhat because businesses remained cautious over new construction projects

The number of foreign tourist arrivals to Thailand rose 11.6% YoY after Malaysian tourist returned. Most inbound tourists except those from Russia saw a rise, led by a 18.1% YoY growth in Chinese visitors. Government spending expanded moderately in June. Overall budgetary disbursements rose 34.8% YoY. Meanwhile, investment spending acclerated 19.7% YoY, led by disbursement for rural road projects. On the external front, exports remained rather resiliant. The value of exports grew 8.2% in June 2018, led by a wide range of industrial goods, especially automobile, electronics, machinery and oil-related products. The export volume surged 7.8%, against the 7.3% growth seen in the previous month. This was partly driven by a rise in purchase orders before US tariffs become effective. In terms of export destinations, CLMV, China and ASEAN saw a double-digit growth. On our final tought, KResearch anticipates that

24

exports may grow up to 8.8% this year, in case of a containment of US-China trade dispute. Headline inflation rose 1.48%YoY in July, due to increases in fuel and food prices. Core CPI rose at a lesser extent by 0.79% YoY. Going forward, inflationary pressure will rise moderately, supported by a rise in energy prices. Without a catalyst for consumer spending, KResearch maintains headline inflation forecast at 1.1% in 2018.

Global Economic Update

Global economy: Impacts of US trade protectionist are starting to hit

the economy.

2018 started with full optimism about a global economic recovery. A revival of global

trade together with US tax cut would bring prosperity to the global economy. Although Q1

GDP in major economies met expectation, such a high optimism has been undermined

somewhat since the beginning of 2018. Industry production showed sign of cooling down

after registering high growth earlier this year. Rising trade uncertainties, high oil price

environment and geopolitical risk can be blamed as main culprits.

In the midst of tougher US trade protectionist stance, the US economy is bracing for

impacts of a trade war as price pressures are building. Producer prices for final demand

rose 3.4 % YoY, a record high since 2012, after steel and aluminum tariffs were extended

to US allied partners, namely the EU, Canada and Mexico. Unless the US changes its

mind on the tariff, we will see tariffs push consumer prices higher later this year. A

similar story of rising inflation followed for the consumers. The CPI came in at 2.9 % YoY

in June, the strongest pace in over six years, supported by a price rise in consumers

goods as well as rising energy items.

The second batch of US-China tariffs, if implemented, will affect US

consumers and become a litmus test for the popularity of US

protectionist policies

Recently, President Donald Trump has threatened to ratchet up an additional USD200 bn with levies of 25%. The public comment period on the U.S. tariffs aimed at USD200 billion ends in late Aug-18 after public hearings Aug 20-23, 2018, according to the US Trade Representative’s office. This may become a climax of US-China trade dispute and a litmus test for US consumer over a continuing support for the Republicans in the mid-term election because the tariffs will directly hit consumer goods. The early batches of US tariffs are focused on intermediate goods, of which the impacts can be absorbed by some producers without pushing price increases on the consumers. However, the new list of goods (USD200bn) includes a variety of consumer products such as frozen meats, fish and seafood, butter, onion, garlic and other vegetables, fruits, nuts, metals, and a massive list of chemicals, as well as tires, leather, fabrics, wood and paper. Therefore, impacts of trade war, which directly hit consumer goods, will be a litmus test for the popularity of US protectionist policies. This can be reflected in the midterm election results. Moreover, the broadening tariffs produce some upside risk to inflation outlook. With inflation having returned to the FOMC’s target and economic growth proving robust, the Fed will likely continue the interest rate hike in September and December and this will slow the economic growth in the next few quarters.

25

Affected products under US-China trade dispute

Source: USTR, WTO, KResearch

26

Equity market Monitor: Key obstacle gone; economy gains

pace

While we lower our 2018E SET Index target to 1,805 (from 1,898),

we remain upbeat on the Thai market on the back of positive

economic momentum, improving bank asset quality and more signs

the provincial economy is stabilizing.

We have assigned a 25% probability to our worst-case scenario of a

“full-blown” trade war, which translates into a 93-pt downgrade of

our SET Index target.

The SET Index’s valuation, in our opinion, remains undemanding

given 2018E 10% EPS growth.

Thai banks have started to show better asset quality

Thai banks’ 2Q18 NPL ratio declined QoQ for the first time since peaking in 1Q18 due to

a lower gross change in NPLs and more active NPL write-offs. The 2Q18 gross change in

NPLs dropped from 1.0% in 1Q18 to 0.6% in 2Q18, still mainly from relapses. Due to

improving asset quality, overall credit cost for the sector fell QoQ from 133 bps to 125

bps. We believe that the upcoming new NPL formation data from BOT (to be released by

Aug. 20) will continue to confirm this improving asset quality trend.

Maintain our view on a rate hike in 1Q19E

With global interest rates remaining on an uptrend, we still believe a Thai rate hike will

take place in 1Q19E, given the strong external stability factors (massive current account

surplus, low external debt, and strong foreign reserves). Thailand is in better shape

compared with its regional peers to weather the concerns about emerging markets,

allowing the BOT to maintain an accommodative monetary policy.

Our investment theme remains domestic cyclical

plays

Our key investment theme remains domestic cyclical plays, i.e. big banks, non-bank

lenders (secured) and residential property developers on the positive domestic demand

outlook, improving NPL outlook and robust operational momentum of key residential

players. Key stock picks remain BBL, KTB, MTC, ORI, LH, AP, SPALI and QH.

We remove KCE and HANA and add DELTA and TNR. While the electronics sector will

continue to benefit from a weak THB, this investment theme has played out well with 20%

TSRs for both KCE and HANA. Within the electronics sector, we now prefer DELTA on its

cheap valuation, improving earnings outlook and limited impact from raw material

shortages. We add TNR, a key global condom manufacturer, to our top pick list on the

back of its improving earnings momentum, position as a key beneficiary of the weak THB

and expected increased contributions from the “Playboy” trademark.

Equity Research Team

27

We remove BEAUTY from our "domestic structural plays" due to overhanging industry

concerns on overall product safety and stricter approval from China’s FDA. We replace

BEAUTY with ROBINS on the firmer outlook for the provincial economy and ROBINS’

75% contribution from provincial sales. IVL remains the only stock on our "extended

cycle plays" list as its earnings trend in 2018 should remain solid on improving product

spreads and higher volumes from its previous expansion and acquisitions.

We keep KTC, BCH and STPI as our least preferred stocks. We maintain our view that

KTC’s valuation remains highly demanding. Holdings in KTC are concentrated among the

parent company, key retail investors and derivative warrant issuers, which substantially

reduces the stock’s liquidity in small retail investors’ hands and creates an opportunity for

share price manipulation, in our opinion.

Concrete signs of improving asset quality

The SET Index is currently trading at a 2018E Bloomberg consensus PER of 15.4x,

which is +1SD of its 1-year forward historical mean. The current SET Index valuation, in

our opinion, is undemanding with Bloomberg consensus showing 2018E EPS growth of

9.7%, which is underpinned by the global economic upcycle and the improving

momentum of the Thai economy. While the tariff hikes by both US and China were

imposed as promised, the market has been recovering since then as the impacts on Thai

exports are seen as limited. We still believe that a full-blown trade war is highly unlikely

as the end result would be disastrous for both developed and emerging economies.

On the domestic front, things continue to progress positively with a strong economic

outlook on the back of strong exports, robust tourist arrivals and improving asset quality.

Thai banks’ 2Q18 NPL ratios for the first time since peaking in 1Q18 on the slower gross

change in NPLs and more active NPL write-offs. We believe that upcoming new NPL

formation data from the Bank of Thailand (to be released by Aug. 20) will continue to

show a decline in “new NPL formation”, the most useful indicator of asset quality.

Fig 1. SET Index and major sectors: BBG consensus forecasts & valuations

Source: Bloomberg, KS Research

ROE (%) Div yld (%)

(20 July) % YTD 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2018E

SET 1,671 -4.7 108.8 119.8 129.6 15.4 13.9 12.9 9.7 10.1 8.2 -0.1 -0.4 -11.6 13.8 3.1

Energy 25,190 2.6 2,117.1 2,188.8 2,222.8 11.9 11.5 11.3 11.5 3.4 1.6 10.0 9.0 -0.4 15.1 3.9

Petrochem 1,427 -0.4 134.1 141.0 146.0 10.6 10.1 9.8 2.9 5.2 3.6 13.6 13.6 1.5 15.6 4.0

Banks 526 -8.3 48.5 54.4 61.6 10.9 9.7 8.5 9.0 12.3 13.3 -7.6 -9.2 -8.6 9.9 3.4

Telcos 158 -4.2 7.9 9.1 9.8 20.0 17.5 16.2 2.5 14.3 8.1 -0.5 0.9 -3.5 16.7 3.9

Commerce 41,816 -7.0 1,475.4 1,702.2 1,943.3 28.3 24.6 21.5 11.4 15.4 14.2 -0.4 -0.8 -2.8 22.6 2.0

Property 315 -4.6 21.0 23.5 25.9 15.0 13.4 12.2 12.3 12.0 10.3 -0.7 -0.6 5.2 14.1 3.1

ConMat 10,924 -12.9 872.2 939.3 989.7 12.5 11.6 11.0 -2.8 7.7 5.4 -7.8 -7.4 -20.9 5.6 3.9

Transport 363 -5.6 11.7 13.6 14.9 31.2 26.7 24.3 39.2 16.7 9.8 -1.3 1.0 15.9 13.3 1.8

Food 11,767 -15.5 528.5 674.4 773.0 22.3 17.4 15.2 -18.8 27.6 14.6 -21.6 -13.1 -9.2 8.9 2.5

Healthcare 5,830 9.3 155.2 174.0 195.8 37.6 33.5 29.8 -4.2 12.2 12.5 2.6 1.9 9.0 15.1 1.5

Index EPS PER (x) EPS growth (%) YTD EPS revision (%)

28

Fig 2. SET Index-12-month forward consensus PER

Fig 3. SET Index-12-month forward consensus PBV

Source: Bloomberg, KS Research Source: Bloomberg, KS Research

Lower 2018E SET Index target to 1,805. We lower our 2018E SET Index target to 1,805

from 1,898 previously, due solely to the tariff hikes by the US and China in early July. The

93-pt downgrade represents 25% of the impact of a full-blown trade war, which we

estimate at 370 pts.

Despite our SET Index target downgrade, we remain upbeat on the market’s outlook on

the back of positive economic momentum, improving asset quality and more signs the

provincial economy is stabilizing. The key big-picture assumptions behind our positive

view remain: 1) a general election in 2019; 2) no major economic slowdown in EMs; and

3) a benign global trade environment. We believe that the first round of tariff hikes by the

US and China will still have only a marginal impact on Thai exports as the targeted

products account for only 0.1% of total exports from Thailand (see Topical report-

Gauging the impact of US-China tariff (2), 13 June 2018).

Fig 4. SET index targets and implied PER valuations


We have made some slight adjustments to our sensitivity analysis. Our three key assumptions remain that a general election will be held in 2019, there will be no major economic slowdown in EMs and a benign global trade environment, while our sensitivity analysis offers SET Index targets if these assumptions do not hold. In this update we have lowered the assigned PER in the case of an “EM slowdown” to 15.3x from 15.8x previously and 15.5x for the case of a “full-blown trade war” from 15.8x previously. Our

-2SD = 9.92

-1SD = 11.55

MEAN = 13.17

+1SD = 14.8

+2SD = 16.43

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

Dec-0

9

Jun-1

0

Nov-1

0

May-1

1

Oct-

11

Mar-

12

Sep-1

2

Feb-1

3

Aug-1

3

Jan-1

4

Jun-1

4

Dec-1

4

May-1

5

Nov-1

5

Apr-

16

Sep-1

6

Mar-

17

Aug-1

7

Jan-1

8

Jul-18

(x)

-2SD = 1.5

-1SD = 1.69

MEAN = 1.88

+1SD = 2.06

+2SD = 2.25

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Dec-0

9

Jun-1

0

Nov-1

0

May-1

1

Oct-

11

Mar-

12

Sep-1

2

Feb-1

3

Aug-1

3

Jan-1

4

Jun-1

4

Dec-1

4

May-1

5

Nov-1

5

Apr-

16

Sep-1

6

Mar-

17

Aug-1

7

Jan-1

8

Jul-18

(x)

2017A 2018E 2019E 2020E

SET index EPS BB consensus 99.2 108.8 119.8 129.6

- implied growth (%) 9.7 10.1 8.2

KS 2018 year-end SET Index target 1,805

Implied 12-months forward PER (x) 16.6 15.1 13.9

Current SET Index (20 July) 1,671

- % upside/(downside) to current SET index 8.0

- % TSR (assuming 3.0% dividend yield) 11.0

29

SET Index target under the worst-case scenario (i.e. misses on all three positive assumptions) will be 1,335 vs 1,423 previously.

Fig 5. Sensitivity analysis on KS's SET Index target (revised)


Below are short explanations of each scenario:

• In the case the election is delayed to 2020E, FDI and hence private investment will also be delayed. Moreover, consumption will likely be affected due to lower consumer confidence.

• In the case that the emerging-market slowdown spreads to Vietnam and India, with whom Thailand has significant economic exposure, we expect slowdowns in trade and tourism. Note that Vietnam accounts for 5% of Thailand’s total export values and 3% of total tourists.

• This is an extreme and unlikely scenario in our view. However, if a full-scale trade war erupts, according to the World Bank's estimate, global trade could shrink by 9%. Thus, the hardest hit among Thai GDP components would be exports of goods and services, followed by imports of goods and services, private consumption, and private investment. However, we expect the government to mitigate the impact with stimulus packages, similar to what happened in 2009.

Fig 6. Sensitivity analysis on KS's macroeconomic forecasts

Source: Bloomberg, BOT, MOC, MOTS, NESDB, KS Research

Maintain our view on rate hike in 1Q19E despite likely more hawkish

BOT tone

2019E market EPS EPS growth (%) Assigned PER SET Index Downside to SET Index target

Base case 120 9.7 15.8 1,898

1. No election in 2019 118 8.0 15.3 1,810 88

2. EM slowdown 117 7.0 15.3 1,793 105

3. Full-blown trade war 99 -10.0 15.5 1,528 370

1+2+3 1,335 563

KS forecasts

2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E

GDP (%YoY) 4.5% 4.2% 4.4% 3.8% 4.3% 3.9% 4.0% 0.3% 3.9% -0.1%

Private consumption 3.5% 3.2% 3.5% 3.1% 3.5% 3.0% 3.2% -1.5% 3.1% -1.6%

Government consumption 2.4% 3.0% 2.4% 3.0% 2.4% 3.0% 2.4% 5.0% 2.4% 5.0%

Gross fixed capital formation 5.2% 7.5% 5.0% 6.2% 5.2% 7.5% 5.0% 1.9% 4.9% 0.6%

Private capital formation 3.8% 6.8% 3.5% 5.0% 3.8% 6.8% 3.5% -1.0% 3.3% -2.8%

Public capital formation 9.9% 9.7% 9.9% 9.7% 9.9% 9.7% 9.9% 9.7% 9.9% 9.7%

Exports 6.3% 5.2% 6.3% 5.2% 5.7% 3.9% 4.7% -4.5% 4.7% -4.5%

Export of goods 5.3% 5.4% 5.3% 5.4% 4.8% 4.0% 3.8% -5.0% 3.8% -5.0%

Exports of services 9.2% 4.5% 9.2% 4.5% 8.1% 3.5% 7.1% -3.0% 7.1% -3.0%

Imports 8.3% 5.9% 8.3% 5.9% 7.8% 4.6% 6.8% -4.5% 6.8% -4.5%

Imports of goods 8.5% 6.4% 8.5% 6.4% 8.0% 5.0% 6.9% -4.0% 6.9% -4.0%

Imports of services 7.2% 3.4% 7.2% 3.4% 6.7% 2.5% 5.9% -7.0% 5.9% -7.0%

Base case No election in 2019E EM slowdown Full-blown trade war

Full-blown trade war

& No election in

30

While we expect the BOT’s statements in 2H18E to be more hawkish (vs those in 1H18E), we believe a first rate hike since October 2011 will take place in 1Q19. Given the strong external stabilizing factors (massive current account surplus, low external debt, and strong foreign reserves), Thailand is in better shape compared with its regional peers to weather the concerns about emerging markets, allowing the BOT to keep an accommodative monetary policy in place to support a headline inflation recovery in a sustainable manner.

Overall inflation recovery should continue, but at a gradual pace and well below the BOT’s higher-end CPI target of 4%. Our estimates suggest the 12-month average of headline inflation will barely reach the lower bound of the inflation target in 2H18E (1.1% in 3Q18E and 1.2% in 4Q18E). The annual average of headline inflation (BOT’s preferred basis) is expected to reach 1.1% for FY2018E by the BOT (vs 1.3% for our forecasts).

Fig 7. KS’s CPI forecasts

Fig 8. KS’s CPI forecasts (4Q moving average)

Source: Ministry of Commerce, KS Research Source: Ministry of Commerce, KS Research

Fig 9. Summary of macroeconomic forecasts

Source: Bloomberg, BOT, MOC, MOTS, NESDB, KS Research

Thai banks started to show better asset quality

Sector NPL ratio dropped QoQ from 3.81% to 3.67% in 2Q18

0.6%

1.3%

1.6%

1.4%

0.6% 0.8%

1.1%1.2%

0.0%

0.5%

1.0%

1.5%

2.0%

1Q18 2Q18 3Q18E 4Q18E

(%, YoY)KS Research quarterly inflation forecast

Headline CPI Core CPI

BOT's headline inflation target: 2.5 % 1.5 %4.0%

0.5%

0.8%

1.1%1.2%

0.5%

0.6%

0.8%

0.9%

0.0%

0.5%

1.0%

1.5%

2.0%

1Q18 2Q18 3Q18E 4Q18E

(%YoY, 4QMA)KS Research quarterly inflation forecast

Headline CPI (4QMA) Core CPI (4QMA)

BOT's headline inflation target: 2.5 % 1.5 %

4.0%

KS Econ forecasts 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Avg (2005-17)

GDP (%YoY) 0.8% 7.2% 2.7% 1.0% 3.0% 3.3% 3.9% 4.5% 4.2% 4.0% 3.5%

Private consumption (%YoY) 1.8% 6.7% 0.9% 0.8% 2.3% 3.0% 3.2% 3.5% 3.2% 3.2% 2.6%

Public consumption (%YoY) 3.7% 7.2% 1.5% 2.8% 2.5% 2.2% 0.5% 2.4% 3.0% 2.9% 4.9%

Gross fixed capital formation (%YoY) 4.9% 10.7% -1.0% -2.2% 4.3% 2.8% 0.9% 5.2% 7.5% 8.6% 3.2%

Private investment (%YoY) 9.5% 11.8% -1.5% -0.9% -2.1% 0.5% 1.7% 3.8% 6.8% 8.3% 3.2%

Public investment (%YoY) -8.6% 7.0% 0.8% -6.6% 28.4% 9.5% -1.2% 9.9% 9.7% 9.5% 4.0%

Exports of goods&services (%YoY) 9.5% 4.9% 2.7% 0.3% 1.6% 2.8% 5.5% 6.3% 5.2% 5.1% 4.8%

Export of goods (%YoY) 8.8% 2.2% 0.1% 0.8% -2.0% 0.3% 5.6% 5.3% 5.4% 5.2% 4.1%

Exports of services (%YoY) 13.6% 19.3% 14.6% -1.7% 16.2% 11.5% 5.1% 9.2% 4.5% 4.6% 8.2%

Imports of goods&services (%YoY) 12.4% 5.6% 1.7% -5.3% 0.0% -1.0% 6.8% 8.3% 5.9% 5.7% 4.4%

Imports of goods (%YoY) 14.4% 7.1% 1.8% -6.3% 0.2% -2.3% 8.5% 8.5% 6.4% 6.0% 4.8%

Imports of services (%YoY) 4.5% -1.1% 1.1% -0.5% -1.0% 4.6% -0.3% 7.2% 3.4% 4.0% 3.0%

Nominal export of goods (Customs basis, %YoY) 15.1% 2.9% -0.3% -0.5% -5.8% 0.5% 9.9% 7.7% 7.2% 6.1% 7.7%

Nominal import of goods (Customs basis, %YoY) 25.1% 8.9% 0.5% -9.1% -11.0% -4.2% 14.7% 15.2% 9.2% 7.4% 8.3%

Trade balance (USD bn) 12.2 0.0 0.0 17.2 26.8 36.5 31.9 19.1 16.5 14.8 18.7

Trade balance (% of GDP) 3.3% 0.0% 0.0% 4.2% 6.7% 8.9% 7.0% 3.7% 3.1% 2.7% 5.6%

Tourist arrivals (mn.) 19.2 22.3 26.5 24.8 29.9 32.6 35.4 38.6 40.3 41.9 21.1

Tourist arrivals growth (%YoY) 20.3% 16.3% 19.0% -6.5% 20.6% 8.7% 8.8% 9.0% 4.5% 4.0% 9.3%

Current account (USD bn.) 9.4 -1.7 -4.9 15.2 32.1 48.2 49.3 40.5 39.9 40.2 14.8

Current account (% of GDP) 2.5% -0.4% -1.2% 3.7% 8.0% 11.7% 10.8% 7.8% 7.6% 7.4% 3.8%

HL inflation (%YoY) 3.8% 3.0% 2.2% 1.9% -0.9% 0.2% 0.7% 1.3% 2.0% 2.2% 2.3%

Policy rate at year end (%) 3.25% 2.75% 2.25% 2.00% 1.50% 1.50% 1.50% 1.50% 2.00% 2.50% -

THB/USD at year end 31.6 30.6 32.7 32.9 36.0 35.8 32.6 32.5 33.8 35.0 -

THB/USD avg 30.5 31.1 30.7 32.5 34.3 35.3 33.9 32.0 33.1 34.5 -

Dubai oil price avg (USD/barrel) 106.2 108.9 105.4 96.6 51.1 41.4 53.1 70.0 80.0 75.0 -

31

NPL ratios of Thai banks in 2Q18 declined QoQ from 3.81% to 3.67% on a lower gross change in NPLs, active NPL write-offs and strong loan growth. Most of the new NPLs were still from SME and SME-related housing loans. As these two key factors have driven Thai banks’ NPLs since 2015, we believe that the “residual” impact on their asset quality will decrease from here (See Banking sector-2Q18 NP beat; improved asset quality, 23 July 2018).

The gross change in NPLs in 2Q18 dropped from 1.0% in 1Q18 to 0.6% in 2Q18 and was still mainly from relapsed NPLs, while banks continue to see lower new NPL formation. Due to the improved asset quality, overall credit cost for the sector decreased QoQ from 133 bps to 125 bps. The upcoming new NPL formation data by the Bank of Thailand (to be released on August 20) will provide a more accurate picture of improving asset quality in 2Q18 as the data will provide full details of new NPL formation, relapsed NPLs, debt restructuring and NPL write-offs.

Fig 10. NPL ratios by bank; BBL’s NPL ratio dropped

sharply QoQ from lower formation and higher

outflows

Fig 11. Estimated NPL formation fell significantly QoQ

from 1.0% to 0.6%

Source: Company data, KS Research Source: Company data, KS Research

Fig 12. SML ratios of large banks: BBL’s SML dropped

sharply to the lowest level since 2Q13

Fig 13. Estimated write-offs rose QoQ in 2Q18

Source: Company data, KS Research Source: Company data, KS Research

4.04%

3.21%

5.64%

2.28%2.69% 2.71% 2.69%

4.51%

3.67%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

BBL

SCB

KTB

BAY

TCAP

TM

B

TIS

CO

KKP

SECTO

R

NPL ratio

2Q17 4Q17 1Q18 2Q18

1.2%

1.1%

1.2%

1.0%

1.6% 1.7%

1.0%1.0%

1.0%

0.6%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

Estiamted sector NPL formation

1.6%

2.5%

3.5% 3.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

BBL

SCB

KTB

BAY

SML %

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18

11.7

14.3

17.3 15.5

16.4

28.3

13.2

20.3

12.4

17.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

Estiamted write-offs (Bt Mn)

32

Fig 14. Credit cost declined 8 bps QoQ to 125 bps

Fig 15. Coverage ratio rose sharply 5 bps QoQ to 146%

Source: Company data and KS Research Source: Company data and KS Research

Key investment theme: Domestic cyclical plays

In this update we have made some changes to our sector calls and stock picks. Our key investment theme remains domestic cyclical plays, unchanged from our June strategy note (i.e. big banks, non-banks (secured) and residential property). Despite our lower SET Index target, we still have a positive view of Thai domestic demand underpinned by strong exports, robust tourist arrivals and an improving asset quality outlook. Big banks, non-banks (secured) and residential property players are still key beneficiaries of the big picture trend, and we make no changes to our key stock picks under the domestic cyclical theme, i.e., BBL, KTB, MTC, ORI, LH, AP, SPALI and QH, which occupy 8 out of our 15 most preferred stocks.

While the electronics sector will continue to benefit from the more subdued current account surplus, a weak THB and our belief of a benign global trade environment despite, the recent tariff hikes by the US and China has played out well with a 20% TSR for both KCE and HANA, but we believe further upside from the current level looks limited. As a result we remove KCE and HANA from our top picks and replace them with DELTA on a cheap valuation, an improving earnings outlook and a limited impact

from a raw material shortage.

We add TNR, a key

The case for and against pegging the baht · 2018. 8. 7. · 3 FX market monitor: Recalibrating...

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