The Thai capital market is bracing for an exodus of foreign investors as the US Federal Reserve (Fed) will soon tighten its unprecedented monetary easing stance, said Bank of Thailand governor Prasarn Trairatvorakul.
"Only part of the funds has been pulled out of the bond market. The country's foreign reserves, however, can cushion risks even if all funds are moved out as foreigners' holdings in Thai bonds is far smaller than foreign reserves at around US$200 billion," he said.
Foreigners' holding in Thai bonds amount to 800 billion baht, representing 12% of the overall bond market. Local bonds with 4- to 5-year maturity are the most popular type among offshore investors.
Mr Prasarn said that foreign investors also yanked money out of Thai equities but the amount is deemed to be minimal.
"If the Fed exits QE [quantitative easing], it won't be a big problem for Thailand. But the Bank of Thailand will monitor the situation closely," he said.
Financial liquidity in the local market has fallen to 4.7 trillion baht from 4.9-5.0 trillion baht, he said.
Growing expectations that the Fed will taper its stimulus in coming months and that this could dent the demand for assets among emerging markets have triggered foreign investors' selling off Thai bonds and stocks since May 23, after chairman Ben Bernanke said that the Fed will pare the stimulus if America's economic recovery is sustained.
The selling spree by offshore players ahead of the US Federal Open Market Committee (FOMC)'s meeting today and tomorrow sent the Thai stock market into turmoil last week, while the baht retreated beyond the 31-mark at one point from the year's strongest level of 28.55 to the dollar in mid-April.
Assistant governor for Financial Markets Operations Group Chantavarn Sucharitakul said foreign investors have been net sellers of Thai bonds and equities at a combined value of 90 billion baht so far this year.
"Foreign investors were net sellers, shedding 40 billion baht of Thai bonds from May 22 to June 14, representing a third of their net buying since early this year. If considered from the baht's weakness, I assume that some funds are flowing out," she said.
Foreign investors' exodus from Thailand is in line with the region, but it is difficult to tell at the moment whether they will return to the Thai markets, said Mrs Chantavarn.
In a related development, Kasikorn Research Centre forecasts that the Fed will maintain its $85-billion-a-month asset purchase scheme as a rush could pose risks to the sustained recovery of the world's largest economy.
Winding down the asset buying scheme gives the global financial market time to adjust to unstable market conditions, the research house said.