Fasten your seatbelts and prepare for turbulence

JP Morgan Chase Bank had to absorb losses in derivatives trading of about US$2 billion. Subsequently, Barclays Bank agreed to a hefty penalty levied by US and UK authorities for its involvement in manipulating of the London Interbank Offering Rate (Libor). 

The bad news, however, did not stop there. HSBC came under investigation for its failure to comply with anti-money laundering measures. Furthermore, Standard Chartered Bank was probed for alleged violation of US sanctions against Iran. US authorities say the bank concealed illegal transactions over the past 10 years. As a result, Standard Chartered settled for a $340-million fine earlier this month. 

 After dealing with the banking industry’s woes, we should now focus on the situation in Europe and the US. Both areas are in economic difficulty. Peripheral euro-zone countries remain mired in the sovereign debt crisis with debts reaching unserviceable levels. At first, we were confident that their large and financially strong neighbours such as Germany would step in and pull them out of trouble. The existence of the euro zone and its currency were not an issue. But now, talk of a euro-zone break up and the possible end of the euro is growing ever louder. Lately, European Central Bank president Mario Draghi reassured the market that euro-zone authorities would do whatever it takes to preserve the regional grouping. The resulting boost in the euro’s value was short-lived as deep-seated market scepticism over the viability of the euro zone remained. As a result, the euro began to slide.

On the other side of the Atlantic, US economic growth has shown signs of a slowdown. The Federal Reserve is considering implementing a third round of quantitative easing (QE3). Such a move would, however, put the country at risk of a larger sovereign debt. 

All those factors have effected export-led countries in Asia. Thailand in particular has experienced a sharp slowdown in export values in the first half of 2012. The Bank of Thailand has revised the growth rate down to 5.7 per cent from the earlier forecast of 6 per cent. Export growth was expected to be 7 per cent, compared to the 15 per cent initially forecasted by the Ministry of Commerce. The bank of Thailand, however, left the policy rate unchanged at 3 per cent after its latest meeting but gave room for a more accommodative policy in the future.

The situation in the world economy remains charged with uncertainty. Problems in the euro zone and the US will not be solved overnight. In order to keep our economy going, we need to stimulate domestic demand with public spending, consumption and investment. It is noticeable that the yield curve has shifted downward in the past month in anticipation of a policy-rate cut. Meanwhile, the government issued a large tranche of bonds to fund investment projects, which has created a “crowding out” effect. It is hard to predict which way the interest rate will go. On one side, foreign investment will flow into Thai bonds to exploit the interest differential, which will put downward pressure on the interest rate. On the other side, strong loan growth and demand for cash from government to fund investment projects will put upward pressure on the interest rate. Readers may notice that banks are competing for depositors now. 

Our main focus, however, should not be on the interest rate, but on our own preparedness for the possibly turbulent times just ahead.

 

Views expressed are the writer’s own.

 

Padej Piroonsit is head of Global Sales at CIMB Thai Bank.