NERUDA: Expects central bank to be proactive in pushing growth.

UBS Securities (Thailand) has forecast that the central bank's policy interest rate will be lowered 150 basis points in the course of the year, and the interest-rate reductions will pave the way for the central bank to lift its harsh 30-per-cent reserve requirement.

The international broker has overweighted the Thai stock market with an estimate of 20-30 per cent upside from the current level. Supporting the prediction, foreign investors have turned to piling up Thai shares with a net position of Bt10.91 billion in the past week.

"The lower the interest rate goes, the quicker the Bank of Thailand (BOT) will relax the capital control," said Keith Neruda, executive director of UBS Investment Research.

He said the interest-rate cuts would reduce interest in bonds, and foreign investors' demands to buy baht to invest in Thai bonds would then be weakened. At that point, the central bank will feel at ease in revoking the capital-control measure.

"There are several areas where government policy could surprise on the upside. The Bank of Thailand underestimated the effect of the change in government and subsequent events on the country's domestic demand. However, with evidence suggesting domestic demand has weakened, we expect the BOT will take a more active role in stimulating the economy through the use of monetary policy over and above the first cut of 25 basis points just announced," he said. "Policy decisions are likely to become more market-friendly."

However, the determining factors in how much the policy interest rate can be cut are a possible resurgence of high inflation and the fast recovery of private consumption.

UBS predicts the baht will remain at about 35 to the US dollar this year.

On Wednesday, the central bank's Monetary Policy Committee set its new benchmark, the one-day repurchase rate, at 4.75 per cent, cutting it down nearly a quarter of 1 per cent from 4.9375 per cent.

Neruda said the controversial amendments to the Foreign Business Act were better than expected and likely to prove less damaging to the economy than initially thought.

He said UBS was bullish about the Thai stock market, because Thai shares had slumped sharply, and sentiment was going to improve. The Thai stock market lost nearly 14 per cent of its valuation, triggered by the BOT's harsh reserve requirement, the New Year's Eve bombings in Bangkok and the draft amendments to the Foreign Business Act.

"Thailand's valuation discount to its regional peers is nearly as high as it was when it peaked in January 1997, even though corporate balance sheets are much stronger today," Neruda said. "Thailand's dividend yield of more than 5 per cent is particularly attractive, given that we're at the start of a falling interest-rate cycle. Further cuts should support a rerating."

The broker estimates that the dividend yields of Thai listed companies this year - at 5.1 per cent - will be the highest in Asia, where yields are expected to average 2.8 per cent.

Neruda said attractive dividend stocks included Tisco Bank, Siam Commercial Bank, Land and Houses, Advanced Info Service, Siam Cement, and MCOT.

UBS expects earnings per share of listed firms to rise 10.9 per cent this year, compared with an estimated contraction of 1.8 per cent last year. The broker is bullish on the banking, telecom and property sectors.

Meanwhile, Deputy Finance Minister Sommai Phasee said that bond yields, which fell 10 basis points after the BOT cut its policy interest rate, will come as a boon to the government's plan to issue bonds to finance a budget deficit of Bt142 billion in the current fiscal year.

The Finance Ministry believes the central bank's 30-per-cent reserve requirement is not severe, following moves to "loosen" the measure, he said.

The ministry does not see the measure resulting in a capital outflow. However, this might result from still-solid economic growth, a stronger trend in regional currencies and the prevailing high returns from bonds, said Sommai.

Oranan Paweewun

The Nation