MNI ANALYSIS: MonPol Divergence To Drive Ringgit Gains Vs Baht

By Stuart Allsopp

     SINGAPORE (MNI) - Divergent monetary policy stances between the Bank of

Thailand and Bank Negara Malaysia, among other factors, suggest that the

ringgit's recent outperformance over the baht has further to go, despite the

risks posed by the upcoming Malaysian elections.

--MANY SIMILARITIES

     The economies of Thailand and Malaysia share a number of similarities from

solid current account surpluses and broadly balanced external debt positions, to

high levels of domestic private debt and middling fiscal pictures. Malaysia has

the disadvantage of having a higher share of local bonds owned by foreigners

(around 30% compared to Thailand's 15%), meaning that rising global interest

rates have a greater tendency to trigger portfolio outflows. On the other hand,

Thailand has the disadvantage of being a net energy importer making it

susceptible to rising global energy prices.

--MONETARY STANCE THE KEY DIFFERENCE

     The key policy difference between the two countries at present, however, is

the ongoing divergence in monetary policy stances. Not only is Malaysia's

overnight policy rate 175bps above Thailand's (at 3.25% versus 1.50%), but

policymakers have shown a much more hawkish bias in recent months. 1-year swaps

are now 242bps higher in Malaysia than Thailand as BNM looks to high rates amid

rising global pressures while the BOT remains preoccupied with low rates of

trailing CPI.

     BOT Governor Veerathai Santiprabhob noted on April 4 that accommodative

policy is still needed given the low inflation rate, even as real GDP grows at a

solid 4.0%.

     While inflation is indeed lower in Thailand relative to Malaysia (0.79%

versus 1.30% in March), real yields are still significantly higher in Malaysia.

The higher real yield is not a reflection of substantially greater default risk

facing Kuala Lumpur, with both 5-year CDS spreads showing negligible default

risk (74bps for Malaysia and 44bps for Thailand).

--OIL PRICE TO BENEFIT MYR, UNDERMINE THB

     Real yield spreads are likely to head further in Malaysia's favour, not

just because of BNM's more hawkish monetary policy stance but also the

relatively favourable terms of trade position. As a net hydrocarbons exporter,

Malaysia should begin to benefit from the recent surge in oil prices as natural

gas prices rise, which should support demand for the ringgit. Conversely, higher

oil import prices in Thailand risks reigniting inflation pressures.

     Regarding the risk of outflows from the Malaysian bond market amid

continued hikes in U.S. interest rates, while certainly a risk but 3-year

government bond yields remain 114bps above their U.S. counterparts at present,

with the spread even higher in real terms with Malaysian inflation currently

106bps below that of the U.S.

     Finally, in spite of the diverging monetary policy stances, the ringgit's

real effective exchange rate is undervalued from a historical perspective, while

the baht's is slightly overvalued. As the real GDP growth outlook for both

countries is similar, we should not see a secular rise in the THB's real

effective exchange rate relative to the MYR, and so mean reversion should take

place, causing relative strength in the MYR, even in the absence of the other

factors mentioned above.

--THB UNDERPERFORM DESPITE RISING RATES

     MNI sees the Malaysian ringgit outperforming the Thai baht over the coming

weeks and months. Even though we expect the BOT to shift to a more hawkish

stance on monetary policy, this is likely to be driven by baht weakness itself.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

[TOPICS: M$A$$$,MN$FX$]