Kim Eng Offices Kelive by liaoqinmei


									 KELIVE                                                                                             Thailand
                                                                                                11 April 2007
 R E S E A R C H


MPC cites weakening domestic demand as reason for 50 bps
rate cut
Key benchmark rate lowered to 4.00%
The Bank of Thailand’s Monetary Policy Committee (MPC) reduced its one-day repurchase rate this
afternoon by 50 bps to 4.00%, as widely expected. The accompanying statement from the MPC left little
doubt that the Bank of Thailand sees the sharper-than-expected slowdown in domestic demand in the first
quarter as a greater risk than inflation, even with the recent increase in global crude prices. Furthermore,
the rate cut and greater gap between US dollar and Thai baht rates should help ease pressure on an
appreciating baht and give relief to the export sector. As such, we believe that this unusual 50 bps rate cut
is a major step in the right direction.

Banks should immediately begin another round of deposit rate cuts
We believe that commercial banks will immediately announce another round of deposit rate cuts. With
average funding costs already coming down from previous deposit rate cuts, we believe that banks should
soon be in a position to lower lending rates and still maintain their net interest margins.

GDP forecast range expected to be lowered again to below 4.00%
Due to slower-than-expected economic growth in the first quarter, we believe that the official GDP forecasts
will need to be lowered from the current range of 4.00-4.50% to below 4.00%. The government is talking
about using both monetary and fiscal policy to stimulate demand. However, monetary policy will not be
effective until commercial banks actually lower lending rates and it usually takes 3-6 months before lower
rates help stimulate demand. Secondly, the government is still have difficulties in accelerating budget
disbursement, so higher deficit spending would also be ineffectual. Thirdly, there are fears that the
strengthening baht and global economic slowdown will finally slow down export growth, which, thus far this
year, has been surprisingly resilient at 17-18%. The Commerce Ministry is projecting full-year export
growth of 12.5%.

Another 50 bps rate cut expected later this year
We believe that there are still quite compelling arguments for the Bank of Thailand to lower rates a further
50 bps over the next few MPC meetings on May 23, July 18 and August 29. We believe that subsequent
rate cuts will prod the commercial banks to continue lowering deposit rates and start more aggressive
lending rate cuts.

Interest rate plays in bank and property sectors likely to gain
As the Thai stock market widely anticipated this 50bp rate cut, we are unlikely to see a near-term rally just
before the 4-day Songkran holiday. However, we believe that the pending commercial bank rate cuts,
particularly lending rate cuts, should help improve overall market sentiment. We have turned more bullish
on the market over a one-two month view. We continue to recommend investors to buy interest rate
stocks, such as banks and property stocks, as well as selected blue chips and dividend stocks. Among our
favourites are BBL, KBANK, QH, PS, SCC and PTT.
                                                                                           Analyst : George Huebsch

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