Securities analysts expect foreign funds to exit the Thai stock market after inflation jumped to a 13-year high of 7.1% in May, with the Bank of Thailand having to deal with rising prices, potential interest rate hikes and an economic slowdown.
Pipat Luengnaruemitchai, chief economist at KKP Research, a research house under Kiatnakin Phatra Financial Group, said Thai inflation has not peaked yet and is likely to continue rising for several months because of many external factors, including rising oil prices caused by European countries' sanctions on Russian energy supplies.
He said although the Thai economy is expected to recover in the second half of the year, inflation is rising rapidly, eroding people's purchasing power, savings and ability to service debts.
Mr Pipat said surging oil prices will push up production costs and may lead companies to cut costs by reducing investment and laying off staff. Inflation will also drive up financial costs as global central banks all start to tighten their monetary policies.
"Even though Thailand is a food exporting country, the country has a very high proportion of energy and food consumption in the consumer basket compared with other countries," he said. "The effect from inflation on the population may be greater, especially on low-income people that consume higher amounts of food and energy than rich people."
Moreover, Mr Pipat said the country's financial stability is being strained by energy price subsidies that are adding to government debts.
The Bank of Thailand is expected to find a way to support a slowly recovering economy without running the risk of increasing inflationary pressures.
According to analysts from Krungsri Securities, Asia Plus Securities and Globlex Securities, inflation may cause investment to slow down in the second half as investors worry that the central bank may be pressured to raise interest rates.
The prospect of rate hikes would greatly sour market sentiment and encourage investors to sell stocks to reduce risks, causing funds to flow out of the Thai bourse.
The Thai central bank left interest rates unchanged at 0.5% on Wednesday, but Therdsak Thaveeteeratham, executive vice-president of Asia Plus Securities, said the monetary policy committee will likely implement interest rate increases at subsequent meetings this year to curb inflation.
He said both global and domestic inflation rates are expected to remain on an uptrend while the baht continues to depreciate. On Wednesday the currency stood at 34.46 baht per US dollar, up 3.86% year-to-date.
Investors also see a high probability of interest rate hikes this year because the one-year bond yield is still above the policy rate of 0.5%, at 0.66%, 16 basis points higher.
Mr Therdsak said the increased chance of rate rises will cause funds to flow out of the Thai market.
