The West Coast Trail Presentation for SAIT international students
KBank Capital Market perspectives Portugal in focus
1. KBank Capital Market Perspectives Market Updates
Macro / FX / Rates
Portugal in focus – problems, changes and possible impacts
23 April 2012
Summary of author’s views Nalin Chutchotitham
nalin.c@kasikornbank.com
• Portugal’s debt problem is a result of rigid regulations in
the product and labor markets, leading to continued
deterioration of productivity and competitiveness
• Political risks are lower compared to other PIIGS and the
new government indicated strong commitment to reforms
• Significant changes had been made with economic
structure to restore competitiveness to Portugal, but more
time is needed
• IMF assessed that existing financial assistance is
adequate yet risks remain; additional funds from Europe
could be warranted but funds are available
• Market likely to be more prepared after experience with
Greece but by rising bond yields suggest continued
skepticism
• Impacts on Thailand’s exports and financial market likely
to be similar to the past – indirect negative impact on SET
and Thai baht from global risk aversion
Stay worried about Spain but don’t forget Portugal
The market seemed to be somewhat forgetful. It is now worrying about Spain,
which is the fourth largest economy in the eurozone with a huge housing market
trouble. Yet, the concerns in Portugal remained and it is worth noting as well,
especially since the eurozone shares the same pool of limited emergency
funding e.g. EFSF and ESM. We gather here facts and recent data for readers to
understand the problems of the Portuguese economy better and finally reflect on
what could be the impacts on the financial markets.
First, we go back in time to review the Page 5 of the IMF’s report in June 2011
(two months after Portugal officially sought financial assistance). The aspects
mentioned below clearly illustrated the weaknesses in Portugal’s economy and
the dire situation that it must overcome over the next decade. Towards the end of
the report, we will discuss the IMF’s latest views reflected in its April 2012 report.
First, the early findings on Portugal’s economy below:
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1
2. Table 1. IMF’s report on Portugal’s economic structure and weaknesses
Topic Findings
Average GDP growth in Portugal during 2000-2010 is around 1.0%, compared to that
Slow economic growth of the euro area’s 1.5%
GDP per capita (income per head) rose very slowly during 2000-2010 period, falling
Slow income growth behind the euro-area average and even Greece.
Working-age population with upper secondary education and above is one of the
Weaker labor force weakest in Europe. The percentage of such population is < 30% while the average of
EU and OECD countries are well above 60%. (based on 2007 data)
According to 2008 data, Portugal has one of least flexibility with regards to the
Product and labor product market regulations and labor market regulations. Greece’s score is far worse
market rigidity than Portugal under IMF’s study but Portugal’s score is a far cry from the rest.
In this aspect, IMF showed that the PIIGS countries all have trouble, as real effective
Real effective exchange exchange rate had been on a relatively steady rise since 1995, in contrast to the euro
rate (based on unit area which fell. Higher REER means that exports are more costly and therefore less
labor costs) competitive. Italy is the worst among the PIIGS, with Portugal in the second place.
1994-2007 data (excluding those after the financial crisis since 2008) for
Increase in government’s primary expenditure showed that Portugal had been increasing its
government’s spending expenditure by nearly 10% of GDP during the period, on par with Greece. Spain and
Ireland saw declines of expenditure while Italy’s record was close to zero.
Once debts of corporate sector (non-financial) and household sector are added to
the government debt, Portugal’s indebtedness ranks among the worst-performing in
Total debt to GDP the euro zone at 300% of GDP. Ireland performs worse than Portugal in this aspect
but both are much worse off than Germany at 200% of GDP and France at 250% of
GDP.
A measure of banking sector’s indebtedness – loan-to-deposit ratio, indicates that
Loan-to-deposit ratio Portugal is again among the worst performers. Portugal’s LDR is around 140%
(June 2010) compared to most of the euro area that are below 120%.
Source: IMF
Further illustrations of Portugal’s debt problems
First, let us look at the indebtedness of Portugal’s government. Portugal’s public
debt as a share of its economy (debt-to-GDP on Fig 2) had usually been lower
than that of the eurozone’s (EMU) average prior to the year 2007 with an
average of 64.5% during 2000-2007 compared to 71.3% of the EMU. However,
the ratio had significantly exceeded the EMU’s average afterwards and the main
reason was the government’s inability to reign in spending and fiscal budget
deficits in the later years.
In the year 2005 when it first missed the Maastricht Treaty’s deficit/GDP ratio
target of 3%, Portugal had recorded a fiscal shortfall of 5.9% but this figure
continued to rise to 9.8% in 2010 as a result of economic weakness. Clearly, the
2008 global financial crisis had deepened the economy’s existing problems.
Eventually, accumulated deficits led to a piling of debts until debt-to-GDP ratio
rose to 93%, compared to the 85% average of the eurozone. Despite such
weakness of fiscal health, the government’s borrowing costs remained relatively
on par with the eurozone members and only saw significantly increases in the
year 2010, as suggested by the bond yields. This reflects that refinancing costs
did not become more pronounced until recently (Fig 3).
22
2
3. Fig 1. Deficit-to-GDP ratio % Portugal vs. eurozone Fig 2. Debt-to-GDP ratio % Portugal vs. eurozone
deficit/GDP Debt/GDP
0 100
00 01 02 03 04 05 06 07 08 09 10
-2 90
80
-4
70
-6
60
-8
50
-10
40
-12 00 01 02 03 04 05 06 07 08 09 10
Portugal deficit/gdp ratio Eurozone deficit/GDP ratio Portugal debt/gdp ratio Eurozone debt/gdp ratio
Source: Bloomberg, KBank Source: Bloomberg, KBank
Fig 3. 10-year government bond yields of Portugal Fig 4. Private sector debt as a % of GDP
% Sovereign 10-year bond yields % %
350
40 40 Private sector debt as % of GDP (2010)
35 35 300
30 30 250
25 25 200
20 20 150
15 15 100
10 10 50
5 5
0
0 0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
ly
um
l
ain
K.
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Sp
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rm
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Ir e
Fr
Gr
No
Sw
Be
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De
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Germany Spain Portugal Greece
Ne
Source: Bloomberg, KBank Source: eurostat, KBank
Apart from its government debt situation, Portugal’s private sector debt is also
very high (Fig 4), crippling the household and business sector to provide stimulus
to the economy and this also added to the banking sector’s weakness. (Recall
ECON101: engines of growth of an economy include government’s spending,
private consumption, private investment, and exports). Reuters reported in March
2012 that, citing Portugal’s central bank, total private sector debt is close to three
times of the country’s GDP (Eurostat reported private sector debt at 249% of
GDP in 2010. Increased risks also came from the EUR31bn of corporate debt
due this year - its size about 40% of what Portugal have secured in terms of
financial aid from EU/IMF, which is EUR78bn.
In fact, the economy in Portugal was not always in such a dire state. Portugal did
benefit from becoming part of the European Union (EU) and the European
Monetary Union (EMU) as there were improvements in terms of both economic
growth and stability prior to the global financial crisis in 2008. Later in April 2007,
The Economist magazine had entitled a report on the Portuguese economy “A
new sick man of Europe”. The labels were a result of underperforming numbers
in Portugal as compared the euro zone neighbors as well as the whole of the
European Union (EU).
33
3
4. According to the U.S. government’s record:
“Before the economic crisis, Portugal's membership in the EU had
contributed to stable economic growth, largely through increased trade
fostered by Portugal’s low labor costs and an influx of EU funds for
infrastructure improvements. Portugal's subsequent entry into the EMU
brought exchange rate stability, lower inflation, and lower interest
rates. Falling interest rates, in turn, lowered the cost of public debt and
helped the country achieve its fiscal targets. Until 2001, average
annual growth rates consistently exceeded those of the EU average.
However, a dramatic increase in private sector loans led to a serious
external imbalance, with large capital account deficits that year. De-
leveraging by Portuguese banks to meet the June 2011 EU
requirement to increase core tier-one capital ratios above 9% has
caused bank lending to tighten.”
Source:http://www.state.gov/r/pa/ei/bgn/3208.htm
We highlight further the degree of deterioration of the economy and
competitiveness using the World Economic Forum’s Global Competitiveness
Index. Portugal’s ranking has fallen from 22nd in the year 2005 (higher-ranked
than Spain, Ireland, France and Hong Kong) to 40th (out of 131 countries) in the
2007-2008 ranking and finally 46th (out of 139 countries) in the 2010-2011
ranking.
Fig 5. World Economic Forum’s Global Competitiveness
Fig 6. Portugal’s GDP growth vs Eurozone’s
Index
World competitiveness ranking % GDP Growth % yoy
90 Germany
8.0
80 6.0
Greece
70 4.0
60 Ireland 2.0
50
46 0.0
40 40 43 43 Italy
34 -2.0
30
24 Portugal -4.0
20 22
10 -6.0
Spain
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10
0
04-05 05-06 06-07 07-08 08-09 09-10 10-11 Year
Spain Portugal Eurozone
Source: WEF, KBank Source: Bloomberg, KBank
No quick fix for Portugal’s economy
Household spending: Household fixed consumption level, at the end of 2011, had fallen
to the same level observed in 2006. The pace of decline is more significant in recent
quarters, with Q4/2011 consumption dipping 6.6% yoy, a fourth straight quarter of
contraction. This is a stark contrast to the average growth rate of 0.7% per quarter since
the year 2000 and 1.5% if we exclude the period after 2007. Yet, given the high level of
household debt and low levels of saving rate, it seems that households’ balance sheets
does not accommodate increased spending either.
44
4
5. Fig 7. Household fixed consumption level and growth Fig 8. Household saving rate (2010)
EUR mn % yoy %
20
28000 4
27000 2 15
26000 0
10
25000 -2
5
24000 -4
23000 -6 0
22000 -8
Es al
S l an d
S p re a
rm )
xe c e
S w ia
d
ep ds
Un Hu nia
S l ium
C y ly
ia
A u rg
Cz e th kia
m
in g y
I re n
Be ny
P o b li c
E u -27
F in s
G e (2
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to
N ova
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EU
lg
u
ov
e c er l
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
ro
m
Household Fixed Consumption (LHS) Household consumption growth % yoy
Source: Bloomberg, KBank Source: Eurostat, KBank
Wage growth slowed. Another factor that had been a drag on the household
consumption was the pace of wage increase. Furthermore, the economic recession made
unemployment rate surge quickly from 7.5% in the first half of 2008 to 14.0% as of the
fourth quarter of 2011. During the period between 2001 and 2003, Portugal’s
unemployment rate had been well below the 6% mark. Notice that the poor labor market
conditions and economic recession had also led to slower pace of real wage growth
during 2008-2010 period, before rebounding to modest growth in 2011.
Confidence level is also low: Confidence indicators helped to reflect on the reasons
why household consumption had been falling. Consumer confidence in the year 2011 hit
levels below that of the level observed during the 2008 financial crisis, although it had
since rebounded, reflecting a dismal outlook. Meanwhile, the overall outlook on the
economy remained depressing with the economic sentiment index (which includes
service sector, industrial sector, and the household) sliding quickly in the year 2011 to
levels near to the 2009 recession.
Fig 9. Real wage growth (using wage growth – inflation) Fig 10. Confidence levels near 2009 lows
%
120 0
2.0
1.5 110 -10
1.0 -20
100
0.5 -30
0.0 90
-40
-0.5 80
-50
-1.0
70 -60
-1.5
-2.0 60 -70
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
Difference between Portugal's and eurozone's inflation rate Portugal economic sentiment index (LHS) Portugal consumer confidence index (RHS)
Source: Bloomberg, KBank Source: Bloomberg, KBank
Improving exports and current account balance: There is some comfort in Portugal’s
trade data and the current accounts. Exports had seen continued positive growth from
2010-2012 while imports had declined, allowing for the trade balance record lower
deficits in recent months. The 6-month moving average of current account deficit was
EUR500bn in January 2012 and the same measure for the trade balance deficit narrowed
to EUR720bn in February 2012 – both indicators improved by more than two-folds from
two years ago.
55
5
6. Still, the major trading partners, both import and exports, of Portugal are the EU nations.
Stricter fiscal spending rules within Europe this year and going forward poses risks to
trading activities to Portugal and the region as a whole. Portugal’s improvement in its
competitiveness, be it in terms of higher labor productivity or lower labor costs, would
have to compensate for risks on its exports’ exposure to Europe as well and this depends
heavily on the government to implement structural changes to the labor and product
markets. In fact, Fig 13 below shows that the growth in labor cost (including costs for
hiring workers other than wages) had slowed in the past couple of years, pointing to a
favorable change. However, recent labor costs may be reflecting the consequences of
the rising unemployment rate instead of significant adjustments in the labor market’s
regulatory system. In any case, the IMF gave a positive comment on this change on
Page 6 of its March 2012 report (after a Third Review of Portugal’s financial aid program):
Competitiveness indicators have improved, albeit at a moderate pace. Wage
moderation and higher productivity per worker have allowed for more favorable
unit labor costs developments in Q4. There are also signs that the real exchange
rate depreciation trend may be accelerating, while market shares of exports have
remained broadly stable through September 2011.
Fig 12. Closing gaps – deficits in current account
Fig 11. Exports outpacing imports growth
balance
EUR bn
30 0
20
-500
10
0 -1000
-10
-1500
-20
-30 -2000
-40 -2500
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Portugal imports % yoy Portugal exports % yoy Current account balance (6m moving average) Trade balance (6m moving average)
Source: Bloomberg, KBank Source: Bloomberg, KBank
Fig 14. Labor cost adjustment had begun but only
Fig 13. Labor cost growth and unemployment rate
slightly
% yoy % 110
10 16
8 14 100
6 12
90
4 10
2 8 80
0 6
70
-2 4
-4 2 60
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Labour cost growth % yoy (LHS) Unemployment rate (RHS) Eurozone Ireland Spain Portugal
Source: Bloomberg, KBank Source: Bloomberg, KBank
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6
7. Table 2. Key fiscal austerity measures undertaken under the agreement of EU-
IMF loan
Sector Description
- opening up of protected professions
- Increased working hours by 30 minutes a day (for private sector)
without increase in pay.(2012-2013)
- Some bank holidays removed and some shifted to Mondays
- Summer and Christmas bonuses (usually about a month’s pay)
abolished for employees earning more than EUR1,000 a month.
Labor market (2012-2013)
- Overtime pay to be halved
- Reduce restrictions on worker dismissal for redundancy and
unsuitability
- Align severance payments to EU average
- Introduced some decentralization in the wage-bargaining process.
- Improve competition law and empower the Portuguese Competition
Authority
- Prices and rents in the product market have to be dealt with to
Product and service
improve productivity in the economy. The government is assessing
market
barriers to entry and excessive rents in network industries, especially
electricity and telecommunications
- Provision of healthcare are moved to larger and more specialized
Healthcare centers.
- More contribution by patients
- Portugal has 98 state-owned companies and accounts for 4.6% of
GDP, 3.6% of the work force. Improving the efficiencies of the sector
and improving their balance sheets are key to a reduction of
government debt burden as well
- public sector’s entities to be privatized or made into stand-alone
Public sector
corporations to improve efficiency
- Examples: sale of government’s stake in a major player in the
electricity sector – Energias de Portugal – which raised EUR2.7bn.
sale of 40% stake in an energy network company REN at a premium,
raising about EUR0.6bn.
- value-added tax increase in several products
- several tax benefits removed
Taxation
- increase resources for audit
- enhance focus on large taxpayers
Source: EIU, Bloomberg, IMF
Political will for austerity and political risks ahead
Among the many debt-laden eurozone countries, e.g. PIIGS, several governments
continued to be faced with political threats from the public and their political opposition
but for the current situation in Portugal, such risks are mitigated after the June 2011
election. The present ruling parties in the government are the Social Democratic Party
(PSD) and the Popular party (CDS-PP). They came in to power after Jose Socrate’s
Socialist party’s defeat in Portugal’s general election back in June 2011 (the election was
triggered by Socrates’ resignation after his government failed to persuade the parliament
to pass its fiscal austerity package). Given such a recent election, major news agencies
had mentioned that they expect the two parties to see positive cooperation and remain in
the coalition for the next two years at least. The leader of the PSD and current prime
minister, Pedro Passos Coelho, also said that his government would carry on the
implementation of fiscal austerity measures and make sure that Portugal honor the terms
of its bail-out.
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7
8. In its February 2012 report, the Economist Intelligence Unit said it believes “the
government will have the will to see through the reform programme but… …political
stability will come under pressure, given the expected steep drop in living standards.
Violence at demonstrations is unusual in Portugal, but could flare up.” The
abovementioned suggests that while there is an absence of uncertainty of a change of
the government in Portugal, unlike several countries in the eurozone this year (France,
Spain, Greece, just to name a few), political stability risks would unlikely disappear before
the economy and living standards see significant improvement.
IMF’s Third Review and recent concerns in the market
Portugal sought financial assistance from the IMF and EU back in March 2011. Last year,
Portugal was successful in cutting its deficit from 9.8% of GDP in 2010 to about 4.0% (vs.
initial target of 5.9%) but it will face increased pressure due to economic recession. Still,
the IMF remained optimistic that Portugal would meet its 4.5% deficit-to-GDP ratio in the
year 2012.
With regards to financing for Portugal, the IMF’s staff commented that the existing
program (EUR78bn) is adequate, given the positive structural reforms carried out in the
economy. Nevertheless, there are uncertainties with regards to the timing that Portugal
can return to the market for funding, especially after the recent downgrades of its credit
rating by the three key rating agencies (now non-investment grade by all three agencies).
The IMF’s report stated that “should recovery of market access in fact be delayed, it may
become necessary to call upon the pledges by European leaders to continue to provide
adequate support to Portugal as long as the program is on track”. We believe that such
statements of uncertainties and worries had been the cause of the recent up-tick in
Portugal’s bond yields, especially during the periods when yields of other countries such
as Spain and Italy, had been falling due to ECB’s LTRO (long-term refinancing
operations).
Table 3. IMF’s Projections of Portugal’s economy 2012-2017 (page 37 of report)
- GDP may contract by 3.3% in 2012 vs. 2011’s contraction of 1.5%.
However, GDP will return to growth by 2013 but that growth would
GDP stay low at 1.5-1.9% going forward
- Output gap is likely to return to positive territory only in 2016
- Exports are projected to see positive growth rates of range 4.0-5.5%
through 2017
- Imports are likely to see slightly slower growth, thus an improvement
Exports and imports in the trade balance and current account balance is expected.
- Still, trade and current account balances are expected to remain in
the red of about 3-4.5% of GDP through 2017
- Productivity expected to see positive growth from 2013-2017 but
Labor productivity and increases would be moderate at 0.7% - 1.1%
costs - Unit labor costs are expected to see an average of 0% growth going
forward
- Public debt-to-GDP ratio is expected to peak in 2013 at 115%. A
Government debt steady but slow decline is likely to follow with the ratio projected at
109% in 2017.
Source: IMF
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9. Assessment for Portugal
Credit Rating Scale
Moody's S&P FITCH
Aaa AAA AAA
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
investment grade
A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB-
Ba1 BB+ BB+
Ba2 BB BB
Ba3 BB- BB-
B1 B+ B+
B2 B B
non-investment grade B3 B- B-
Caa1 CCC+ CCC+
Caa2 CCC CCC
Caa3 CCC- CCC-
Ca CC CC
C C C
Color codes *Red: Current rating * Blue: end-2011 *Black: end-2010
Source: Bloomberg
Moreover, the banking system remained a concern, given high levels of private sector
debt (households and non-financial corporate) and the declining in values of sovereign
bonds’ on their balance sheets. Fig 15 shows that Portuguese banks are heavily reliant
on the ECB’s cheap loans (source: IMF) and they have not been able to make adequate
repayments, causing them to increase the tenors of the loans and a huge chunk of the
loans were from the ECB’s 3-year LTRO.
Fig 15. Composition of Portugal’s banks borrowings
Fig 16. Portugal’s loan-to-deposit ratio is among the
from ECB (EUR bn): large increases in long-term loans
worst in Europe
after LTRO
LDR ratio
180
160
140
120
100
80
60
40
20
0
Loans-to-deposit ratio (domestic banks) Loans-to-deposit ratio (all banks)
Source: IMF Third Review report http://www.imf.org/external/pubs/ft/scr/2012/cr1277.pdf Source: ECB, KBank
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10. Fig 17. Portugal’s debt maturity profile (annual) Fig 18. Portugal’s debt maturity profile (monthly)
EUR mn EUR mn
25,000 12,000
Principal
Principal 10,000
20,000
8,000
15,000
6,000
10,000 4,000
5,000 2,000
0
0
Aug-12
Feb-13
Aug-13
Feb-14
May-12
Nov-12
May-13
Nov-13
May-14
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2026
2027
2030
2037
2049
Source: Bloomberg, KBank Source: Bloomberg, KBank
Going forward and possible impacts on the global financial market
Current government debt outstanding of Portugal is EUR127.5bn and financing is
covered from the EU-IMF bailout package until September 2013 when the initial plan was
for Portugal to return to the market (Greece’s debt after haircut stays at EUR143bn while
Ireland’s debt stood at around EUR84bn). Given the relatively small size of the economy
and share of debt in the eurozone (Fig 20.), the impacts on the global financial markets
could well be limited even if there is increased stress on Portugal’s financing. This is
especially so since the European financial safety nets are now better-established and
better-understood (EFSF and ESM). In addition, the “surprise” element has reduced with
Greece’s debt haircut out of the way (recall: bond swap deal with investors in March
2012), the market is likely to have a better idea of what could happen next in a haircut
situation for a small economy.
Nevertheless, risks remain with regards to Portugal’s banking sector and its economic
growth. While the government has managed to regain some control over its spending,
further losses in the financial sector could trigger a government’s bailout of the banks,
thus effectively transferring a substantial amount of debt from the private sector into the
public sector, a perfect case for Portugal’s bond yields to spike. The current three-year
financial assistance program from the EU/IMF may have to be extended or more money
would have to be provided to ease Portugal’s financial strains.
Fig 19. Government debt in nominal terms Fig 20. Public debt of Portugal as a share of eurozone’s
EUR bn Government debt in nominal values 30%
2,500 Share of eurozone's
2007 2010 25%
2,000
20%
1,500
15%
1,000
500 10%
0 5%
0%
e
l
ce
d
ain
e
um
y
ly
ga
ag
lan
an
c
I ta
an
ee
rtu
Sp
lgi
er
rm
Ire
Fr
Gr
av
Be
Po
Ge
e
l
ce
d
a in
ce
y
um
ly
ga
on
lan
an
It a
an
ee
rtu
z
Sp
lg i
rm
ro
Ire
Fr
Gr
Be
Po
Eu
Ge
Source: Bloomberg, KBank Source: Bloomberg, KBank
1010
10
11. Fig 21. Comparison of financial safety net to PIIGS’ Fig 22. Thailand’s trade (exports + imports) to EU and
debt repayment until end-2103 Portugal
% of total trade % of total trade
Combined lending ceiling of the ESM and the 16 0.12
14
0.10
12
0.08
10
Bonds and loans due by end-2013 8 0.06
6
0.04
4
0.02
2
EUR bn
0 0.00
0 100 200 300 400 500 600 700 800 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Ireland Greece Portugal Spain Italy EU-27 (left axis) Portugal (right axis)
Source: Bloomberg, KBank Source: BoT, KBank
Concerns for Thailand: Financial stress in Portugal or any other smaller European
economies would have indirect but significant impacts on Thailand’s financial markets but
limited impacts on the real sector. In terms of exports, Portugal is not a major trading
partner of Thailand but the European Union is. In the past three years, Thai exports
managed to continue growing despite of several adversities and the decline in European
markets’ exports had also been made-up for with exports growth in other markets.
The financial impacts would come via impacts on the Thai baht and the stock market.
According the EUR/THB data since mid-2009 to April 2012, the currency pair had moved
from a minimum level of 38.9 to as high as 50.3 (standard deviation of 3.16). This reflects
significant risks for exporters and imports alike, especially during periods when the
correlation between USD/THB and EUR/USD movements seem to fluctuate i.e.
sometimes highly-correlated movements, and sometimes positive/negative correlation is
observed. We noticed also that Thai media often report the value of the Thai baht in
terms of the greenback alone and so there is reduced attention of the EUR/THB
movements. This seems to suggest that perhaps businesses dealing with the euro and
European partners would have to be more alert on the changes in the market’s
sentiments as well.
Impacts from global risk aversion due to renewed concerns of Portugal’s and Spain’s
debt problems could also lead to a decline in investment appetite for the local stock
market. In fact, this is not surprising or limited to the SET index alone but also the
majority of emerging markets. While local economic fundamental supports a steadier
movement of the SET index vs the euro stoxx 600 index, it cannot be denied that major
corrections in the global equity market could cause damages to equity value here as well.
All in all, continued monitoring of European debt situation is warranted, despite of the size
of individual economies’ sizes or trading relationship with the local business.
Fig 23. Impacts of USD/THB from EUR/USD volatility Fig 24. SET index vs. Euro Stoxx 600 index
Euro Stoxx 600 index SET index
35 52
Greece's 300 1300
34 bailout 50 1200
Portugal's Greece's 280
Ireland's 48
33 bailout haircut 1100
bailout 260
46 1000
32
44 240 900
31 800
42 220
30 700
40
200
600
29 38
Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 180 500
Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
USD/THB EUR/THB (RHS) Euro Stoxx 600 index SET index
Source: Bloomberg, KBank Source: Bloomberg, KBank
1111
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13. Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or
sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we
believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained
herein. Further information on the securities referred to herein may be obtained upon request.
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