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Baht on higher grounds : good or bad for Thailand ?

Boris Sullivan

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Thai Baht banknote 1000

Going up ! And will stay there probably for while, considering how bullish markets seems to be on Asian markets. The baht is the best performer in August among Asia’s most- traded currencies as exchange data show global funds bought $428 million more of Thai equities than they sold. 

This is no surprise : given the circumstance, while economists expect the federal debts of the United States – its current-account and budget deficits – to jump from 70 per cent of gross domestic product to 100 per cent over the next two years.

Emerging markets, particularly in Asia, would become interesting places, because they would lead the economic recovery, while the US would remain an interesting market because of attractive asset prices.

The appreciation of the Thai baht is not caused by capital inflows but the Bank of Thailand (BoT) has been asked to keep a close watch on the currency’s appreciation and prepare measures to cope with capital inflows for currency speculation as the monetary unit hits a two-year high, Finance Minister Korn Chatikavanij said.

The finance minister told reporters that the meeting resolved that the weak US economy and its debt burden has pushed the baht to become stronger in tandem with other currencies.

The Bank of Thailand last week raised borrowing costs for a second time this year.

Ms Tarisa said Thailand’s exports had continued to grow despite the baht appreciating faster than other currencies against the dollar. “Right now, we rank second in terms of currency appreciation in the region,” she said yesterday.

Thailand’s baht had its best month since February 2008 as the economy grew at the fastest pace in 15 years in the first half of the year

“Even so, exports have risen by as much as 30%, even though the stronger baht means lower revenues in baht terms.” Exports have been the main driver of the economy this year, surging 37% year-on-year through the first six months to help push growth to 10.6% for the first half. Capital inflows from a trade surplus and investment have been a major factor pushing the baht to appreciate, despite intervention by the central bank that has pushed the country’s foreign reserves up to record levels of more than US$150 billion (4.7 trillion baht).

Ms Tarisa said while the central bank was “monitoring” the situation closely, exporters had to adjust to the changing environment by hedging against currency risk, particularly given the weak recovery in the US and European economies.

From 1956 until 1973, the baht was pegged to the U.S. dollar at an exchange rate of 20.8 baht = one dollar and at 20 baht = 1 dollar until 1978. A strengthening US economy caused Thailand to re-peg its currency at 25 to the dollar from 1984 until July 2, 1997, when the country was stung by the Asian financial crisis. The baht was floated and halved in value, reaching its lowest rate of 56 to the dollar in January 1998. It has since risen to about 32 per dollar.

The baht has gained 6.4 per cent against the greenback from the beginning of this year and ranks second in the region, behind the Malaysian Ringgit and is remaining at the same level as the Philippine Peso.

Thai baht traded on Wednesday at 31.05-31.44 against the US dollar amid growing concerns that if the baht strengthens to 30 baht against the greenback, it may have an impact on export- driven Thai economy.

The key player here is China, which has the largest surplus.

Additionally, other East Asian countries are rationally reluctant to adjust their currencies absent a Chinese revaluation, as they fear losing competitiveness. This means China’s refusal to significantly revalue its currency against the dollar is forcing a lop-sided adjustment process that places the burden of rebalancing the US trade deficit exclusively on Europe.

The bottom line is that by all reasonable standards China’s currency is under-valued against both the dollar and the euro. China is running huge and growing trade surpluses with both Europe and the US; it has a growing global trade surplus; and on top of that it has an even larger current account surplus since its trade surplus is supplemented by massive foreign direct investment inflows.

Exports are decelerating in July

In its latest statement, the Bank of Thailand noted that during July, export value, amounting to 15,475 million US dollars, increased by 21.2 percent (yoy), but decelerating from a growth of 47.1 percent (yoy) in June. Nevertheless, export expanded satisfactorily in all categories. However, agricultural sector whose overall expansion mainly came from rising price contracted in term of export volume, especially rice, due to intense competition from Vietnam.

Import value, totaling 16,266 million US dollars, rose across the board by 36.5 percent (yoy), particularly from imports of vehicles and parts as well as raw materials to be partly used for export production going forward. Production sector expanded at a slower pace in line with private consumption and export.

Boris Sullivan

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