Daniel Ten Kate
20 July 2007
Thailand’s rapidly rising currency not only leads the region but could force a domestic economic restructuring
Six months after Thailand’s central bank triggered a one-day market collapse by imposing stringent capital controls to stem the surging baht, the
currency continues to strengthen with no end in sight as the US dollar weakens. After rising nearly 14 percent from 41.07 to the dollar in January 2006, to 35.37 when the central bank intervened last December, the baht appreciated another 7 percent this year to hit 10-year highs of 33.47 this month.
The rapid baht increase has caused exporters to demand action, and on Friday Prime Minister Surayud Chulanont unveiled a package of measures seeking to curb its rise. The measures prompted the currency to soften slightly, but many economists expect it to strengthen further in the long term, possibly eclipsing 32 to the dollar by the end of the year.
Under the new measures, Thai firms can hold foreign currency revenues longer and use US dollars to pay down debt. In addition, Thai citizens are allowed to
open US dollar-denominated bank accounts with deposits worth up to US$100,000. In the meantime, the Bank of Thailand stressed that the country will not return to a pegged currency system, which proved disastrous a decade ago when policymakers lost a battle against hedge funds, triggering the Asian financial crisis of 1997-1998.
With the dollar continuing to slide, most economies in the region are now facing similar dilemmas as Thailand. But although global financial imbalances are pressuring most Asian currencies upward, the baht has led the charge. From the end of October 2006 to the middle of this month, the Thai currency jumped 8.5 percent; by comparison, the Philippine peso has gained 7.8 percent, the Chinese yuan 3.1 percent and the Malaysian ringgit 2.5 percent, according to Bangkok’s
Some peripatetic garment factories are already starting to pack up shop. Furniture and food processing plants could be next, leaving wage earners in the lurch and Thai executives pleading for global currency adjustments.
“It’s not so much that the baht is getting stronger, but that the dollar is getting weaker,” Twatchai Yongkittikul, secretary-general of the Thai Bankers’ Association, said in an interview. “If China refuses to adjust its exchange policy to be more flexible, then other Asian countries will suffer.”
The strong baht has become a political liability for Surayad’s military-appointed government, sparking sparked intense debate about the right economic prescription to bolster the economy. One camp of prominent Thai economists has called for the central bank to print more baht and slash its policy rate by up to 1.5 percent to send a psychological message to traders that the currency won’t strengthen further.
Another school of thought argues that Thailand instead should further liberalize capital flows and use the increased purchasing power to make investments that boost productivity, equipping firms to better compete in a world where capital crosses borders at the click of a button. On Wednesday, the Bank of Thailand surprised some, opting for a 0.25 percent rate cut, its fifth this year, putting the policy rate at 3.25 percent.
Proponents of a deeper cut said the bank wasn’t doing enough, while others who say interest rate cuts would have little effect on the baht said the move was at
least good to boost economic growth, which has lagged this year due to ongoing political instability.
With foreign money pouring into the stock market and surging exports boosting Thailand’s current account surplus, economists expect the baht to strengthen
further in the long term despite the rate cuts and new currency measures announced Friday.
“In our view, all measures should only slow down the baht’s rapid appreciation,” Kasikorn Securities said Friday. “The baht is still likely to strengthen further as we expect the country’s current account surplus to continue rising throughout this year.”
Indeed, Thailand has recorded current account surpluses every year since the 1997 financial crisis except for 2005, when the government unwisely froze
diesel prices. This year’s surplus could reach US$12.5 billion, Kasikorn said.
In an op-ed piece Thursday in the Bangkok Post, prominent economist Supavud Saicheua argued that Thailand’s current account surpluses since the country
repaid its foreign debt in 2004 were “the crux of the baht problem.”
“We are generating a surplus of dollars, possibly with no end in sight, as the dollar itself is also expected to depreciate vis-à-vis all currencies, not just the baht,” wrote Supavud, who is head of research at Phatra Securities.
Economists say this is partly because Thailand has inefficient mechanisms for capital to leave the country. It also lacks a state-run investment arm like
those in Singapore, Japan and now China that redistribute the excess dollars.
“The Thai baht is stronger than other countries in Asean because it is a less dynamic currency,” said Sompob Manarangsun, an economist at Bangkok’s
Chulalongkorn University. “We need two-way traffic in the financial sector. When you have huge capital inflows, by nature the baht will strengthen if we don’t have an opening for excess foreign currency to go out and invest in the global market.”
In the short term, the government’s efforts will help boost liquidity for small businesses so the strong baht doesn’t push them out of business and create thousands of newly unemployed voters before the country hits the polls for a referendum on the constitution next month. But over the long term, some economists see the strong baht as an opportunity.
“We cannot go back to 2005 when the baht was at 40 per dollar, and we should accept that the baht will appreciate more than this without intervention from the
Thai government,” said Aat Pisarnwanich, director of the International Trade Study Center at the University of the Thai Chamber of Commerce. “What companies should do next is adjust by managing costs of production. The government should also look to cut transport costs and encourage investment in neighboring ountries like Laos, Cambodia and Vietnam. This would not only get us cheaper labor but also cheaper currencies and GSP [generalized system of preferences] privileges from the US, Japan and the EU.”
Indeed, the increased purchasing power can help the country make much-needed investments to upgrade infrastructure, logistics, capacity and technology—all
of which will increase competitiveness in the long run. In doing so, the economy could be restructured to diversify the risk from relying so heavily on exports for growth.
“Thailand is at an important crossroads,” Supavud wrote in the Bangkok Post. “Reducing the country’s dependency on exports as the sole engine
of growth is necessary and inevitable. Procrastination can only further damage the balance sheet of the BoT [Bank of Thailand], making monetary policy management more difficult.”
Economists point out that measures designed to weaken the baht are in effect a subsidy on exports, and ultimately an inefficient way to spend money.
Politicians might argue differently, however, as pictures of teary-eyed laborers without jobs pack much more punch than macroeconomic screeds about a subject few can grasp and on which there is wide disagreement.
Nonetheless, the market doesn’t appear to be finished boosting the baht’s strength. Since the beginning of the year, foreign investors have poured more than $4
billion into Thailand’s $148-billion stock market. Even so, it’s still trading at the lowest price-to-earnings ratio in the region, making more inflows likely as a general election approaches at year’s end.
Many economists see an economic restructuring as the only possible long-term fix for Thailand to cope with a perpetually stronger currency. Indeed, nobody
in the country’s business sector is really counting on the US to stop spending or the Chinese to significantly revalue the yuan—but that doesn’t stop them from asking.
“An appreciation of the yuan would help us immediately, and it would also improve trade flows all over the world,” said Twatchai from the bankers’
association. “We hope China can find other ways to deal with its huge current account surplus.”
Thai PM agrees on measures to curb baht’s rise
07.20.07, 4:48 AM ET
BANGKOK (Thomson Financial) – The Thai prime minister on Friday agreed on new measures aimed at curbing the baht’s rise, while the central bank governor insisted the country would not return to a fixed exchange rate system.
‘My government has a clear stance that we want to stabilize the currency,’ army-installed Prime Minister Surayud Chulanont said after meeting with top finance officials.
Surayud endorsed a package of measures laid out by his economic team, including Finance Minister Chalongphob Sussangkarn and Bank of Thailand governor Tarisa Watanagase.
Industry Minister Kosit Panpiemras said the cabinet was expected to formally approve the measures on Tuesday in hopes of weakening the baht.
Under the new rules, Thai firms will be allowed to keep foreign currency revenues for a longer period while also being encouraged to use dollars to pay down their debts.
Ordinary Thais would also be allowed to open US dollar-denominated bank accounts with deposits worth up to 100,000 dollars, Kosit said.
‘The currency situation is improving as the baht is softening,’ Chalongphob insisted.
The baht was quoted at 33.62-66 to the dollar in afternoon trade Friday, down from Thursday’s close of 33.50-51.
Tarisa said the central bank was doing its utmost in an effort to halt the rising baht, which has remained at 10-year highs against the dollar, but stressed that Thailand would not go back to a pegged currency system.
‘We cannot do things that are extreme such as (returning to) a currency peg system. We have to be moderate,’ she told reporters.
Thailand maintained a fixed exchange rate until 1997, when the currency came under speculative attack and the central bank exhausted its foreign reserves trying to defend it.
The decision to finally float the baht sparked the Asian financial crisis, sinking economies around the region.
A rising baht has alarmed the government as it puts pressure on exports, the key driver of the economy. The strong baht makes Thai goods less competitive abroad and cuts the value of repatriated profits.
Thai Finance Ministry, central bank act to curb baht surge
10:53, July 22, 2007
Thailand’s Finance Ministry and the Bank of Thailand (B0T) will propose to the cabinet six measures to curb baht appreciation in a few days, Thai News Agency reported.
After a discussion with BOT Governor Tarisa Watanagase, Finance Minister Chalongphob Sussangkarn agreed to six out of the eight measures proposed by the central bank to supervise the baht volatility.
The six measures and the supporting documentation would be submitted on Monday to a committee chaired by Deputy Prime Minister and Industry Minister Kosit Panpiemras, which is charged with the task of driving the over-all economy, for its consideration.
Then they would be forwarded to the cabinet on July 31 for approval.
According to the proposed changes, Thai firms would be able to invest more money directly in foreign countries, while local institutional investors can invest more in overseas securities.
Exporters would be allowed to hold earned foreign currencies for over 15 days, and open foreign currency deposit accounts at higher levels. Individuals can transfer foreign currencies to relatives overseas, or transfer funds to relatives for overseas property purchases.
Chalongphob said the six measures were aimed to relax the rules on foreign capital inflows, but he added that the measures would be used carefully so that they would not cause capital outflows in a huge amount as what happened during the 1997 economic crisis.
Thailand’s baht pressured again a decade after crisis
Posted: 22 July 2007 1106 hrs
A Thai bank dealer exchanges Thai bank notes to tourists in Bangkok
BANGKOK – The Thai baht, which was battered by massive flight of capital in the 1997 Asian financial crisis, is again facing mounting pressure — this time from large money inflows into the kingdom.
Since early July, the Thai currency has remained at 10-year highs against the dollar with investors pouring money into the stock market, where share prices have gained nearly 30 percent since the beginning of this year.
The strong baht has alarmed Thailand’s army-backed government as it put pressure on the kingdom’s export-driven economy, which was already in a slump due to political uncertainty following a coup in September 2006.
Large money inflows also brought back bitter memories of the Asian economic crisis 10 years ago when the kingdom was forced to float the baht after coming under massive speculative pressure.
Capital had poured into Thailand during the breakneck economic growth of the early 1990s, but investors began to fear the baht was overvalued and pulled their money out.
As large amounts of capital fled out of Thailand in 1997, the baht collapsed, setting off a chain of Asian currency devaluations that crippled economies from South Korea to Indonesia.
Last week Finance Minister Chalongphob Sussangkarn cautioned against current capital inflows, saying there was “contingent liability that the current inflows could become outflows if the stock market starts to decline.”
“That’s the kind of situation we should be aware of to make sure that our international reserves are enough,” the minister said.
Analysts warned against the dangers of large capital inflows but argued Thailand would unlikely repeat the 1997 crisis thanks to its solid economic fundamentals, including robust exports.
“The risk of large capital inflows and outflows is always there in an emerging market like Thailand,” said Albin Liew, a senior economist at United Overseas Bank in Singapore.
“But Thailand is not in a situation like ’97 because its economic fundamentals are steady, the financial sector is strong, and it has strong current account surpluses,” Liew said.
Yiping Huang, head of Citibank’s Asia Pacific economic and market analysis in Hong Kong, agreed, saying Thailand’s robust exports and sound economic fundamentals would keep a financial crisis at bay.
But the Citibank economist said the consequences of large capital inflows were “undesirable given the short-term nature of much of the capital flows and the painful memories of the financial crisis ten years ago.”
Woo Yuen Pau, president and chief executive of think-tank Asia Pacific Foundation of Canada, said current capital inflows were focusing on the equity market, not short-term debts that led to the 1997 meltdown.
But Woo warned money inflows could quickly turn into capital flight if the government takes drastic measures, such as the capital controls it briefly imposed in December 2006 in a bid to halt the baht’s rise.
“A sudden reversal of capital flows could have the same kind of impacts (as in 1997). That could happen through a variety of measures, such as the capital control rules imposed in December last year,” he said in Bangkok.
The capital rules spooked foreign investors who saw them as a steep tax on equity investments. They quickly dumped shares, triggering the biggest-ever one-day drop on the Thai bourse in December.
The stock debacle forced the Bank of Thailand to quickly ease controls for equities and property.
The central bank was again under pressure last week to rein in the volatile baht and cut its key interest rate Wednesday by 25 basis points to 3.25 percent.
Despite the rate cut, the baht closed again Friday at a near 10-year high of 33.65-67 to the dollar.
Central bank governor Tarisa Watanagase has vowed to weaken the baht, but stressed the bank would take no extreme measures such as reimposing the capital controls or returning to a pre-crisis pegged currency system.
“We cannot do things that are extreme such as a currency peg system. We have to be moderate,” she said last week.
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