Thailand’s Baht Soars Higher

photo by Glynda Getape-Marcelo

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 Kasikorn Securities.

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 countries 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."