Thai Baht - Opinions And Views

[Naam]

THB: Defying Gravity (Morgan Stanley)

The THB is racing ahead, but it is trading further and further

away from its underlying fundamentals. We are mindful of

the risks going forward.

Summary

In spite of the exchange controls, the THB has managed to

outperform all other AXJ currencies so far this year, and by a

wide margin (8.2% YTD versus an average of 0.2% YTD for

AXJ minus Thailand). Since we think that Thailand’s

fundamentals are deteriorating, we attribute much of the

THB’s recent appreciation to investors positioning themselves

for a relief rally in anticipation of an end to the exchange

controls in the near future. We, however, take a more

pessimistic view on the THB outlook for four reasons: (1)

investors are likely to be frustrated with the pace of

dismantling the exchange controls; (2) the domestic economy

is rapidly losing growth momentum; (3) the exchange rate is

now already worryingly overvalued; and (4) falling interest

rates will make it increasingly expensive to hold the THB.

No Quick End to the Exchange Controls

On March 1, the Bank of Thailand (BoT) announced further

amendments to its exchange controls, effective on March 15.

In our view, they do little to loosen the restrictions imposed on

the FX participants (see the Appendix to this article for a

further explanation). However, there is still a growing

anticipation that the exchange controls will be fully revoked

soon. This runs contrary to the recent comments made by

BoT Governor Watanagase and even Finance Minister

Chalongphob, who was a strong critic of the controls prior to

his appointment to the government.

Both officials have admitted that some form of exchange

controls is required. Watanagase said that any further

relaxation of controls would only occur if the exchange rate

were weaker. Chalongphob said that he was concerned with

being seen as pressuring the BoT to speed up the dismantling

of the controls. He fears that such an action could threaten

the credibility of the central bank’s independence in the eyes

of the capital markets. It therefore seems to us that some

investors will need to revise their expectations for the ending

of these exchange controls.

Domestic Economy Is Decelerating

While the market has fixated on the exchange controls, the

Thai economy has been decelerating. Consumer and

business confidence have been hit hard by: uncertainties

surrounding the political coup; introduction of the exchange

controls; proposed new draconian laws on foreign ownership;

and Islamic insurgency in the south. As a result, retail sales

contracted 1.8%Y in 4Q06 and investment slowed to 2.4%Y in

4Q06 from 15.0%Y in 1Q05. The key areas of aggregate

demand – consumption and investment – are therefore losing

momentum, in our view.

Carry Costs Set to Increase

Inflation pressures are subsiding due to weakening domestic

demand and the passthrough from the strong exchange rate.

With core inflation down to 1.4%Y, real (core) interest rates

have risen above 3% – an unsuitably tight monetary stance

when the economy is rapidly losing growth momentum, in our

view.

In the previous cyclical downturn, real interest rates fell below

0.5%. Now this current downturn is not as severe, of course,

but a return to the normal range of real interest rate levels

observed since 2000 (see Exhibit 2) suggests to us that it is

realistic to expect a decline in real yields by at least 150-

200bp over the course of this year.

Further, this unwind in the real interest rates is unlikely to

come from higher inflation, given current price trends. We

therefore believe that the BoT would likely undergo further

easing of around 150bp as compared to the 75bp of easing

currently discounted by the market. Consequently, we believe

that the carry costs are likely to become dearer for the THB

going forward.

THB Is Worryingly Overvalued

While the domestic economy has waned, the external sector

has admittedly held up. However, the THB’s continued

appreciation during 2007 has meant that it has now become

significantly overvalued against the USD (+20%). This is a

meaningful divergence from fair value. There are lagged

effects, of course, and we believe that this overvaluation will

begin to have a sizeable impact on exporters’ price margins

and their overall international competitiveness in the months

ahead. Not only does this pose risks for future GDP growth,

but it also raises the issue of how much the THB can

appreciate from here, given that it is already stretched.

Bottom Line

The THB is trading further and further away from its

underlying fundamentals as investors tactically try to catch the

anticipated relief rally from an early end to the exchange

controls. However, we believe that investors could risk

policymakers frustrating them in the near term and trading

against the underlying macro, valuation and carry

fundamentals in the medium term. From a risk/reward

perspective, we do not see it as a favorable opportunity.

[southwest19]

THB: Defying Gravity (Morgan Stanley)

I am no central banker but I did spend many years on a derivatives trading desk in London and basically the central bank here has not got a clue what they are doing. Obviously their disasterous capital inflow controls did not work and they rarely do when they have been attempted elsewhere.

The first thing they should have done was to cut interest rates a tool generally favoured by central bankers in making a currency less desirable to hold. This would have made even more sense when you take into consideration the slump in Thai consumer demand.

Another reason the exporters are so exposed to interest rate fluctuations is because of their poor productivity and efficiency what they could do would be to try and attract some more foreign investment and partnerships therefore gaining valuable expertise and technology. Ah but I forgot due to the governments plans to amend the FBA no foreign companies want to increase their investments here.

Bottom Line

Neither the central bank or the government have a clue what they are doing!

[Martin_F]

Good piece thanks for posting it Dr.

It still really doen't answer the $1K question, but if they had the answer they wouldn't be posting it on the country conditions newsletter.

[Martin_F]

Another reason the exporters are so exposed to interest rate fluctuations is because of their poor productivity and efficiency what they could do would be to try and attract some more foreign investment and partnerships therefore gaining valuable expertise and technology. Ah but I forgot due to the governments plans to amend the FBA no foreign companies want to increase their investments here.

The FBA is just a small factor when making an overall investment decision. For exports there are the BOI concessions.

But overseas investors have a lot more opportunities these days than 10 years ago and Thailand needs to accept the fact that there are more investment inviting countries out there that will give a lot more concessions with better educated and language able populations.

For example overseas organizations like to put finance guys in but Thailand prohibits this (yes there are ways around by bending the rules).

There is also the tax structure. Thailand does not have an easy tax structure there are too many inconsistencies and costly processing taxes.

The requirements for VAT are a prime example. The name and address needs to be perfect. Invoices need to be submitted within a specified time. It all adds to control and costs.

OK thats my 2 cents worth.

[bendix]

The Morgan Stanley line is exactly my view too. It's overvalued and increasingly diverged from fair value. One day - and it aint that far off, i think - the trend will reverse and we will see a baht collapse. It won't be like 97; but i see considerable baht depreciation, particularly against the Aussie dollar and less so against the greenback, the two currencies that particularly interest me.

[Mid]

too many physical dollars in the country ??

[Old Man River]

THB: Defying Gravity (Morgan Stanley)

Thanks for posting this. It is a good overview of pretty much what Dr. Tarisa has been saying and gives a good explanation of why Korn Chatikavanij has been calling for a drop in interest rates by as much as 200 bps. (or more).

The THB has to weaken to help agricultural exporters remain competitive. All the signs are there for it to weaken with the government increasing its spending to offset existing declines in consumer and investment spending so as to seek a softer landing when the s--t hits the fan.

[Old Man River]

I am no central banker but I did spend many years on a derivatives trading desk in London and basically the central bank here has not got a clue what they are doing. Obviously their disasterous capital inflow controls did not work and they rarely do when they have been attempted elsewhere.

The first thing they should have done was to cut interest rates a tool generally favoured by central bankers in making a currency less desirable to hold. This would have made even more sense when you take into consideration the slump in Thai consumer demand.

Another reason the exporters are so exposed to interest rate fluctuations is because of their poor productivity and efficiency what they could do would be to try and attract some more foreign investment and partnerships therefore gaining valuable expertise and technology. Ah but I forgot due to the governments plans to amend the FBA no foreign companies want to increase their investments here.

Bottom Line

Neither the central bank or the government have a clue what they are doing!

Our views are somewhat different. I won't get into a discussion on the FBA, as I have been vocal against this from day one. On interest rates, there is no question that lowering interest rates is the normal, acceptable practice to weaken a currency. I say this even though one completely clueless TV "expert" questioned my level of education for making this statement a few months ago.

I have been told (by someone I know knows), that the BOT did an analysis (which I haven't seen), that showed speculators were foregoing investment opportunities in regional countries where rates were higher. Instead, their primary interest was making profits on the THB appreciation. Based on this, the BOT didn't see lowering interest rates as being effective at that time.

I have never been in favor of capital controls, although in this case it was successful in stemming the rapid rise of the THB (as seen in the offshore markets). Of course, the disastrous impact on the equity market is another issue, and it did show the BOT's lack of knowledge of the average Thai equity investor. Still, at this point, I think they are doing what needs to be done. I don't think they should announce to the markets what they are going to do and when they are going to do it, but releasing the capital controls needs to happen shortly.

[highchol]

I am no central banker but I did spend many years on a derivatives trading desk in London and basically the central bank here has not got a clue what they are doing. Obviously their disasterous capital inflow controls did not work and they rarely do when they have been attempted elsewhere.

The first thing they should have done was to cut interest rates a tool generally favoured by central bankers in making a currency less desirable to hold. This would have made even more sense when you take into consideration the slump in Thai consumer demand.

Another reason the exporters are so exposed to interest rate fluctuations is because of their poor productivity and efficiency what they could do would be to try and attract some more foreign investment and partnerships therefore gaining valuable expertise and technology. Ah but I forgot due to the governments plans to amend the FBA no foreign companies want to increase their investments here.

Bottom Line

Neither the central bank or the government have a clue what they are doing!

Our views are somewhat different. I won't get into a discussion on the FBA, as I have been vocal against this from day one. On interest rates, there is no question that lowering interest rates is the normal, acceptable practice to weaken a currency. I say this even though one completely clueless TV "expert" questioned my level of education for making this statement a few months ago.

I have been told (by someone I know knows), that the BOT did an analysis (which I haven't seen), that showed speculators were foregoing investment opportunities in regional countries where rates were higher. Instead, their primary interest was making profits on the THB appreciation. Based on this, the BOT didn't see lowering interest rates as being effective at that time.

I have never been in favor of capital controls, although in this case it was successful in stemming the rapid rise of the THB (as seen in the offshore markets). Of course, the disastrous impact on the equity market is another issue, and it did show the BOT's lack of knowledge of the average Thai equity investor. Still, at this point, I think they are doing what needs to be done. I don't think they should announce to the markets what they are going to do and when they are going to do it, but releasing the capital controls needs to happen shortly.

HEY PRESTO

the baht has fallen 50 satang against the pound since this morning.

whats happened.

Is it because we are talking about it? Do the powers at be read these posts?

[topfield]

Dear friend..............one cannot see what's going on by refering to the 'baht /pound rate' ...its like adding chickens and pigs...they are different. If you are interested in the baht sterling rate you have to look at

1. the pound/dollar rate

2. the baht/dollar rate

as the pound baht rate is purely a figure that arises by multiplying the above two rates.

I saw your posting and went to work and can now report an amazing new divergance of rates.

1. I checked the pound dollar rate...stable since last nights NY close at 1.965..so no change.

2. I checked the Bloomberg baht/$ rate. Unbelivably the baht has STRENGTHENED to a new high of 31.65

3. I checked the local onshore KrungThai Bank rate...mid rate baht WEAKENED to 34.95 !!

So there you have it folks. This morning the baht has weakened offshore but strengthened considerably offshore.

[private opinion :Great news for the banknote smugglers !!]

Also did you read this headline in the Bankok Post this morning ?

"One trillion spent trying to weaken baht"...how long can the BOT keep this up ?

[highchol]

Dear friend..............one cannot see what's going on by refering to the 'baht /pound rate' ...its like adding chickens and pigs...they are different. If you are interested in the baht sterling rate you have to look at

1. the pound/dollar rate

2. the baht/dollar rate

as the pound baht rate is purely a figure that arises by multiplying the above two rates.

I saw your posting and went to work and can now report an amazing new divergance of rates.

1. I checked the pound dollar rate...stable since last nights NY close at 1.965..so no change.

2. I checked the Bloomberg baht/$ rate. Unbelivably the baht has STRENGTHENED to a new high of 31.65

3. I checked the local onshore KrungThai Bank rate...mid rate baht WEAKENED to 34.95 !!

So there you have it folks. This morning the baht has weakened offshore but strengthened considerably offshore.

[private opinion :Great news for the banknote smugglers !!]

Also did you read this headline in the Bankok Post this morning ?

"One trillion spent trying to weaken baht"...how long can the BOT keep this up ?

Dearest Topfield Thanks for sharing the fruits of your labour.

I wouldn't like to suggest which currency is a chicken and which one is a pig though less of a problem here than say in the the middleeast!

I know I did not quote the dollar or the euro etc but they had also moved at the time of my post a considerable proportionate amount aswell based on the Kasikorn bank exchange rate web page. I see they have dropped back alittle since my post. Kasikorn bank have updated the web page 7 times as of 14:30 today which suggests volitility in the currency market.

I did a little poking around also as to the possible cause of this volitility and could only assume it was as a result of the press release you mention about the 1 trillion baht defence fund.

[Naam]

"I checked the Bloomberg baht/$ rate. Unbelivably the baht has STRENGTHENED to a new high of 31.65"

-----

presently 31.49 (local thai time)

[Naam]

"Also did you read this headline in the Bankok Post this morning ?

"One trillion spent trying to weaken baht"...how long can the BOT keep this up ?"

-----

topfield,

if you post jokes than you should provide a clickable link to them. Bangkok Post is always good for a joke. but i rather prefer "Hagar the Terrible" as he generally utters more wisdom than some journ@sslists writing for the Post and the Nation.

[topfield]

"Also did you read this headline in the Bankok Post this morning ?

"One trillion spent trying to weaken baht"...how long can the BOT keep this up ?"

-----

topfield,

if you post jokes than you should provide a clickable link to them. Bangkok Post is always good for a joke. but i rather prefer "Hagar the Terrible" as he generally utters more wisdom than some journ@sslists writing for the Post and the Nation.

Of course you are right but surely when a current article in the BKK Post or Nation is pasted most people know where to access/click if they want more details !

[sbk]

This does not appear Samui related at all. In fact, I don't see any of the words "Samui", "Phangan" or "Tao" mentioned even once.

Not sure why you posted it in this forum.

======Topic moved to appropriate forum=====

[Naam]

Not sure why you posted it in this forum.

======Topic moved to appropriate forum=====

mea culpa! had no idea that one can/is supposed to post in a specific forum. now i am educated.

[topfield]

Not sure why you posted it in this forum.

======Topic moved to appropriate forum=====

mea culpa! had no idea that one can/is supposed to post in a specific forum. now i am educated.

Thanks ! Was wondering how I found it and why in the Koh Samui section !!

[bkkandrew]

Well, for one, I have cancelled this month's buying from Thailand due to the cr*p rate (and plan to chill for Easter in UK instead). I wonder how many export decisions are being affected likewise?

I hope/expect the rate to normalise in April... Maybe 80B/GBP by July

[LaoPo]

THB: Defying Gravity (Morgan Stanley)

I am no central banker but I did spend many years on a derivatives trading desk in London and basically the central bank here has not got a clue what they are doing. Obviously their disasterous capital inflow controls did not work and they rarely do when they have been attempted elsewhere.

The first thing they should have done was to cut interest rates a tool generally favoured by central bankers in making a currency less desirable to hold. This would have made even more sense when you take into consideration the slump in Thai consumer demand.

Another reason the exporters are so exposed to interest rate fluctuations is because of their poor productivity and efficiency what they could do would be to try and attract some more foreign investment and partnerships therefore gaining valuable expertise and technology. Ah but I forgot due to the governments plans to amend the FBA no foreign companies want to increase their investments here.

Bottom Line

Neither the central bank or the government have a clue what they are doing!

I agree, but would like to change your last sentence a bit....." ....The Central Bank or the Government don't know WHAT to do....-next-".

I have a very strong feeling that both (CB and Government) are afraid to take steps.....the first steps.

We shouldn't forget that the people who are running the country and the 'Baht' are all 'interim' and nobody wants to lose face and/or their jobs and image.

It's a scary scenario for the countries' economy itself.

Also, 95% of the Thai doesn't have a clue about the Baht and it's value and they don't care either; it's just the insiders and the exporters as well as the Expats who wish the Baht to go down.

Lowering the interest rates on the Baht will help a little but I'm afraid not enough.

My humble opinion? A drastic devaluation of the Baht against all MAJOR currencies.

Ooops...that's dangerous to say....

LaoPo

[topfield]

THB: Defying Gravity (Morgan Stanley)

I am no central banker but I did spend many years on a derivatives trading desk in London and basically the central bank here has not got a clue what they are doing. Obviously their disasterous capital inflow controls did not work and they rarely do when they have been attempted elsewhere.

The first thing they should have done was to cut interest rates a tool generally favoured by central bankers in making a currency less desirable to hold. This would have made even more sense when you take into consideration the slump in Thai consumer demand.

Another reason the exporters are so exposed to interest rate fluctuations is because of their poor productivity and efficiency what they could do would be to try and attract some more foreign investment and partnerships therefore gaining valuable expertise and technology. Ah but I forgot due to the governments plans to amend the FBA no foreign companies want to increase their investments here.

Bottom Line

Neither the central bank or the government have a clue what they are doing!

I agree, but would like to change your last sentence a bit....." ....The Central Bank or the Government don't know WHAT to do....-next-".

I have a very strong feeling that both (CB and Government) are afraid to take steps.....the first steps.

We shouldn't forget that the people who are running the country and the 'Baht' are all 'interim' and nobody wants to lose face and/or their jobs and image.

It's a scary scenario for the countries' economy itself.

Also, 95% of the Thai doesn't have a clue about the Baht and it's value and they don't care either; it's just the insiders and the exporters as well as the Expats who wish the Baht to go down.

Lowering the interest rates on the Baht will help a little but I'm afraid not enough.

My humble opinion? A drastic devaluation of the Baht against all MAJOR currencies.

Ooops...that's dangerous to say....

LaoPo

No....no need or even possibility of a devaluation against ALL currencies. A change against the dollar only is required and all other currencies follow automatically !! A technical point .

[bendix]

Leave things alone.

The market is always right, even when it's being manipulated. It won't be long before the speculators run out of steam and the baht will once more yield to market forces and find it's proper level.

My concern is about the baht. It's about wondering what on earth poor old Topfield is going to do with himself when this all blows over.

[Gary A]

I did my part to weaken the baht. I really believed it would weaken to 40 to a dollar by now. Five weeks ago I wire transferred a years worth of living expenses so I would no longer have to get sick because of the exchange rate. Maybe my luck is changing.

[topfield]

I did my part to weaken the baht. I really believed it would weaken to 40 to a dollar by now. Five weeks ago I wire transferred a years worth of living expenses so I would no longer have to get sick because of the exchange rate. Maybe my luck is changing.

So you must have got 70-71 for your pounds Gary, ....right ?

Oops forgot you might not be British ...so 35 for your dollars ???

Ooops you could be an Ozzie.....sorry don't follow the rate fror that.

[ What a pity ones nationality is not given on the TV postings !]

[Naam]

So you must have got 70-71 for your pounds Gary, ....right ?

Oops forgot you might not be British ...so 35 for your dollars ???

Ooops you could be an Ozzie.....sorry don't follow the rate fror that.

[ What a pity ones nationality is not given on the TV postings !]

From: USA, born in Ohio.

my best guess is that Gary is either a Maori or a Taiwanese

[topfield]

So you must have got 70-71 for your pounds Gary, ....right ?

Oops forgot you might not be British ...so 35 for your dollars ???

Ooops you could be an Ozzie.....sorry don't follow the rate fror that.

[ What a pity ones nationality is not given on the TV postings !]

From: USA, born in Ohio.

my best guess is that Gary is either a Maori or a Taiwanese

Now that is surprising...thought with your knowledge you must be a Brit !

Am sure Sonic the other expert is.

[Gary A]

The best advice I was ever given was to NOT concern myself with things I had no control over. At that time I was looking to set the world on fire and I was VERY angry with that old fart who was intent on making my life miserable. MANY years later when I became an old fart myself, I decided that it was indeed good advice.

At this point in my life I am always amused by people who shoot from the hip before they know where the target is. It's probably best to gather what information you can BEFORE you comment.

[sonicdragon]

Now that is surprising...thought with your knowledge you must be a Brit !

Am sure Sonic the other expert is.

Umm, what's the relationship between nationality and knowledge ?

I'm not sure I agree with what some have said about the BoT: ie that it "has not got a clue what they are doing". I tend to agree with LaoPo. The BoT have some experienced and very well educated people. But they do face a serious dilemma. I'm sure they feel a lot of pressure after past mistakes - there must be a real fear of another gaff - the junta must not lose (more) face.

And I do think that things may look very different in a few months when the elections are looming. Postponements, problems with the "new" constitution, more security concerns, an escalation of southern unrest, and then it's not outside the realm of possibilities for there to be a collapse in confidence and a corrsponding collapse in the baht.

[topfield]

"The BoT have some experienced and very well educated people"

I can add some personal knowledge to that.

I was at the LSE in Houghton St (London) recently and came across a large group of young men speaking Thai.

I entered into conversation with them. They informed me that every year a large group of young BOT staff receive a scholarship to study monetary policy and economics at the LSE at the LSE for a year.

So clearly they receive adequate training at the UK's top educational establishment .

Note..in case you were wondering : No there were no women in the group when I met them but the women may have been elsewhere at the time !

[topfield]

Now that is surprising...thought with your knowledge you must be a Brit !

Am sure Sonic the other expert is.

Umm, what's the relationship between nationality and knowledge ?

I'm not sure I agree with what some have said about the BoT: ie that it "has not got a clue what they are doing". I tend to agree with LaoPo. The BoT have some experienced and very well educated people. But they do face a serious dilemma. I'm sure they feel a lot of pressure after past mistakes - there must be a real fear of another gaff - the junta must not lose (more) face.

And I do think that things may look very different in a few months when the elections are looming. Postponements, problems with the "new" constitution, more security concerns, an escalation of southern unrest, and then it's not outside the realm of possibilities for there to be a collapse in confidence and a corrsponding collapse in the baht.

"Umm, what's the relationship between nationality and knowledge ?

My remark was made purely because most of my postings on this section of the forum are sterling/uk orientated and that normally would result in little or no response from our US/Ozzie readers who naturally have no interest in such matters. A Brit of course would.

Like the visa section of this forum, nationalities tend to respond to and deal only with matters that concern the nationality of the person posting.

[sonicdragon]

Now that is surprising...thought with your knowledge you must be a Brit !

Am sure Sonic the other expert is.

Umm, what's the relationship between nationality and knowledge ?

I'm not sure I agree with what some have said about the BoT: ie that it "has not got a clue what they are doing". I tend to agree with LaoPo. The BoT have some experienced and very well educated people. But they do face a serious dilemma. I'm sure they feel a lot of pressure after past mistakes - there must be a real fear of another gaff - the junta must not lose (more) face.

And I do think that things may look very different in a few months when the elections are looming. Postponements, problems with the "new" constitution, more security concerns, an escalation of southern unrest, and then it's not outside the realm of possibilities for there to be a collapse in confidence and a corrsponding collapse in the baht.

"Umm, what's the relationship between nationality and knowledge ?

My remark was made purely because most of my postings on this section of the forum are sterling/uk orientated and that normally would result in little or no response from our US/Ozzie readers who naturally have no interest in such matters. A Brit of course would.

Like the visa section of this forum, nationalities tend to respond to and deal only with matters that concern the nationality of the person posting.

Ahh. OK - now I see where you are coming from :-)

FWIW, you were right about my nationality.