The Baht Balancing Act

[george]

THE BAHT BALANCING ACT

BANGKOK: -- Currency's strength may dismay exporters, but meddling in the markets could cause more problems than it solves.

A strong baht can mean cheaper oil, machinery, raw materials and medicines. But it can also cause a string of difficulties for exporters. For manufacturers in competitive markets such as hard disk drives, a strengthening baht eats into their margins. Buyers would then look elsewhere for more reasonable deals.

The baht, now at 34.02 to the dollar, has strengthened by about 2% since the beginning of the year and by 6% since March. Manufacturers of products with little to no imported content such as the agricultural sector are relatively unaffected.

Exports account for roughly 70% of the Thai economy and they have tumbled in the first seven months of the year. The decline is mainly from quantity, as prices have remained stable.

The baht's appreciation, in fact, has been in the middle range of regional currencies since March, but exporters want a weak baht because they say the government's priority should be economic growth.

The surge in the trade surplus caused by the slump in imports has underpinned the strength of the baht since the global recession took hold late last year. Current account income from trade and services totalled $2 billion in the first five months of the year.

A turnaround in global optimism has spurred investors to return to East Asia and other emerging markets. The Thai stock market recorded inflows of $124 million, compared with $136 million in Indonesia, $300 million in India and $1.5 billion in South Korea from July 16 to 22, according JP Morgan.

Are exporters and importers caught in a zero-sum game?

Kobsidth Silapachai, head of capital market research at Kasikornbank, said concern voiced by China and other countries that the US was addressing its economic crisis by expanding the budget deficit and printing money was one factor behind baht appreciation.

China has kept its yuan firm to encourage its trade partners to use its currency for settlement in place of the dollar.

Regional countries' trade relations with China have increased in the past few years. Thailand's export market share to China has risen to 13% from 6% over the past several years. There is upward pressure on the baht because of an expectation that Thai exports will gain from China's economic growth.

"China increased flexibility to the yuan in July 2005, but it fixed it against the dollar again in the middle of 2008. This was to prevent its exporters from losing competitiveness. The Chinese yuan has a large impact on the baht because of the increase in intra-regional trade," Mr Kobsidth said.

Apichai Boontherawara, president of the Export-Import Bank of Thailand, said a stronger baht would inevitably affect exporters in terms of local revenues.

"[Export] profits decrease after converting dollar earnings into baht. But the extent depends on whether they hedge currency risks. If so, the impact will be less. And if the baht strengthens faster than other regional currencies, it will affect price competitiveness," he said.

Baht volatility also makes it difficult for exporters to quote prices. If left unfettered, a hedging cost will be transferred to the exporters, he said.

"In the long term, competitiveness will come from lower cost of production. By increasing value in their products, exporters can reduce the impact of the strengthening baht on their margins to 10% from 20%," he said. "I think the key is whether the baht has appreciated more quickly than the currencies of our trade competitors."

The Bank of Thailand's view is that global demand is weak and importers have better bargaining power. Therefore, a policy to weaken the baht is unlikely to increase exporters' sales.

"The baht has not appreciated unduly. It moved from 35 to a dollar at the beginning of the year to 33 and to 34 to the dollar now. The baht has not caused Thai exporters to lose competitiveness," said Tarisa Watanagase, the central bank governor.

The Nominal Effective Exchange Rate has appreciated by 1.3% since the end of 2008. The NEER is calculated by export value in dollar terms with trade partners and competitors.

The current account had a surplus of $11 billion the first five months of the year. Capital inflows have increased in part because of Malaysia-based CIMB's investment in BankThai, said Suchada Kirakul, the central bank's assistant governor for Financial Markets Operations.

"The degree of appreciation is insignificant. In 2006, the NEER was up by 10%," she said. "Malaysia has a high current account surplus. The ringgit has appreciated less than the baht because the economy has huge capital outflows."

Thailand does not have large capital outflows because the government's Unremunerated Reserve Requirement on short-term capital outflows imposed between the end of 2006 and February 2008 deterred capital inflows, she said.

Upward pressure on the baht could decrease as inventories get whittled down, meaning businesses would likely import more in the second half of the year.

"Weakening the baht will cause the cost of living to increase. When production costs increase, producers pass them on to consumers. Who will protest for consumers?" Ms Suchada asked rhetorically.

-- Bangkok Post 2009-08-03

Heavy public investment can rein in baht

BANGKOK: -- Accelerating public investment and cutting import duties on key industrial goods are among the strategies being pursued by the Finance Ministry to help depress the value of the baht.

Longer-term, authorities are exploring the possibility of establishing a sovereign wealth fund, similar to Singapore's Temasek Holdings, to manage overseas investments that will help offset capital inflows.

Somchai Sujjapongse, the director-general of the Fiscal Policy Office, said the ministry's goal was not necessarily to weaken the baht, but to ensure that exchange rates were on par with those of major trade competitors.

The FPO is united with the Bank of Thailand in wanting the baht to move in line with the rest of the region.

"If the currencies of our competitors weaken, then so should the baht. If they strengthen, then ours should as well," Dr Somchai said.

Strategies to pursue competitive devaluations to benefit the export sector will ultimately undermine the global financial system, he said.

Most analysts, however, agree that the medium-term trend for the baht is toward appreciation, owing in part to weakness in the US economy as well as expectations that the Thai and Asian economies will grow faster than other regions.

The baht has appreciated this year against the greenback thanks to trade surpluses and capital inflows.

For the Finance Ministry, accelerating new public investment projects and imports as well as facilitating investment abroad can help reduce pressure on the baht to appreciate.

"From the ministry's perspective, we have a current account surplus, a trade surplus. Capital inflows into the market is causing the baht to appreciate. So how can we spur capital outflows?" Dr Somchai asked.

Over the past several years, authorities have relaxed overseas investment restrictions to help facilitate capital outflows, either directly or indirectly through foreign investment funds.

The government's 1.56-trillion-baht infrastructure investment programme will also have an impact on currency rates in the form of equipment and machinery imports.

Import tariff cuts, meanwhile, will also help facilitate imports by reducing financial costs. The ministry is currently reviewing new tariff cuts for parts and materials used in the auto, petrochemical and electronics sectors.

State enterprises also have a considerable role to play in capital flows as they prepare to ramp up investment over the next few years.

Areepong Bhoocha-oom, the director-general of the State Enterprise Policy Office, said that for the fiscal year ending in September, 291 billion baht in investments have been allocated for state enterprises under the budget.

Disbursements to date stand at just 40% of the budget, or 115 billion baht. Authorities expect actual disbursements this year to reach 85%, with 60 to 70 billion of the investment budget going to imported goods and materials.

Import content includes new aircraft purchased by Thai Airways International, rolling stock for the State Railway of Thailand and equipment and machinery for PTT Plc, the Electricity Generating Authority of Thailand and TOT Plc.

Chakrit Parapuntakul, deputy director-general of the Public Debt Management Office, said procurement plans may begin in earnest after the cabinet approves the overall investment programme, expected to come on Aug 18.

The 1.56-trillion-baht investment programme will run from 2010 through 2012 and have an estimated import content of 30%, ranging from small medical tools and equipment to large aircraft.

Mr Chakrit said the stimulus programme would have a direct impact on the currency through imports.

An additional indirect impact is expected as contractors working on infrastructure projects import machinery and equipment themselves to complete the work.

But Chotichai Suwannaporn, a economist with the Fiscal Policy Office, said delays in budget disbursements may undermine hopes that the infrastructure investment programme will help restrain the baht from future appreciation.

State enterprises would benefit by scheduling their import orders during periods when the baht is strong.

"Actually, the most efficient method to push the baht downwards is straight intervention by the central bank," Dr Chotichai said.

"If the Bank of Thailand buys $400 million per day, it should be enough [to push the baht downward]. You don't need to buy every day, and at the end of each week, you can still keep a square position. But it certainly will help."

The recent baht appreciation stemmed largely from a fall in imports. Reduced buying activity of dollars in the spot and forward markets is also accompanied by higher dollar supply from exporters.

-- Bangkok Post 2009-08-03