Is The Thai Baht Going To Collapse Due To The Ongoing Mess

[wintermute]

Investment is the remaining big item. That can swing the other way, but it doesn't seem like people are heading for the exits yet.

No one will head for the exits anytime soon because the EU and $ are built on a big flimsy debt bloated house of cards.

[Naam]

The dollar has been creeping up against the baht the last few days. My prediction stands, here goes ...

that goes without saying. a creepy currency does creep

[Gambles]

The dollar has been creeping up against the baht the last few days. My prediction stands, here goes ...

that goes without saying. a creepy currency does creep

and a crawly currency like the GIPSI Euro does......

[Gambles]

Very interesting Nation piece from the excellent, Khun Achara, featuring a chap that I know and whose research I use and with whom I was recently on a panel discussion ref pegging the baht or not (I'll also post this on the other current Baht threads)

Thailand urged to resume pegged currency

By ACHARA DEBOONME

THE NATION

Published on May 4, 2010

Thailand and other Southeast Asian nations are being strongly urged to change their foreign-exchange policy, given that major Western currencies could further lose their shine, due to massive public debt.

Independent consultant John Sheehan yesterday advised Thai authorities to consider resuming the currency peg."If the baht moves freely, it could further appreciate to 25 to the US dollar. That would destroy exports and tourism," he said.

His argument lies heavily on the massive amount of public debt. Leading the charge is Japan, where public debt now exceeds 200 per cent of gross domestic product (GDP), with Europe and the US hot on their heels. They all need to cut back on spending, but this will result in lower tax receipts and an even bigger deficit. The options are to default on the debts or print more money, which would only lead to hyperinflation.

US public debt rose to US$11 trillion (Bt356 trillion) last year, or nearly the size of that country's economy, against $5 trillion in 2000. Sheehan expects the US to seek partial debt default sometime between 2012 and 2014.

He said the default outlook was imminent, given that inclusive of contingency liabilities, that country's public debt was now 160 per cent of GDP. Western countries are also shouldering a huge burden from unfunded welfare benefits.

The general belief is that a public-debt level of 60 per cent of GDP slows down economic growth. At 90 per cent, it could stop growth.

"If this hits 200 per cent, there are two options: hyperdeflation or default," Sheehan said.

Thus, Southeast Asian economies are urged to change their approach to foreign-exchange risk, because Western currencies are at the beginning of a long-term slide, and for smaller, export-based economies to continue flowing previous foreign-exchange approaches is illogical and will become increasingly risky. This is aside from major investment in new technologies and products and aggressive and active development of new export markets.

Southeast Asian currencies are now strengthening artificially, not in response to domestic growth, but rather to Western weakness. Sheehan said if this intensified, the baht could rise above 30 to the dollar, reaching even 25 - when it was last pegged to the US.

He said the simplest and most logical way of counteracting this was implementation of a managed peg similar to the Chinese model. This would stimulate growth immediately by increasing GDP and automatically build up reserves. The downside is inflation risk, but this is the lesser of two evils, particularly in a global recession.

In this way, Sheehan sees the advantage of the political crisis, which has weakened the baht, and he suggests authorities peg it once it hits bottom.

Last Friday, the baht fell to about 32 to the dollar, making it one of the region's weaker currencies. It is expected to trade at 32-32.40 this month on the uncertainty surrounding the ongoing political turmoil.

Sheehan sees less need for building up foreign reserves to defend the currency, because reserves are needed only to defend an overvalued currency. Given the perilous state of Western markets, the baht is now effectively undervalued. Hot-money flows have also been flagged, but given the likelihood of Western deflation, such flows into Thailand would be an issue regardless of whether the currency was pegged.

The baht can be fixed against a basket of currencies related to, say, export-destination markets, foreign direct investment or even commodity and energy prices, given that Thailand is reliant on exports and energy.

Sheehan ended by saying the sooner a peg was placed, the sooner the benefits would flow. This would also mitigate rebound volatility when the major Western currencies reverse their present long-term decline

[chiang mai]

A good article Gambles and I agree with the sentiment expressed in it but I think it's probably a little over done, that's certaionly the direction the planet is headed however, it's just a question how much and how fast.

[Time Traveller]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis. In fact, an artificially weaken currency such as the policy that China has adopted, only creates problems in those countries such as asset price bubbles imported inflation and effectively subsidizes rich Western consumers to continue their consumeristic binge. You can not solve a problem (of debt) by creating more of it (debt). This is what having a fixed currency means - buying the debt (presumably US dollar denominated) and printing Baht.

Western nations need to deleverage, or expericence lower standards of living and not ask Asian countries to subsidize to their lifestyle. In anycase, a floating exchange rate is a sign of a strong economy since businesses are capable of adapting. Those that can't are not really strong businesses.

[Naam]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis.

seconded... although times have changed and the BoT has considerably more cash in its coffers than in 1997 to defend a peg.

[Pib]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis.

seconded... although times have changed and the BoT has considerably more cash in its coffers than in 1997 to defend a peg.

I just wish BoT would stop lowering the peg they are defending.

[Gambles]

A good article Gambles and I agree with the sentiment expressed in it but I think it's probably a little over done, that's certaionly the direction the planet is headed however, it's just a question how much and how fast.

I'd totally agree CM - in fact that was pretty much my position on the panel discussion!

Edited May 4, 2010 by Gambles

[Gambles]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis. In fact, an artificially weaken currency such as the policy that China has adopted, only creates problems in those countries such as asset price bubbles imported inflation and effectively subsidizes rich Western consumers to continue their consumeristic binge. You can not solve a problem (of debt) by creating more of it (debt). This is what having a fixed currency means - buying the debt (presumably US dollar denominated) and printing Baht.

Western nations need to deleverage, or expericence lower standards of living and not ask Asian countries to subsidize to their lifestyle. In anycase, a floating exchange rate is a sign of a strong economy since businesses are capable of adapting. Those that can't are not really strong businesses.

TT,

Firstly I find the racist overtones of "this westerner" offensive although I actually think that Asian Central Banks setting global policy now will be a good thing because of their expertise if that's the point that you were getting at. FYI John Sheehan has been in South East Asia since 1993, for much of that time as an investment banker.

The dangers that you highlight would at times be valid but the key points are that the west remains locked in a deflationary spiral and that western deflation will temper Asian inflation and also that the RMB is one of the 800 Lb gorillas in the room. Thailand has moved from being a successful exporter to the G3 and now is a successful exporter to the region. To lock in the competitive advantage that the weakness of Baht offers it makes sense to look at a range of policy measures. I'm not convinced of a black & white peg - I prefer a more 'historically Siamese' solution involving manipulated fixing. I've been asked to write a piece on this which I'll post next week.

I think that the idea of less competitive Asian curencies would be to subsidise the west by making e.g. US exports more competitive into the fast growing Asian markets so I'm not really sure where you're going with that one - also fixed currencies potentially have greater ability to control debt and while China turned on the debt taps very heavily last year, it appears to be turning them off again now and is the only major economy likley to be operating a trade surplus this year which for China is also very positive for the fiscal account so I think that you need to re-think that too. Perhaos you're getting confiused with pegging a weak currency rather than pegging a strong one. baht seems undervalued and therefore now is the opposite of '97

[Gambles]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis.

seconded... although times have changed and the BoT has considerably more cash in its coffers than in 1997 to defend a peg.

You don't need to defend a peg when your currency is underpriced - only when it's overpriced. Pegging now is to create stability and prevent appreciation not depreciation

[chiang mai]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis.

seconded... although times have changed and the BoT has considerably more cash in its coffers than in 1997 to defend a peg.

You don't need to defend a peg when your currency is underpriced - only when it's overpriced. Pegging now is to create stability and prevent appreciation not depreciation

[Naam]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis.

seconded... although times have changed and the BoT has considerably more cash in its coffers than in 1997 to defend a peg.

You don't need to defend a peg when your currency is underpriced - only when it's overpriced. Pegging now is to create stability and prevent appreciation not depreciation

thanks for revealing to me that "two plus two equals four" Gambles, i always thought it's 3.999999999 but that's besides the point.

questions: who is to judge which currency is underpriced or overpriced and what is the timewise as well as the fundamental validity of this judgment? do you know by chance any experts who possess this relevant knowledge? if yes, can you name them?

[jcon]

Very interesting Nation piece from the excellent, Khun Achara, featuring a chap that I know and whose research I use and with whom I was recently on a panel discussion ref pegging the baht or not (I'll also post this on the other current Baht threads) Please don't.

<snip>

Southeast Asian currencies are now strengthening artificially, not in response to domestic growth, but rather to Western weakness. Sheehan said if this intensified, the baht could rise above 30 to the dollar, reaching even 25 - when it was last pegged to the US.

And the source of that "Western weakness" is? Rubbish to infer that Thailand (SE Asia for that matter) should 'peg' for such a reason.

He said the simplest and most logical way of counteracting this was implementation of a managed peg similar to the Chinese model. This would stimulate growth immediately by increasing GDP and automatically build up reserves. The downside is inflation risk, but this is the lesser of two evils, particularly in a global recession.

Barf.

In this way, Sheehan sees the advantage of the political crisis, which has weakened the baht, and he suggests authorities peg it once it hits bottom.

???? Double-barf.

Sheehan ended by saying the sooner a peg was placed, the sooner the benefits would flow. This would also mitigate rebound volatility when the major Western currencies reverse their present long-term decline

Benefits to whom??? Breakfast, lunch, dinner triple-barf.

Couldn't it be possible that little-old Thailand is actually growing in it's own? No way, right? The &lt;deleted&gt;' nerve....

[Gambles]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis.

seconded... although times have changed and the BoT has considerably more cash in its coffers than in 1997 to defend a peg.

You don't need to defend a peg when your currency is underpriced - only when it's overpriced. Pegging now is to create stability and prevent appreciation not depreciation

thanks for revealing to me that "two plus two equals four" Gambles, i always thought it's 3.999999999 but that's besides the point.

questions: who is to judge which currency is underpriced or overpriced and what is the timewise as well as the fundamental validity of this judgment? do you know by chance any experts who possess this relevant knowledge? if yes, can you name them?

I was very impressed with the BoT's economics people when I met them!

Looking at projected fundamentals, Thailand's seem to be clearly improving relative to the currencies that I'm expecting it to weaken against - have you seen developed versus emerging market projected debt

[Gambles]

Very interesting Nation piece from the excellent, Khun Achara, featuring a chap that I know and whose research I use and with whom I was recently on a panel discussion ref pegging the baht or not (I'll also post this on the other current Baht threads) Please don't.

<snip>

Southeast Asian currencies are now strengthening artificially, not in response to domestic growth, but rather to Western weakness. Sheehan said if this intensified, the baht could rise above 30 to the dollar, reaching even 25 - when it was last pegged to the US.

And the source of that "Western weakness" is? Rubbish to infer that Thailand (SE Asia for that matter) should 'peg' for such a reason.

He said the simplest and most logical way of counteracting this was implementation of a managed peg similar to the Chinese model. This would stimulate growth immediately by increasing GDP and automatically build up reserves. The downside is inflation risk, but this is the lesser of two evils, particularly in a global recession.

Barf.

In this way, Sheehan sees the advantage of the political crisis, which has weakened the baht, and he suggests authorities peg it once it hits bottom.

???? Double-barf.

Sheehan ended by saying the sooner a peg was placed, the sooner the benefits would flow. This would also mitigate rebound volatility when the major Western currencies reverse their present long-term decline

Benefits to whom??? Breakfast, lunch, dinner triple-barf.

Couldn't it be possible that little-old Thailand is actually growing in it's own? No way, right? The &lt;deleted&gt;' nerve....

You got me there with your superior knowledge, information and powers of deduction...now let me just find the 'ignore-the-idiot' button (no offence intended)

[Naam]

I completely disagree with this westerner John Sheehan saying a fixed currency is the solution. It is completely the worst advice and obviously he didn't live through the Asian crisis.

seconded... although times have changed and the BoT has considerably more cash in its coffers than in 1997 to defend a peg.

You don't need to defend a peg when your currency is underpriced - only when it's overpriced. Pegging now is to create stability and prevent appreciation not depreciation

thanks for revealing to me that "two plus two equals four" Gambles, i always thought it's 3.999999999 but that's besides the point.

questions: who is to judge which currency is underpriced or overpriced and what is the timewise as well as the fundamental validity of this judgment? do you know by chance any experts who possess this relevant knowledge? if yes, can you name them?

I was very impressed with the BoT's economics people when I met them!

Looking at projected fundamentals, Thailand's seem to be clearly improving relative to the currencies that I'm expecting it to weaken against - have you seen developed versus emerging market projected debt

more than a year ago i met some of them too, was impressed and mentioned that fact in this forum. for the last some years, and especially since autumn last year, i am very bullish on the Baht and bought perhaps too many of them (posted this too here). to be on the safe side i keep most of my Baht offshore which enables me to switch into any other currency at any time mon-fri (instead of dealing with archaic and ridiculous thai banking procedures ). i agree that the fundamentals look "good" but there is no way predicting accurately what THB might do next week or next month vs. any other currency. the fundamentals might be the same, the "anals" might shout on top of their voice what they read in tea leaves, arrangement of chicken bones, the intestines of a goat or what ol' Fibonacci had to say about THB when he spoke at the ASEAN summit in 1239 A.D. but fundamentals can get pushed aside overnight or even in a matter of hours.

just my two Satang

[lannarebirth]

So the USD:THB is stuck in .25 Baht range while $USD kicks the ass of every other currency on the planet and headlines scream Thailand is about to be engulfed in civil war. Impressive.

[Gambles]

more than a year ago i met some of them too, was impressed and mentioned that fact in this forum. for the last some years, and especially since autumn last year, i am very bullish on the Baht and bought perhaps too many of them (posted this too here). to be on the safe side i keep most of my Baht offshore which enables me to switch into any other currency at any time mon-fri (instead of dealing with archaic and ridiculous thai banking procedures ). i agree that the fundamentals look "good" but there is no way predicting accurately what THB might do next week or next month vs. any other currency. the fundamentals might be the same, the "anals" might shout on top of their voice what they read in tea leaves, arrangement of chicken bones, the intestines of a goat or what ol' Fibonacci had to say about THB when he spoke at the ASEAN summit in 1239 A.D. but fundamentals can get pushed aside overnight or even in a matter of hours.

just my two Satang

Spot on !

[dmax]

go into page 42 of the sun newspaper and ask mystic meg because no one on here knows

[EvilDrSomkid]

Just in case none of you noticed:

THB to Euro today: 40.5

Total disaster for me. The euro has lost 20% against the THB in about half a year.

Just great.

Its not the baht that's about to crash, but the euro is. And until the EU countries get their debt &lt;deleted&gt; together its going to keep dropping.

I am really working and saving hard for my investment capital in Thailand and the goal posts just keep moving further away.

However, once the business is running its good that my customers are paying in dollars. The dollar has been sitting on 32.something the last months

Edited May 7, 2010 by EvilDrSomkid

[mynextgig]

Just in case none of you noticed:

THB to Euro today: 40.5

Total disaster for me. The euro has lost 20% against the THB in about half a year.

Just great.

Its not the baht that's about to crash, but the euro is. And until the EU countries get their debt &lt;deleted&gt; together its going to keep dropping.

I am really working and saving hard for my investment capital in Thailand and the goal posts just keep moving further away.

However, once the business is running its good that my customers are paying in dollars. The dollar has been sitting on 32.something the last months

EUR broke all support levels yesterday against the USD, its ripe for a big drop over the next few months with parity a distinct possibility.

GBP was holding its own until the election debarcle and is currently sitting at around 1.46, if the UK end up with a hung parliment expect your GBP to buy you 42-43 THB over the next couple of months.

Anyone in Thailand living off income from Euro or Sterling is going to have a tough time for at least the remainder of this year.

My advice (for what its worth), hedge yourself by converting a years worth of funds to USD now. Alternatively SGD is quite a good currency to hedge with as its fixed against a basket of currencies, i suspect including THB but the MAS do not publish this, and you will find that the SGD/THB has been fairly stead at 23-24 against THB throughout the financial crisis.

[hawthorne]

Collapse. The Thai Baht please Buddha that it dose. But I think your got more chance of winning spot the ball (Lotto) than that happening. I will make a prediction now. In six month's time. Or less. The Baht will be 31/50 to the $ The way the euro and pound are at the moment, they will be down a few Baht as well. To day the Baht stand's at 32.16 that's up yet again from last week. Trouble with the red shirt's dosen't seem to matter. Im thinking of bringing more over!!! If the election's go pair shaped in the UK then the pound could fall through the floor.

Well Fred your prediction seems spot on with the pound and agree with the dollar. Having money in the country you live is not nearly as risky as just the opposite if planning a long stay.

The baht has done well. I wish the Thai baht would get weak as well but that is only wishfull thinking and the trend is only the opposite.

[humbug]

well it depends if many of the big fiancial institutions decided bangkok is no longer a place to park money for financial executions in asia. if that sentiment deteriates then for sure you will see the results in the forex markets for the baht, for sure 2006 loonytoons by the thai narmy started the deteriation, and now it just depends on whether there will be a stable democratic outlook away from millitary rule if thats the case i am sure the larger institutions will start again to park their money in bangkok for inter asian transactions and then you will see the baht move in a different angle

[Naam]

well it depends if many of the big fiancial institutions decided bangkok is no longer a place to park money for financial executions in asia. if that sentiment deteriates then for sure you will see the results in the forex markets for the baht, for sure 2006 loonytoons by the thai narmy started the deteriation, and now it just depends on whether there will be a stable democratic outlook away from millitary rule if thats the case i am sure the larger institutions will start again to park their money in bangkok for inter asian transactions and then you will see the baht move in a different angle

this stuff you ingest... is it legal? or do we just have a case of "nomen est omen"?

[Gambles]

well it depends if many of the big fiancial institutions decided bangkok is no longer a place to park money for financial executions in asia. if that sentiment deteriates then for sure you will see the results in the forex markets for the baht, for sure 2006 loonytoons by the thai narmy started the deteriation, and now it just depends on whether there will be a stable democratic outlook away from millitary rule if thats the case i am sure the larger institutions will start again to park their money in bangkok for inter asian transactions and then you will see the baht move in a different angle

In my experience, Hong Kong and Singapore remain the capital hubs for Asean - Thailand only has very limited use as a conduit into just Burma and Cambodia and HK lost interest in Thailand as China developed and Singapore started turning its attention increasingly to Indonesia and Malaysia after the AIS problems, airport closure etc etc

It will take a lot of time to rebuild confidence. The Nation ran this yesterday

ECONOMICS AND POLITICS: A MARRIAGE MADE IN hel_l

PAUL GAMBLES

SPECIAL TO THE NATION

I NEVER talk about politics because I try to limit myself to rational topics of which I have some understanding. In the past I’ve only ever commented on politics or politicians when they’ve impinged on my chosen field of economics. Sadly this seems to happen more and more frequently. I prefer the old-fashioned idea that economics was something which existed very much outside the political realm. The spectre of politicians getting involved in fiscal and monetary policy is a bizarre nightmare that haunted much of the 20th century but happily, independent central banks have in many cases now once again attained some level of independent power and responsibility.

In particular, I never comment on Thai politics because I really don’t feel qualified to add anything to the debate, having only lived here for 16 years. But I do recognise that Thailand might fail to capitalise on the opportunities presenting themselves to Asian investment markets if political risk continues to affect the country’s economy.

Last week, Scott Campbell, CEO MitonOptimal Guernsey, MBMG Group’s S&P award-winning affiliated portfolio manager, spoke to investors here in Bangkok about the great divergence between Western markets which in many cases are still significantly below the levels of 10 years ago, and regional stocks which have increased three-to-fourfold since the Asian crisis. Local valuations remain reasonable and a number of structural factors, such as the growth in domestic consumption and markets, the rapid expansion of intra-regional trade, and favourable demographics, will continue to offer an advantage to the East over the West, and to developing markets rather than developed markets for perhaps the next 30 to 40 years. Asian population distribution looks similar to that of the United States in the Baby Boom era:

“The region is exporting within itself. This has shown that Asia is much less dependent on the West which is very positive. ... An economy that has a higher proportion of population in younger age groups is in much better shape than economies that have an ageing population. India, for example, will progress through the baby boom stage and isn’t projected to reach the top heavy state that is now starting to impact on the growth of the US today until 2050. In long term trends this theme is very supportive of emerging markets’ growth for another 40 years or so.”

Scott Campbell also noted that other shifts have occurred from West to East:

“In the past, a high-risk portfolio was emerging market bonds, Japanese equities and developing market property. At the same time a low-risk one contained US government bonds, German blue-chip companies and UK property. Now, the situation is completely reversed.”

Asian commercial property is particularly attractive with low gearing ratios and good yield carry in many cases, unlike western commercial property markets where higher leverage and low or negative real yields make asset prices extremely vulnerable. While Thailand’s economic fundamentals are attractive, political risk is currently a major obstacle. Scott highlighted the relative underperformance of the baht during a period which has seen a significant rebound in Asean currencies (other than the Vietnamese Dong):

Currency is a barometer of political risk and the baht has been pretty much flat since last year on a trade-weighted basis] ... If the political risk gets sorted out, then you may see the baht appreciate just to catch up with the other regional currencies which it has lagged during this time.”

Long term observers such as Dr Mark Mobius have noted that Thailand started to under-perform in 2004, when political tensions first began to affect the economy. If so, it may well account for much of the relative under-performance identified in research by John Sheehan of Global Market Asia which shows that Thailand’s economy has significantly lagged over the last few years in terms of economic growth rates, FX rates and stock market valuations relative to those Asean neighbours which have not only caught up with but have overtaken Thailand. If you take the superior GDP growth rate of the Philippines and apply this higher rate to Thailand’s growth from 2005, it can be seen that by the end of 2008 Thailand’s GDP would have been somewhere between US$30 billion and $40 billion (Bt970 billion-Bt1.29 trillion) higher than it actually was.

Hopefully the political stalemate in Thailand is closer to a resolution, and any under-valuation that this has caused in local assets and/or currency now represents a buying opportunity.

OVER IN THE UK…

All three candidates in this week’s UK election are fighting hard over the middle ground, and that should be comforting news. However, having so little to choose between them makes us glad we don’t follow politics. Alexis De Tocqueville said that in a democracy we get the government we deserve. You might feel that this is a harsh way to look at the choices facing voters in Thailand and the UK where politics seem to have descended into Hobson’s choice (ie, no choice at all). In both cases the incumbent Prime Ministers may have a lot going against them, but a widespread view is that maybe they have limitations as politicians just because they’re decent, honest and sincere people. Maybe the depressing, universal truth is that good people make bad politicians and vice versa.

Whether in Thailand or the UK, let’s just hope that not only is De Tocqueville right but also that our karma yields good political results and I can go back to fretting about what I know best – the less tangled web of the investment world ... did anyone see the Goldman hearings last week?

Edited May 8, 2010 by Gambles