What To Do With The Baht?

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What to do with the baht? perhaps we should look to lessons from the past

By Paul Gambles

Special to The Nation

In 1910, prominent Republican Senator Nelson Aldridge and a team of experts started to lay the foundation for the Aldridge Plan, which led to the creation of the Federal Reserve System three years later.

"1910" was an interesting year. Various events that year demonstrated the rapid technological developments being made at the time, such as the first commercial passenger flight of the Zeppelin dirigible Deutschland, the use of the wireless telegraph in the arrest of a murderer and the passing of English monarch Edward VII and also of King Rama V, who had presided over a great deal of the modernisation of Siam and its currency.

In many ways the world was a simpler place a hundred years ago, with major currencies convertible into either silver or gold. Foreign exchange transactions were therefore generally rather less complex, volatile and stressful than in today's environment.

Locally, exporters, business leaders and trade associations are increasingly concerned about the relatively strong baht and its negative impact on their orders, revenues and bottom lines.

Expats remunerated in major foreign currencies and local investors with overseas interests have been hit by a similar problem, with incomes and assets falling in value.

Both the Bank of Thailand and the Finance Ministry have vehemently insisted that the baht is just moving roughly in line with other regional currencies and in fact the baht has actually underperformed other regional currencies by about 10 per cent over the year ending in January (2009), with many analysts blaming domestic politics for this weaker performance.

Mark Mobius, the legendary fund manager at Templeton Asset Management who manages about US$34 billion in emerging market funds, has stated that the local economy, equity markets and currency have failed to achieve their full potential since 2004 because of political risk.

Closer examination of the BOT's foreign reserves data shows that the central bank has however been intervening in the money markets but basically has been sterilising inflows by buying surplus dollars and issuing more local currency.

This accumulation of foreign reserves and issuance of baht is designed to effectively prevent any excessive strengthening of the baht.

Data until the end of June show some interesting and new emerging trends if you look at the region's most comparable currencies and track their performance against the US dollar.

Over the past two years the Indonesian rupiah has strengthened versus the dollar although the Malaysian ringgit has fallen marginally less than the baht. Both of these currencies have also outperformed the baht during the past 12 months - a period that has seen the baht gain just over 5 per cent versus the greenback, while the rupiah's gains have been more than 10 per cent during that period.

During the first half of this year both currencies again outperformed the baht. The ringgit was the stronger over the six-month period, with the rupiah performing best in the second quarter.

It's only been in the aftermath of the Bangkok protests that the baht has outperformed its two regional rivals, falling back less against the dollar as the US currency strengthened again in June.

Throughout the period the baht has generally been the weaker of the three currencies which, during a period of significant global currency volatility, have been remarkably stable and range-bound versus the dollar and dollar-linked currencies.

This would seem to imply that fears of a strengthening baht directly affecting sectors such as tourism and increasingly damaging Thailand's export competitiveness are overstated. Exports remain a key driver of the overall Thai economy, accounting for as much as 75 per cent of gross domestic product.

However the baht and its regional competitors have tracked the strength of the dollar and that has seen gains against currencies such as sterling and the euro amid concerns about the debt levels of the UK and the eurozone.

The threat of a serious weakening of major currencies - which some analysts see as inevitable with the greenback falling below 25 - is heightening these fears.

Mitigating the impact of these currency issues calls for some intelligent action from the BOT. Opinions may be divided over what form that action should take, such as pegging the baht to its current dollar value prior to a collapse of the greenback, but the central bank has a long history of coming up with innovative, leftfield solutions to its foreign exchange problems, as indeed it did a century ago when it corrected an undervalued baht.

Asia is now leading the global recovery and the region's currencies are strengthening at a time when the West's lacklustre economic fundamentals are leading into a disinflationary period that will be characterised by anaemic growth. Furthermore, Europe has been struck by a sovereign debt storm that could dwarf the 2008 financial crisis.

For 95 per cent of the last century the baht was either a managed or pegged currency until the Asian financial crisis erupted in July 1997. Floating the currency saw the baht's value hit a low of 56 to the dollar, which led to an export boom - rising from 13 per cent of GDP in 1972 to 50 per cent in 1998.

A more pragmatic "Thai" solution may exist, one which could help fend off the criticisms of protectionism that re-pegging the baht will certainly bring.

The initial reaction to the recent limited appreciation of the yuan has been muted and it may be that Thailand and Asia are already on top of the currency issues rather better than the West was just like 100 years ago.

After all we shouldn't forget the only country that remained on the silver standard throughout the 1930s was the same country that would avoid recession or depression during the '30s. That country was of course ... China!

Paul Gambles is a regular speaker at industry events on market forecasting,

financial planning, investing and legal issues for foreigners living or doing business

in Asia. He can be contacted at:

paul [at] mbmginternational.com.

The baht in the 19th century

During the 19th century, Siam's currency unit, originally the tical and then the baht, were both simple weight measures of the amount of silver they contained - a coin was literally worth its weight - a tical was a measure of weight equivalent to around 15-and-a-quarter grams.

Foreign exchange rates were easily worked out from the relative weights of respective currencies - five baht being worth seven Indian rupees or three Straits dollars.

When paper currency was introduced, backed by silver reserves, baht banknotes also had their values in Straits dollars and Indian rupees printed on them.

The decimal system was introduced in 1897, with one baht equal to 100 satang.

By 1902, the government of Siam started to more actively manage and modernise the currency system in response to greater fluctuations in the relative values of gold and silver. While the baht was fixed against other silver-backed currencies, a fall in silver relative to the gold price weakened silver standard currencies such as the baht against gold standard currencies such as sterling.

The baht fell from eight to the British pound during the 1880s to 10 in the 1890s, before plummeting to 21.75 by 1902.

At this point many currencies abandoned the plunging silver standard but, prior to doing that, the Siamese government initiated an ingenious method for revaluing the currency. The baht was allowed to rise when the price of silver increased relative to that of gold, but any declines were simply ignored.

By 1908, the currency strengthened to 13 to the pound, which allowed Siam to follow many other former silver standard countries and peg its value at that level to sterling, the major regional and global trading currency. The peg value was updated twice, to 12 baht in 1919 and 11 in 1923.

Following World War II and a brief period of linkage to the yen, the US dollar replaced sterling as the primary trade currency and became the new peg currency for the baht.

For 95 per cent of the last century, the baht was either a managed or pegged currency until the Asian financial crisis erupted in July 1997. Floating the currency saw its value hit a low of 56 to the dollar, which led to an export boom - rising from 13 per cent of GDP in 1972 to 50 per cent in 1998.

-- The Nation 2010-08-02

[morrobay]

The Nation is a very nationalistic paper and everything they select to print about the baht is good and everthing about the dollar is bad.

In my opinion the problems with the dollar are a result of bush and that hack greenberg who ran the country and the dollar into a ditch.

[Robby nz]

The problem isnt with the Baht but with the dollar and european currencies that have dived.

Just transfered some cash today and the Baht has fallen against the NZ $ in the last 6 months from 22.22 to 22.64 today not a huge fall but a big contrast against what has happened with the US $, euro, pound.

And it will get worse for yanks brits and others, I read that morgage foreclosures are still running at 300,000 a month in the US.

Then there is the huge 700 billion ballance of payments deficite and two unwinable wars etc, etc, etc.

what economic recovery?

[jonclark]

" ...the Siamese government initiated an ingenious method for revaluing the currency. The baht was allowed to rise when the price of silver increased relative to that of gold, but any declines were simply ignored...."

Anyone think TAT follow a similar train of thought with tourist arrivals. Any decline in visitor numbers are ignored thus allowing arrivals to continue to increase