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TREASURY VIEW

Time to consider the various options for reining in the baht

By Thiti Tantikulanan

So far this year the baht has appreciated by around 8 per cent, which puts it somewhere in the middle of the pack among the strengthening Asian currencies.

The Malaysian ringgit and the Japanese yen lead the pack at 10 per cent appreciation, while the Indonesian rupiah, Philippine peso and Singapore dollar come in at around 5 per cent.

By stepping back and looking at the big picture, it seems like the baht is just a part of this picture of strengthening Asian currencies. However, it is the pace of the strengthening baht - from 32.00 to 30.80/US dollar, or a 3.5 per cent appreciation, in the past month - that is drawing attention and sparking debate.

In 2010, the baht was expected by most economists to strengthen. After all, Thailand continues to run a healthy current account surplus. From January to June the current account surplus was US$6.5 billion (Bt199.9 billion) and the baht was appreciating at around 3 per cent. But since July, the baht's appreciation has quickened and we have seen increased capital inflow into both the equity and debt markets.

For the first six months of the year we saw net selling of $500 million in the equity markets and a net buying of Thai bonds at around $600 million by offshore investors. However, since July the pace of capital inflow has quickened. In July and August, offshore investors bought around $700 million of equity and $1.5 billion of Thai bonds.

There is a good deal of excess liquidity in the markets at the moment, and fund managers are trying to hard to find places to invest. America's economic data has deteriorated noticeably in the third quarter of 2010 from the first quarter, which has put a question mark over the US economic recovery.

It also increases the likelihood that the US interest rate could very well stay near zero per cent for at least another 12 months.

This zero rate policy is causing the outflows of "hot" money into the global capital markets. Fund managers around the world are facing an increasingly obvious choice when it comes to their investment: Do you invest in the US dollar - while the US suffers from weak economic fundamentals, a high public debt-to-GDP ratio, a high unemployment rate and a shaky recovery outlook - or do you invest in a robust region of the world, Asia in particular? Asia continues to enjoy a strong trade balance surplus, growing GDP and a relatively low public debt-to-GDP ratio. The choice is quite obvious.

Therefore, what we have been seeing is a result of capital seeking a safer and higher return on investment, causing the Asian currencies to appreciate. Nevertheless, in the last two months, Thailand has been recipient of the heaviest inflow. This is because investment in Thailand was slow earlier in the year due to the country's political uncertainty.

Many fund managers and investors were underweight in Thailand in the first and second quarters while over-weighting in other Asian markets. As those Asian markets have rallied since then and have become relatively expensive, Thailand's capital markets have become very attractive and undervalued. What we have seen in the past two months is investors rebalancing their portfolios to increase their investments in Thailand.

There has been talk about the need to use capital controls to curtail the strengthening baht. There is no denying that there are speculative flows on the baht, but implementing capital control or any version of control is a delicate task.

The 30 per cent reserve requirement, implemented in December 2006, was not a success, as evidenced by the gradual relaxation of the rules thereafter. It was a blanket capital control which did not distinguish between speculative and genuine flow.

There is a range of mechanisms in the markets that are not, per se, capital control - but more of a deterrent against short-term "hot money" - that should be discussed and considered.

Thiti Tantikulanan is head of the Capital Markets Business Department of Kasikornbank.

-- The Nation 2010-09-14

[12DrinkMore]

Can't argue with that analysis.

Pity the Western lot can't come clean and give such a clear description of the mess that the Western economies are in, instead of misleading bullshit about "stimulating the economy", "no double dip", "jobless recovery", "house price recovery" and all the rest of the crap.

I guess the POWERS consider that it would be too harsh for the Nanny State to give the "kids" the real situation. Let's just keep them blinkered to the television, feed 'em on junk.and ensure the pacifier is firmly in their gobs.

[Renbe]

Let's just keep them blinkered to the television, feed 'em on junk.and ensure the pacifier is firmly in their gobs.

People are like mushrooms, keep 'm in the dark and feed them horse manure...

[RKASA]

The world tit of the US economy is running dry because no one wants to feed the cow. Your imports to the US are paid for with exports.

The best way for Thailand to moderate the baht is to lower trade barriers and taxes on imports and get the juices flowing. Manage the surplus and pay for your windows programs. How will you sell car parts to people with no money outside of Thailand? Lift the Thai standard of living and let them buy some stuff.

I got mine and protectionist policy will only lead to another 97 type bust.

How many repatriated bahts plus some investment will there be? Once the bottom hits the Thai baht will be right on the down slope like the rest and like always will recover following the US and EU. lead and lag.

Traders are happy to work both ends and often profit the most in the extremes, which makes them the last choice for any honest advise - people have to live in the middle of it.