Weak US Dollar Is A Big Threat To The Baht And Thai Economy

[webfact]

EDITORIAL

When the Fed fires its arsenal, we will need to be prepared

By The Nation

Weak US dollar is a big threat to the baht and Thai economy

The US Federal Reserve is ready to unleash another round of unconventional monetary easing. This follows its latest assessment of the US economy, which is still experiencing price deflation, as well as sluggish growth and high unemployment. The Fed said in its statement that it is "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate".

The statement didn't say what level of inflation would be consistent with the Federal Reserve Act's directive for "maximum employment, stable prices and moderate long-term interest rates". Fed officials indicated at their June meeting that they prefer long-run inflation ranging from about 1.7 per cent to 2 per cent. That's based on the Commerce Department's personal consumption expenditures price index.

From the statement, it is clear that the Fed is aiming to combat deflation vigorously, fearing that failing to do so would risk plunging the US into something similar to Japan's "Lost Decade". In the first round of quantitative easing, the Fed bought up securities of different sorts to prop up the banking system and the housing market. This has resulted in a ballooning of its balance sheet to a record US$2.3 trillion (Bt70.8 trillion). But the first round of the monetary easing, which has witnessed interest rates falling to zero per cent, has failed to perk up the economy. Some now consider that the Fed will be firing its guns in November by buying US Treasuries to keep the interest rate in the zero per cent range. But for how much? And will it work?

In any event, the dollar can only go south. The greenback slid to its lowest level in almost five months versus the euro. Gold, which represents a hedge against inflationary expectation, has also climbed to a record high on market anticipation that the Fed will flood the financial system with further liquidity to prop up the US economy.

This monetary easing will result in further weakening of the dollar. And as the US government continues to run a massive deficit, the Fed will be obliged to come to the rescue by purchasing the Treasuries that finance the deficit, which is not likely to come down in the foreseeable future due to economic weakness, falling tax revenue and spending obligations that have dramatically increased.

With the US weakness, a sovereign debt crisis in Europe and deflation in Japan, how will Thailand cope with the policy challenge? The first thing that comes to mind is that the baht will continue its upward trend. This is inevitable. The baht could go back to the pre-1997 crisis level of Bt25 to the dollar. This is not impossible, given the depth of the US and global crisis. Many labour-intensive export industries will be forced to close down as a result.

Secondly, capital will continue to flow into Thailand and Asia, with the region still experiencing strong growth. Funds are now moving into Thailand to invest in bonds (at about 90 per cent) and equities (at about 10 per cent). In bonds, the funds will enjoy a wider margin against the US dollar rates. They will also earn an extra bonus from the baht's appreciation. In equities, the funds can also look forward to an emerging market play. Foreign funds have been net buyers recently.

This has complicated the monetary authorities' policy action. As the Bank of Thailand looks forward to normalising the interest rate to curb inflation, it risks inducing more foreign capital from the higher Thai rates. Massive foreign capital can create stock market and real estate bubbles. But the foreign capital could also move out of Thailand suddenly and create a systemic shock.

There have been rumours in the market that the banking authorities are pondering some kind of administrative control to curb the capital inflow. For now, the Bank of Thailand simply monitors the foreign exchange market closely and tries to keep the baht in line with the regional trend through its intervention programme. It will be interesting to see how the authorities react when foreign capital keeps feeding into the Thai system to create bubbles or over-valuations beyond the price fundamentals.

In the end, with the global volatility, Thailand will have to learn to rely more on the domestic economy, measures to cope with the inflow, and a monetary policy that pre-empts the inflation threat. This policy mix will have to be handled artfully to avoid painful ramifications.

-- The Nation 2010-09-26

[asiawatcher]

Whilst the US has been sliding constantly with the largest national debt of any country, it would be a disaster for Thailand for the Baht to gain 25% against the greenback. The Fed's interference to keep propping up the sick US economy is stupidity. It is time to let the levelling take place and the banks should be held to book for their manipulation of America.

[lovelomsak]

It doesnot sound like a threat to me I feel this story is a red herring. A strong baht is what Thailand needs and will use their advantage in the future.Time will tell this is the correct road to take. It maybe be what most people want to hear or admit to but Thailand is going in the right direction to become a strong world economic power.Thanks to America and China. And of course the failing japanese economy.

[gotlost]

Fridays close. 30.34 USD 47.50 GBP 40.59 EUR

[Heng]

Just another environmental condition. Adapt, survive, prosper.

[Thai at Heart]

With the US printing money hand over fist and Thailand running a large balance of payments surplus, there isn't too much Thailand can do. They have been accumulating USD hand over fist for the last 2 years. It won't make much difference to drop interest rates, since the US is rock bottom.

Drop duties on imports? Big tax breaks on imported capital investment, but Mapthaput is stalled. Encourage Thai companies to go overseas and invest (done last week by Korn).

[tijnebijn]

Fridays close. 30.34 USD 47.50 GBP 40.59 EUR

sounds strange perhaps but considering the cicumstances I was

quite happy to see the EURO above 40 again , almost looked like it was

moving south to 35 , but now I'm quite positive it can keep above 40 somewhat .

For the dollar it is looking not good , but what goes down goes up eventually ,

and one day it will happen , got to stay positive in something .

[Pib]

"Weak US dollar is a big threat to the baht and Thai economy"

And for those of us who get paid in dollars, a weak US dollar is a big threat to our household economy due to fewer baht received per dollar. The US just needs to turn off its dollar printing presses for a few years (and so do a lot of other western countries with their currency printing presses).

[siamtexan]

in the past, all international companies made it a requirement whenever possible to ensure the US dollar was the currency clearly stated in contracts. Now Asia currencies are the currency of choice for many future looking deals.

[Spee]

Whilst the US has been sliding constantly with the largest national debt of any country, it would be a disaster for Thailand for the Baht to gain 25% against the greenback. The Fed's interference to keep propping up the sick US economy is stupidity. It is time to let the levelling take place and the banks should be held to book for their manipulation of America.

Couldn't agree more. The whole concept of a government deciding a business is "too big to fail" can only lead to bias and corruption. This is precisely what happened in the US. Some banks were allowed to fail, if not driven to failure through government policy, while at the same time other banks were kept afloat by government policy and financial backing.

The total US debt is almost as large as the GDP of the rest of the entire world. The total US debt under Obama, Pelosi and Reid is larger than under all of the other previous administrations combined. And the Fed is still printing money like it is going out of style, monetizing the debt.

Just be sure the point is clear, the problem is not with the US economy and the US ability to produce. The problem is with the government's constant focus on transfer of wealth, which inevitably leads to the laws of unintended consequences. The problem is with the government's unending desire to dictate and manipulate the currency, instead of serving as the public steward of the money supply and letting market forces be free to survive, prosper or fail on their own merits.

The dollar has no chance of recovering as long as the current administration continues with their economically destructive policies. I wouldn't be surprised to see the dollar drop to 25 ThB or even lower. The bright side is that the American population (as measured by all reputable polls) has totally soured on these policies and that drastic changes are expected in the 2010 and 2012 elections. I dare not dream as to what could happen if things continue as they are.

Let's also keep in mind that the drooping dollar is driving the cost of gold through the roof. Haven't checked lately but it's probably close to 20k ThB for 1 baht gold. Many Thai people use gold as both savings and currency, not to mention sinsod and other aspects of the culture. People that have gold as savings may be inclined to sell it now while it is high. Some people that want to buy gold perhaps now cannot afford it. Not saying this is totally good or totally bad. It's just another way the weak dollar indirectly affects Thailand.

[RKASA]

As I have said before nothing great about the overly dependent Thai economy which intentionally lacks any real domestic economy. The leveling you need to address is the trade manipulation of net exporters that want only to suck the tit dry. Steal windows software like its a sport and everything else they can, make cars for the US market and resist and tax imports on the bases of a fabricated "we are a poor country" which they are not.

I say level it good - use a 75% tax on all products from net export counties that have bad trade policies.

China already has said they see this and want to change trade policy, but I am sure it is only going to be a min. effort.

The EU is pretty much in the same boat and came near to dumping the euro, which in the end they will even after multi billion euro prop ups expire. I see the dollar worth more then the euro in the future and it was only high because of the same bad trade policies and manipulations that asia follows.

The US has run trade deficit for tens of years with countries like Thailand to prop up their economies and maintain a sense of stability in regions, and now its labeled as at fault.

Ha - turn off the tap or in this case, keep working at killing your goose and see what happens. Yes Thailand has trade with other countries too, but they get their money from the same end source i.e. consumers. You think China is going to make a great trade partner - Good luck with that one.

[slapout]

Just another environmental condition. Adapt, survive, prosper.

History/Forbes has shown that some people are brilliant at reading and projecting how some of the most inept/good monetary plans will affect exchange rates for countries as well as the stock price of the private sector. It would appear that the two sectors are becoming more closely intertwined and this may require a more astute evaluation.

I agree, adapt, and survive are the first two considerations. To prosper, will depend on your definition of the latter, and may probably not agree with those, who are more successful than you.

[w11guy]

The EU is pretty much in the same boat and came near to dumping the euro, which in the end they will even after multi billion euro prop ups expire.

Not sure what planet you are on, but the EU has never considered or come close to dumping the Euro. The Euro has had its ups and downs, as have most currencies, but that is no reason to dump it.There would be more to lose than to be gained by dumping it. It's possible that a country like Greece could leave the Eurozone, but the Euro would still continue. The Euro mostly brings stability to the Eurozone because businesses that import and export to other Eurozone countries don't have to worry about wildly fluctuating exchange rates. The EU is mostly a single market, so needs a single currency.

I doubt the US would have been as successful as it has been over the past century if it had a different currency in every state.

One day most Asian countries will also have a single currency. Maybe 20-50 years away, but it will happen.

Edited September 26, 2010 by w11guy

[kuffki]

Thailand's economy or the rest of the world is the last thing on US mind.

If Thailand recognizes(which i doubt) that $US will get weaker, perhaps rather then worrying about what US is doing, they should concentrate on their own economy and weaken THB if they do not want to go into the biggest crisis of 20th-21st century

Other country's in the region monitor this and act accordingly, for example Vietnam who weakened dong to keep their economy stable.

Thailand really needs to stop pointing fingers and start to mind their own business and deal with reality rather then concentrating on good PR.

Tourism is not the only source of income, even though tourism alone takes care of thousands if not millions of people, but the main business is exports and who will continue to buy from Thailand if the prices have almost doubled(due to exchange rate) in the past 5 years

Edited September 26, 2010 by kuffki

[Spee]

The US has run trade deficit for tens of years with countries like Thailand to prop up their economies and maintain a sense of stability in regions, and now its labeled as at fault.

You make it sound as though the US government is the sole determiner of business with Thailand and of course, nothing could be further from the truth. Governments typically don't do business with other governments. Businesses do business with other businesses.

The US doesn't run trade deficits with ANY country on purpose much less Thailand. Many of the goods that Americans want to buy are made in and imported from other countries because that is the way economies run.

Let's look at shrimp, because most of the frozen shrimp in American stores is imported from Thailand. This doesn't happen because the US and Thai governments have established laws that say only shrimp imported from Thailand can be sold in stores. It happens because the best product for the least amount of money happens to be produced in Thailand. Thes are private American enterprises buying from private Thai enterprises.

And frankly, any government involvement is usually unwanted and unnecessary interference, such as tariffs and taxes, which aside from common defense and other basic civil functions, do nothing but serve those who seek power and influence.

I would suggest that you or anyone else who may disagree with me, to go watch the great Milton Friedman's "Free to Choose" series. You can find the link on my ThaiVisa profile.

[CobraSnakeNecktie]

It's funny. for decades countries like Japan, Korea, China, Thailand etc have been exploiting the US with weak manipulated currencies to gain market share and increase exports which many contend is unfair. When the US does it back to export its debt back to those same countries then it's a travesty. Go figure.

[cloudhopper]

they should concentrate on their own economy and weaken THB if they do not want to go into the biggest crisis of 20th-21st century

I have no doubts that that is exactly where their concentration is focused. The extent to which tourism and exports are affected by exchange rate is far less important than the cost of imported energy and raw material inputs. All those countries who enter the mathematically futile race to devalue their currencies relative to all the others will be the losers.

[kuffki]

they should concentrate on their own economy and weaken THB if they do not want to go into the biggest crisis of 20th-21st century

I have no doubts that that is exactly where their concentration is focused. The extent to which tourism and exports are affected by exchange rate is far less important than the cost of imported energy and raw material inputs. All those countries who enter the mathematically futile race to devalue their currencies relative to all the others will be the losers.

so from where does Thailand import its energy and raw material?

[cloudhopper]

so from where does Thailand import its energy and raw material?

http://www.economywatch.com/world_economy/thailand/export-import.html

[RKASA]

The EU is pretty much in the same boat and came near to dumping the euro, which in the end they will even after multi billion euro prop ups expire.

Not sure what planet you are on, but the EU has never considered or come close to dumping the Euro. The Euro has had its ups and downs, as have most currencies, but that is no reason to dump it.There would be more to lose than to be gained by dumping it. It's possible that a country like Greece could leave the Eurozone, but the Euro would still continue. The Euro mostly brings stability to the Eurozone because businesses that import and export to other Eurozone countries don't have to worry about wildly fluctuating exchange rates. The EU is mostly a single market, so needs a single currency.

I doubt the US would have been as successful as it has been over the past century if it had a different currency in every state.

One day most Asian countries will also have a single currency. Maybe 20-50 years away, but it will happen.

Maybe you better read google headlines today - a group to study just that was formed during Greece crisis. We have 50 states not fifty countries, but you bring up a good point. Maybe we should have 50 votes at the UN.

[kuffki]

so from where does Thailand import its energy and raw material?

http://www.economywa...ort-import.html

ok, and ?

Edited September 26, 2010 by kuffki

[Chunky1]

Helicopter Ben in da house!

Don't worry, there is still time to buy a 15m baht 100m box in the sky.

Edited September 26, 2010 by Chunky1

[Puccini]

...Thailand...should concentrate on their own economy and weaken THB if they do not want to go into the biggest crisis of 20th-21st century...

There have been riots and terrorism, there is a dismal telecommunications infrastructure, etc. What more can Thailand do to try and weaken the Baht? Exports have increased by 30%, tourist arrivals by 13%, foreign companies continue to invest in Thailand.

[Thai at Heart]

...Thailand...should concentrate on their own economy and weaken THB if they do not want to go into the biggest crisis of 20th-21st century...

There have been riots and terrorism, there is a dismal telecommunications infrastructure, etc. What more can Thailand do to try and weaken the Baht? Exports have increased by 30%, tourist arrivals by 13%, foreign companies continue to invest in Thailand.

I would agree with most of it. As for the investment, I am not so sure. Mapthaput is a mess, 3g licensing is up the swanee. What industry they have here is doing very well thankyou, but in terms of new foreign investment, I think the last big one was Ford, which whilst good, is all to do with having a very large car making industry here, which isn't going anywhere any time soon.

Beyond oil (of which Mapthaput is a big part of the problem) and cars, I don't read too many stories about large FDI in Thailand. This is a worry for growth in the next 10 years.

[Jingthing]

The USA deficit issues are way overstated mainly by the blowhard teabagger movement, which doesn't have any serious economists behind it. It is quite easily solvable with more reasonable taxation of the American rich. A teabagger political victory will be an economic disaster, causing a massive crash in the US stock market, which has actually done quite well under Obamanomics.

[Thai at Heart]

The USA deficit issues are way overstated mainly by the blowhard teabagger movement, which doesn't have any serious economists behind it. It is quite easily solvable with more reasonable taxation of the American rich. A teabagger political victory will be an economic disaster, causing a massive crash in the US stock market, which has actually done quite well under Obamanomics.

I have to agree with you. I bumped into an acquaintance of mine the other day who was over from the US on business. Unusually the story turned to economics and he stated to me that on his salary of over 100k USD he paid 10.2% income tax when all the allowances, deductions and cash for clunkers for his new car etc was deducted. It might not solve all the issues for the deficit, but I was astonished when I heard this number.

Even he stated that when he didn't believe it when his accountant calculated his tax bill.

[kuffki]

...Thailand...should concentrate on their own economy and weaken THB if they do not want to go into the biggest crisis of 20th-21st century...

There have been riots and terrorism, there is a dismal telecommunications infrastructure, etc. What more can Thailand do to try and weaken the Baht? Exports have increased by 30%, tourist arrivals by 13%, foreign companies continue to invest in Thailand.

Exactly. but during all those times, it got stronger with some help from BOT i am sure.

How to weaken it? simple they need to wake up one morning and set the rate 10% or whatever % lower and problem is solved.

Its not like its freely traded on the market

[puipuitom]

Already for many years I am astonished about the complete focussing of the Thais on the USA and their currency, realy totally ignoring other economic powers on the world, especially the total lack of interest to the biggest economy of the world: the EU.

They still see it as completely independant states, while economiccally seen, it is one big block: many laws are in fact EU directives, no customs between the member states, even any contract , agreement etc, which might hamper the free flow of people, capital and goods is illegal ( art 85 of the founding agreement in 1958). SO.. a SOLE AGENCY for only ONE (or more) member state is ILLEGAL and punishable with huge sums by DG 23: EU competition.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

GDP (millions of USD)acc IMF

World 57,937,460

European Union 16,447,259

United States 14,256,275

Japan 5,068,059

P R of China 4,908,982

Brazil 1,574,039

Canada 1,336,427

India 1,235,975

Russia 1,229,227

Australia 997,201

South Korea 832,512

Thailand 263,889

[mommysboy]

The USA deficit issues are way overstated mainly by the blowhard teabagger movement, which doesn't have any serious economists behind it. It is quite easily solvable with more reasonable taxation of the American rich. A teabagger political victory will be an economic disaster, causing a massive crash in the US stock market, which has actually done quite well under Obamanomics.

"US deficit overstated". Can you justify that statement? I"m a Labour supporter (democrat in US) but taxing the rich won't work as there is not enough of them to provide reasonable support. I suppose it's just about austerity measures versus 'spend your way out' and at this pointit appears US took the wrong gamble.

But regarding Thailand: its only real problem is that it has done bXXXXX all to foster and nurture a strong domestic demand, and that is really essential for developing the real domestic economic growth, and competitiveness regarded for a 'first division' nation, which it now arguably is. Thailand, it seems, won't invest by itself.. Wonder why? Thailand is very dependent on exports, and these will suffer dramatically with the rising baht.

Tourism actually employs 3-5 million people and agriculture a staggering 17 million as I recall. There's a few million in textiles too. A strong baht will exacerbate unemployment.

A real mess, but then US, etc, in awful shape.

[Chunky1]

The thing is, Thailand imho has a slave driven economy so what does it even matter? So instead of investing in 5 new houses that will remain empty this year, a factory owner will only invest in 3. He probably has 50 other houses. You have a very tiny % of Thais with a massive proportion of the earnings. I'm not saying that this is a good or bad thing but the point remains that the poor will stay poor and the rich will stay rich in Thailand no matter <deleted> happens in the rest of the world.