Thai Baht Back Strong But Challenges Remain

[webfact]

Baht back strong but challenges remain

Achara Deboonme

The Nation

Massive flows of global funds mean day-to-day volatility still a concern

BANGKOK: -- In the 15 years since the embattled baht was floated on July 2, 1997, the economy and currency have skidded through considerable turbulence. But for sustainable strength, proper policies are required to sail the economy and baht through worse weather to firmer ground, economists say.

The baht came under heavy attack in 1997 due to a toxic recipe. The unit was pegged at Bt25 to the US dollar and backed mainly by foreign reserves that were seen as too thin against foreign claims built up through lax regulation of local financial bodies over the years. As a net importer due to a relatively small export sector, Thailand had current-account deficits. Non-performing loans reached nearly half of outstanding loans. The combination led to capital flight, a failed defence of the baht and finally a de facto devaluation that led to the "Tom Yum Kung crisis".

"The euro area crisis is a clear example. A disaster is in sight if one end (monetary policies) is fixed and the other (the currency) is not," Sutapa Amornvivat, chief economist of Siam Commercial Bank, said last week.

Six months after devaluation, the baht plunged in value, from Bt25 to Bt57.6 to the dollar, before finding equilibrium in 2001 when the economy was put back on a normal path by export income and the International Monetary Fund's rescue package repaid. During the harrowing years, the number of commercial banks shrank from 15 to 13 today -with the integration of many finance houses.

Since 2001, the baht has mainly appreciated, thanks to years of current-account surpluses, low investment from the public and private sectors, and consistent portfolio investment, said Usara Wilaipich, senior economist at Standard Chartered Bank (Thai). From 45 per cent of gross domestic product before the crisis, investment by the public and private sectors is now less than 20 per cent, which has kept capital goods imports at a low level.

This trend is expected to continue. Thailand has enjoyed current account surpluses for most of the past 10 years, which resulted in a continued build-up of reserves. From $27 billion in 1997, foreign reserves peaked at $189.9 billion on April 29, 2011 before retreating slightly to $173.1 billion as of June 22 this year.

"Economic fundamentals in Asia have changed significantly, with higher current account surpluses, better economies in Asia, better capital markets, bond market development, deeper capital markets and higher reserves. Asian foreign reserve positions are much higher," said Danny Suwannapruti, senior rates strategist at Standard Chartered Bank in Singapore. The baht could weaken again, given recent global fund flows, but the economy was much better placed to withstand depreciation, he said.

The first obvious lesson learnt from the devaluation is that fixed exchange rates, with very few exceptions, do not work, said Thiti Tantikulanan, head of KBank's capital markets business.

"Secondly, history (Mexico in 1994, China in 1995, Brazil and Argentina in 2000) has shown that a currency with weak fundamentals may put off facing the music in the short run but eventually market demand and supply will restore its true value," he said.

Sadly, not all countries learnt from 1997sia. In 2008, Iceland's currency, the krona, dropped by 150 per cent, also on a high current account deficit and high non-performing loans.

After the tumultuous years, the baht and economy have picked up resilience. Parson Singha, chief strategist for global markets at HSBC Thailand, said the authorities have done the right thing in letting the market determine the exchange rate, with occasional intervention only to ward off shocks.

While the currency should be allowed to move in line with market forces, from a macro-economic management point of view, and a business point of view, the currency should be stable and appropriately valued.

"Ultimately the key challenge for policymakers should be that the currency is not too volatile on a day-to-day basis, and that the currency does not strengthen too much against comparable currencies in the region," he said.

Yet, coming with the managed float system are greater challenges as local economic fundamentals could be overridden by global forces, particularly with the surplus liquidity in the global system and ease of capital movement. The prolonged euro crisis indicates more injections into the banking industry. Periodically, this will give rise to "risk-off" mode, when investors sell emerging assets and bring money home. When good news returns, they will return to risky assets. In recent months, the baht has traded in a wide band against the greenback.

Standard Chartered's Usara said two-way movement of the exchange rate was in sight, but strong fundamentals would guarantee an upside. This is bad for exporters, but rather than fighting against the tide, policymakers should honour the market and seek a balance through more investment in mega projects and the promotion of overseas investment. New investment over the next five years would invite growth in imports to the point that Thailand runs current account deficits, but if such investment benefits the economy and boosts growth, Thailand will welcome capital inflows and the baht can rise again.

"Baht sensitivity will be greater. Still, despite the upside possibility, it is nearly impossible to see a revisit of a sharp spike like in the past, when it shot up from 46 per dollar to 30. The landscape has totally changed," she said.

"The Bank of Thailand has learnt a lesson - intervention has been kept to a minimum, only to neutralise volatility and keep the currency close to neighbouring currencies for the sake of competitiveness. Rather than focusing on forex rates, policy-makers should emphasise economic fundamentals. Balancing is the key."

-- The Nation 2012-07-02

[apetley]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

Edited July 2, 2012 by apetley

[Moruya]

I'm not so sure the THB is back strong. Over the past year it is 7.8% lower against the USD

[chiang mai]

My interpretation of the article is that tourists and expats are in for some pain as markets force THB higher and GBP lower, the latter being an almost certainty as the BOE unleashes further QE this week, not good for many.

Moruya: it was getting too expensive for the BOT to weaken THB any further, if you read the article you'll see that 7.8% drop you mention cost BOT over USD 16 bill. to achieve.

[w11guy]

This sraticle was posted at 6.00. At 6.44 another one was posted saying that the baht is weak --> http://www.thaivisa.com/forum/topic/566769-political-pressure-not-economic-factors-behind-weak-thai-baht-academic/.

Come on ThaiVisa, make your mind up. It can't be weak and strong at the same time. Unless its fortunes suddenly dropped in 44 mins.

Very bad reporting.

[pointoffew]

I'm not so sure the THB is back strong. Over the past year it is 7.8% lower against the USD

It all depend on 2 factors:

1. The time line you choose

2. The currency you compare it to

As for "the past year" and the USD: the USD, as a presumed safe-haven, has gained on the back of Euro weakness.

Note that, partly due to government policies, initiated during the AV administration, partly due to government policies of the present administration and partly due to global macro-economic factors, Thailand has become a next IMPORTER once again.

[SICHONSTEVE]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

If it was 100 baht to X then it moves to 250 baht to X then it has dropped 150% to X.

[chiang mai]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

Which currency do you think did that?

[SICHONSTEVE]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

Which currency do you think did that?

According to the article the Icelandic Krona!!

[chiang mai]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

Which currency do you think did that?

According to the article the Icelandic Krona!!

Ta, I'm bad and missed that.

[phl]

My interpretation of the article is that tourists and expats are in for some pain as markets force THB higher and GBP lower, the latter being an almost certainty as the BOE unleashes further QE this week, not good for many.

Moruya: it was getting too expensive for the BOT to weaken THB any further, if you read the article you'll see that 7.8% drop you mention cost BOT over USD 16 bill. to achieve.

they might loose much over in long term if they do not continue to weaken it.

[orpheus454]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

If it was 100 baht to X then it moves to 250 baht to X then it has dropped 150% to X.

No it hasn't.

It's dropped 60% to X.

Currencies can't drop more than 100% relative to anything.

[chiang mai]

My interpretation of the article is that tourists and expats are in for some pain as markets force THB higher and GBP lower, the latter being an almost certainty as the BOE unleashes further QE this week, not good for many.

Moruya: it was getting too expensive for the BOT to weaken THB any further, if you read the article you'll see that 7.8% drop you mention cost BOT over USD 16 bill. to achieve.

they might loose much over in long term if they do not continue to weaken it.

I don't disagree, but everything has a price, pay now or pay later, or, pay now and pay later!

[apetley]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

Which currency do you think did that?

The OP makes reference to Icelands currency falling 150%.

Sent from my GT-I9003 using Thaivisa Connect App

[apetley]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

If it was 100 baht to X then it moves to 250 baht to X then it has dropped 150% to X.

No it hasn't.

It's dropped 60% to X.

Currencies can't drop more than 100% relative to anything.

dam_n beat me to it but I knew maths a-level would come in handy one day:-)

Sent from my GT-I9003 using Thaivisa Connect App

[SICHONSTEVE]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

If it was 100 baht to X then it moves to 250 baht to X then it has dropped 150% to X.

No it hasn't.

It's dropped 60% to X.

Currencies can't drop more than 100% relative to anything.

Sorry you are wrong!!!

Let's go the other way, If it went from 100 to 50 baht to X you will you will get double X for your money ie: 100 % more.

Agreed??? Then if it carried on getting stronger to under 50 baht then it has appreciated by over 100%!!!

To be precise, 150% appreciation would be to 40 baht.

Edited July 2, 2012 by SICHONSTEVE

[RogueLeader]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

If it was 100 baht to X then it moves to 250 baht to X then it has dropped 150% to X.

No it hasn't.

It's dropped 60% to X.

Currencies can't drop more than 100% relative to anything.

Sorry you are wrong!!!

Let's go the other way, If it went from 100 to 50 baht to X you will you will get double X for your money ie: 100 % more.

Agreed??? Then if it carried on getting stronger to under 50 baht then it has appreciated by over 100%!!!

Oh, dear me...

[w11guy]

How can a currency drop 150%?

Sent from my GT-I9003 using Thaivisa Connect App

If it was 100 baht to X then it moves to 250 baht to X then it has dropped 150% to X.

No it hasn't.

It's dropped 60% to X.

Currencies can't drop more than 100% relative to anything.

Sorry you are wrong!!!

Let's go the other way, If it went from 100 to 50 baht to X you will you will get double X for your money ie: 100 % more.

Agreed??? Then if it carried on getting stronger to under 50 baht then it has appreciated by over 100%!!!

To be precise, 150% appreciation would be to 40 baht.

A currency can appreciate more than 100% but it can't drop more than 100%. e.g. $1 = 31 baht. If the $ dropped 100% it would be $1 = 0 baht, It can't go any lower.

In the example above, currency X has appreciated 150%. That doesn't mean the baht has dropped 150%.

If GBP1 = USD2

Then GBP1 = USD5

This means GBP has risen 150% against the USD.

But USD has gone from being worth GBP0.5 to GBP0.2, so it has dropped 60%.

Back to school for most of you.

[how241]

My interpretation of the article is that tourists and expats are in for some pain as markets force THB higher and GBP lower, the latter being an almost certainty as the BOE unleashes further QE this week, not good for many.

Moruya: it was getting too expensive for the BOT to weaken THB any further, if you read the article you'll see that 7.8% drop you mention cost BOT over USD 16 bill. to achieve.

they might loose much over in long term if they do not continue to weaken it.

+1

[pomchop]

Reminds me of sportscaster types who love to talk about an athelete giving "110%"....say what? If 100% is the total it is impossible to give MORE than the total...period.

[SICHONSTEVE]

A number of you clearly didn't study math(s) at school as you don't seem to be able to grasp it whatsoever. Of course something can depreciate more than 100% relative to something else.

You are making the mistake of treating the currency against ITSELF whereby it CANNOT depreciate more than 100% ie: when it becomes worthless - I accept this being the case.

Relative depreciation of a currency against A DIFERENT currency CAN be by MORE than 100% (as I have shown in my examples)!!! You must treat the first quoted figures as being comparative 100% units and any movement in either direction by the equivalent amount treated in the same way!!!

[ableguy]

This sraticle was posted at 6.00. At 6.44 another one was posted saying that the baht is weak --> http://www.thaivisa....-baht-academic/.

Come on ThaiVisa, make your mind up. It can't be weak and strong at the same time. Unless its fortunes suddenly dropped in 44 mins.

Very bad reporting.

All cops are honest and crooked so why not ?

[morrobay]

Look at this depreciation/appreciation this way : Suppose 30 baht / 1$ goes to 80 baht / 1$

So 1baht went from 1/30 of a dollar to 1/80 of a dollar.

Then the baht depreciated 1/30 / 1/80 = .03333 /.0125 = 2.66 or 266%

And the dollar appreciated 80/30 = 2.66 = 266 %

Edited July 3, 2012 by morrobay

[RogueLeader]

A number of you clearly didn't study math(s) at school as you don't seem to be able to grasp it whatsoever. Of course something can depreciate more than 100% relative to something else.

You are making the mistake of treating the currency against ITSELF whereby it CANNOT depreciate more than 100% ie: when it becomes worthless - I accept this being the case.

Relative depreciation of a currency against A DIFERENT currency CAN be by MORE than 100% (as I have shown in my examples)!!! You must treat the first quoted figures as being comparative 100% units and any movement in either direction by the equivalent amount treated in the same way!!!

Look at this depreciation/appreciation this way : Suppose 30 baht / 1$ goes to 80 baht / 1$

So 1baht went from 1/30 of a dollar to 1/80 of a dollar.

Then the baht depreciated 1/30 / 1/80 = .03333 /.0125 = 2.66 or 266%

And the dollar appreciated 80/30 = 2.66 = 266 %

Please stop.

[morrobay]

Look at this depreciation/appreciation this way : Suppose 30 baht / 1$ goes to 80 baht / 1$

So 1baht went from 1/30 of a dollar to 1/80 of a dollar.

Then the baht depreciated 1/30 / 1/80 = .03333 /.0125 = 2.66 or 266%

And the dollar appreciated 80/30 = 2.66 = 266 %

Actually it depends how you look at it . 1/30 to 1/80 is also .0125/.03333 = 37.5% or a 62.5% depreciation

[orpheus454]

A number of you clearly didn't study math(s) at school as you don't seem to be able to grasp it whatsoever. Of course something can depreciate more than 100% relative to something else.

You are making the mistake of treating the currency against ITSELF whereby it CANNOT depreciate more than 100% ie: when it becomes worthless - I accept this being the case.

Relative depreciation of a currency against A DIFERENT currency CAN be by MORE than 100% (as I have shown in my examples)!!! You must treat the first quoted figures as being comparative 100% units and any movement in either direction by the equivalent amount treated in the same way!!!

Look at this depreciation/appreciation this way : Suppose 30 baht / 1$ goes to 80 baht / 1$

So 1baht went from 1/30 of a dollar to 1/80 of a dollar.

Then the baht depreciated 1/30 / 1/80 = .03333 /.0125 = 2.66 or 266%

And the dollar appreciated 80/30 = 2.66 = 266 %

Please stop.

Just let them go...

It's probably these same people who sneer at the Thai education system...LOL

[Naam]

My interpretation of the article is that tourists and expats are in for some pain as markets force THB higher and GBP lower, the latter being an almost certainty as the BOE unleashes further QE this week, not good for many.

Moruya: it was getting too expensive for the BOT to weaken THB any further, if you read the article you'll see that 7.8% drop you mention cost BOT over USD 16 bill. to achieve.

to weaken the Baht the Bank of Thailand doesn't spend any Dollars but rakes in Dollars by selling Baht and buying Dollars. therefore the difference in reserves could not have been caused by that procedure but must have had another reason, e.g. accounting procedure transferring debt to the BoT balance sheet.

[orpheus454]

Look at this depreciation/appreciation this way : Suppose 30 baht / 1$ goes to 80 baht / 1$

So 1baht went from 1/30 of a dollar to 1/80 of a dollar.

Then the baht depreciated 1/30 / 1/80 = .03333 /.0125 = 2.66 or 266%

And the dollar appreciated 80/30 = 2.66 = 266 %

Actually it depends how you look at it . 1/30 to 1/80 is also .0125/.03333 = 37.5% or a 62.5% depreciation

Ah, I get it now...

As Sichon Steve has pointed out, it depends on what you're comparing it to.

So, relative to the US dollar, it's depreciated 266%, whereas relative to the US cent it's only depreciated 62.5%.

Next time I change money I'm going to ask for cents instead of dollars!

Just have to remember to take a big bag...

[orpheus454]

Look at this depreciation/appreciation this way : Suppose 30 baht / 1$ goes to 80 baht / 1$

So 1baht went from 1/30 of a dollar to 1/80 of a dollar.

Then the baht depreciated 1/30 / 1/80 = .03333 /.0125 = 2.66 or 266%

And the dollar appreciated 80/30 = 2.66 = 266 %

Actually it depends how you look at it . 1/30 to 1/80 is also .0125/.03333 = 37.5% or a 62.5% depreciation

Ah, I get it now...

As Sichon Steve has pointed out, it depends on what you're comparing it to.

So, relative to the US dollar, it's depreciated 266%, whereas relative to the US cent it's only depreciated 62.5%.

Next time I change money I'm going to ask for cents instead of dollars!

Just have to remember to take a big bag...

...and there's an arbitrage opportunity there if you think about it.

This site just makes my day, sometimes... :-)

[orpheus454]

Look at this depreciation/appreciation this way : Suppose 30 baht / 1$ goes to 80 baht / 1$

So 1baht went from 1/30 of a dollar to 1/80 of a dollar.

Then the baht depreciated 1/30 / 1/80 = .03333 /.0125 = 2.66 or 266%

And the dollar appreciated 80/30 = 2.66 = 266 %

Actually it depends how you look at it . 1/30 to 1/80 is also .0125/.03333 = 37.5% or a 62.5% depreciation

Ah, I get it now...

As Sichon Steve has pointed out, it depends on what you're comparing it to.

So, relative to the US dollar, it's depreciated 266%, whereas relative to the US cent it's only depreciated 62.5%.

Next time I change money I'm going to ask for cents instead of dollars!

Just have to remember to take a big bag...

Uh oh, no go...

Just checked the Fed site and the official rate this morning was 175 cents to the dollar, but apparently you can get as much as 180 or even 190 on the street.

The US cent is on the floor, and common variety's in even worse shape.

Quite frankly, I pine for the good old days of a fixed dollar/cent exchange rate, and have never been a fan of the decision to float it in response to the GFC...