Impact Of Bot Bucking Market On Value Of Baht

[PlanetMan]

Baffled in Bangkhen writes:

Now that the G7 has given the green light to let the dollar fall further I am wondering if there is a predictable impact on the Thai economy.

For months the Bank of Thailand has been selling Baht heavily to keep the value of the baht down relative to the dollar. This is intended to keep Thai exports competitively priced relative to countries such as China and the Philippines competing with Thailand's exporters. It appears the BOT have a target of about 39 Baht/$.

In one sense this is the obverse of the situation in June 1997, when the BOT was buying Baht (selling dollars) to keep the value of the Baht from falling. The crises was precipitated when the BOT ran out of dollars.

Now the BOT is selling Baht to keep the value from rising. They are unlikely to run out of Baht, they can simply print more, which sounds like inflation. So does this imply the BOT may succeed to hold down the price of the baht in the short term , but in the mid to long term Thai inflation will put additional pressure on the Baht to appreciate? I don't understand all I know about this.

In another sense the BOT is still trying to buck the market, same as 1997. Anybody have plausible predictions of the impact over the next 6-12 months? Yogi Berra's dictum about the difficulty of predicting, especially the future, comes to mind. Can't even think about what might be the impact of lost Thai chicken exports.

Thomas Friedman's excellent book The Lexus an the Olive Tree talks about running against the Electronic Herd (ie, trying to buck the market), and used Thailand to illustrate several of his examples. Although the current situation may appear to be the other side of the coin, it is the similarity with 1997 I find more worrying. That Thai technocrats think they know better than the global market the proper value of the Baht.

Yikes.

Cheers

[davidm]

The baht has actually depreciated against most major currencies over the past 12 months. The exception is the dollar. As you pointed out, looks like the BOT is making the same mistake it made in 1996 & 1997. Ironically, this could lead to the baht devaluing against the dollar as investors lose confidence in Thai economic management.

[PlanetMan]

davidm, I agree with you, though not sure how much confidence in "Thai economic management" investers have recovered since 1997

The problem with currency intervention of the type practiced by the BOT (and the Bank of Japan, et al) is that they are always following many masters. Like keeping a currency weak to protect exporters or keeping it strong to fight inflation whatever is the fashonable rationale these days. These competing interests change day to day, yet exchange rate policy is a blunt instrument, requiring years to be truly effective.

I see the Baht has edged up just slightly in the last couple days, breaking 39 to the dollar. Heck, for all we know the BOT may now have decided to NOT intervene for awhile in an effort to give the impression that the Thai economy has not been impacted by Bird Flu. How will policy change next month/next week/5 minutes from now when [insert name of large, well-connected exporter] complains that the strengthening Baht is hurting their profits again? Can't win this game.

Traders and fund managers who ultimately set currency exchange rates in the market seek only one thing: profit. They buy and sell currencies based upon their assessment of value. Crystal clear, no political BS, no image chasing, no second guessing. Wouldn't life be simpler if Central Bankers around the world were so reliable.

With BOT intervention those of us having financial interests outside of Thailand have a more difficult job hedging against currency volatility. Great.

Cheers