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TREASURY VIEW

Strong baht presents both problems and opportunities

Padej Piroonsit

BANGKOK: -- In recent weeks, the baht has surged against the US dollar. The greenback hit a low of 29.60 and bounced back to trade around 29.70. The rapid movement prompted Thai policy-makers and exporters to voice concern about the negative impact of the strong currency. Some said the Bank of Thailand should lower interest rates to slow or stem capital inflows. Some support some kind of capital control.

Let's review the effect of a strong baht. It will make our exported products more expensive in the eyes of foreign buyers. On the other hand, it will help reduce import prices and also help make energy prices lower.

For exports, I believe the negative effects will be on farm products. The lower income in baht terms will eventually affect farmers simply because exporters will calculate their net export receipts in baht to determine the purchase price of raw materials.

Meanwhile industries with high import content could spend less for imported raw materials. In turn, their finished products could be cheaper. Unfortunately, we have many more people living in or depending on the farm sector than the industrial sector. Lower export income will make them poorer.

Let's now look at the effect of measures we would implement to keep the baht from strengthening. First, reduce interest rates to close the interest gap between the baht and the dollar (reference rate is 2.75 per cent), the euro and the yen (reference rates are near zero).

I have seen foreign capital flowing into Thai bonds and equity. If we reduced interest rates, capital inflows would slow down or stop. Questions are: Should we reduce the rate to near zero? Is our economy in the same situation as in the United States, Europe or Japan? Is the interest differential the only factor for the baht's strength?

Second, should we impose some kind of capital control, that is, a tax, on short-term capital inflows? We did that once three or four years back and it caused commotion in the financial markets. I saw the baht weaken sharply, interest rates rise and the stock market lose a lot of value in one day. Are we prepared to take the risk of those effects to keep the baht from strengthening?

I believe that the BOT has made efforts to stabilise the baht's value by buying foreign-currency inflows and controlling the domestic money supply by issuing bonds into the market. We have seen the reports that our international reserves are now near US$200 billion (Bt6 trillion). If we mark to market the foreign reserves to the baht, surely we will see losses. Moreover, the central bank needs to pay interest to bondholders.

The problems now are the opposite of those in 1997. At that time, we did not have enough reserve, but now we probably have too much.

HEDGE RISKS

I believe first that exporters should learn how to hedge their foreign-exchange risks.

I heard someone say that hedging costs are too high. In fact, exporters are gaining some extra premium by selling dollars forward (selling dollars today and promising to deliver some time in the future). If exporters sell dollars today, the rate is 29.70, but if they do forwards, the rate for the same dollar is higher than 29.70. Therefore, I cannot understand the complaint that hedging costs are too high.

Alternatively, exporters may look to price their products in other currencies whose values are more stable against the baht.

Second, I believe the market will determine the movements and values of currencies. There are many factors causing market players to buy or sell currencies. We should be proud that foreigners are interested in investing in our country in both the real and financial sectors.

On the other hand, the strong baht presents opportunities for us to invest in infrastructure or invest offshore to strengthen our competitiveness. Therefore, let's look at the brighter side of things. We should now look for opportunities to make use of the strong baht instead of looking only at one side - the problems.

Padej Piroonsit is head of global sales at CIMB Thai Bank. He can be reached at [email protected]. The views expressed in this article are his own.

-- The Nation 2013-02-13

[yoshiwara]

'On the one hand, on the other hand'. Thank you and goodnight.

[reflectionx]

Blah blah blah ...

On the funny side, "cool" writing style. Sounds like ESL 101 essay

[how241]

'On the one hand, on the other hand'. Thank you and goodnight.

+1....all double talk.

[KuhnPaen]

The Thai Baht. One of the most protected, artificially inflated currencies in the world. Has been between 29-32 Baht/dollar since I visited in 2002. Where's George Soros when you need him?

[stoli]

'On the one hand, on the other hand'. Thank you and goodnight.

I thought it was laid out very thoughtfully. Now it is time to make a decision. That is the tough part, but I think he knows what needs to be done.

[Naam]

The Thai Baht. One of the most protected, artificially inflated currencies in the world. Has been between 29-32 Baht/dollar since I visited in 2002. Where's George Soros when you need him?

= one of the most ridiculous statements on THB i heard since 2002

p.s. you didn't even get the range right. take a look when USD/THB was above 40 and of course above 32:

[el jefe]

The Thai Baht. One of the most protected, artificially inflated currencies in the world. Has been between 29-32 Baht/dollar since I visited in 2002. Where's George Soros when you need him?

= one of the most ridiculous statements on THB i heard since 2002

p.s. you didn't even get the range right. take a look when USD/THB was above 40 and of course above 32:

It was a simple typo. He meant it 'has been between 29-42 baht since 2002." He's only off by 10 baht. Not much you can buy with 10 baht.

[robert888d]

I just want more baht for the pound stirling...it's just about 46 these days ugh!

[KuhnPaen]

The Thai Baht. One of the most protected, artificially inflated currencies in the world. Has been between 29-32 Baht/dollar since I visited in 2002. Where's George Soros when you need him?

= one of the most ridiculous statements on THB i heard since 2002

p.s. you didn't even get the range right. take a look when USD/THB was above 40 and of course above 32:

I just posted that so someone would take the time to look it up and post a nice graph to correct me. thank you sir!

[chiang mai]

The Thai Baht. One of the most protected, artificially inflated currencies in the world. Has been between 29-32 Baht/dollar since I visited in 2002. Where's George Soros when you need him?

= one of the most ridiculous statements on THB i heard since 2002

p.s. you didn't even get the range right. take a look when USD/THB was above 40 and of course above 32:

I just posted that so someone would take the time to look it up and post a nice graph to correct me. thank you sir!

Perhaps now you will explain to us all, why and how you think the value of the Baht is artificially inflated?

[davejones]

I just want more baht for the pound stirling...it's just about 46 these days ugh!

About where it was when I first arrived almost 3 years ago. It's been pretty stable over the last 3 years, in a 46-51 range, more or less. Near 10 year lows though.

[davejones]

The Thai Baht. One of the most protected, artificially inflated currencies in the world. Has been between 29-32 Baht/dollar since I visited in 2002. Where's George Soros when you need him?

Don't let the facts worry you. Just make up any numbers. Laughable.

[KuhnPaen]

The Thai Baht. One of the most protected, artificially inflated currencies in the world. Has been between 29-32 Baht/dollar since I visited in 2002. Where's George Soros when you need him?

= one of the most ridiculous statements on THB i heard since 2002

p.s. you didn't even get the range right. take a look when USD/THB was above 40 and of course above 32:

I just posted that so someone would take the time to look it up and post a nice graph to correct me. thank you sir!

Perhaps now you will explain to us all, why and how you think the value of the Baht is artificially inflated?

Housing, rent, food, everything is rising, so is minimum wage. All the things that should see the Baht buying less but it's still strong. Well, I'm no Alan Greenspan, but wouldn't a certain unnamed entity who happens to own a whole lot of everything in the country have something to do with it?

[chiang mai]

Just because there's inflation in Thailand is no reason for the currency to be worth less, some amount of inflation is healthy for a strong and growing economy and the inflation rate in Thaialnd is not excessive by any means. Of course if you prefer conspiracy theories over GDP growth, assets and borrowing levels, your idea fits perfectly.

[rbrooks]

What goes up must come down, simple economics theory.

[el jefe]

What goes up must come down, simple economics theory.

it's certainly simple.

[Bpuumike]

Think differently.

Has the Thai Baht 'exploded' or is the USD finding it's intended level?

[Naam]

Housing, rent, food, everything is rising, so is minimum wage. All the things that should see the Baht buying less but it's still strong. Well, I'm no Alan Greenspan, but wouldn't a certain unnamed entity who happens to own a whole lot of everything in the country have something to do with it?

none of what you listed necessarily weakens a currency. it might even strengthen the Baht because it is less likely that interest rates are lowered to fight inflation.

the fact remains that the Bank of Thailand has done its utmost not to let the Baht go overboard by continously selling Baht against foreign currency. evidence for that is that Thailand's foreign reserves grew by approximately 100 billion US-Dollars during the last 4 years. shooting from the hip i'd say if the BoT had not intervened we might see today GBP 35, EUR 30, USD 25.

[Thailand1977]

What goes up must come down, simple economics theory.

Dollar was up for the late 90s to late 00s, and now its down.

http://www.forecast-chart.com/exchange-thailand-baht.html

[Thailand1977]

Housing, rent, food, everything is rising, so is minimum wage. All the things that should see the Baht buying less but it's still strong. Well, I'm no Alan Greenspan, but wouldn't a certain unnamed entity who happens to own a whole lot of everything in the country have something to do with it?

none of what you listed necessarily weakens a currency. it might even strengthen the Baht because it is less likely that interest rates are lowered to fight inflation.

the fact remains that the Bank of Thailand has done its utmost not to let the Baht go overboard by continously selling Baht against foreign currency. evidence for that is that Thailand's foreign reserves grew by approximately 100 billion US-Dollars during the last 4 years. shooting from the hip i'd say if the BoT had not intervened we might see today GBP 35, EUR 30, USD 25.

Then exports and tourism would really suffer thus tax take would be down, and it'd be Thailand's turn on the downward slope of the economic cycle.

[Naam]

What goes up must come down, simple economics theory.

it's certainly simple.

simpletons use simple theories

[farang000999]

Very confusing.

If you cannot export your products because your currency is too strong, that means that the price of those products go down and will be consumed in your own country resulting in a higher standard of living for the average individual Thai who will also be able to consume imported products and energy cheaply.

So who is this bad for?

Those who own the factories and farms and those who do not wish to see a more advanced society with a greater distribution of wealth, the same people who make sure that Thailand never ranks higher than 100 globally in education or freedom of speech.

[reflectionx]

Very confusing.

If you cannot export your products because your currency is too strong, that means that the price of those products go down and will be consumed in your own country resulting in a higher standard of living for the average individual Thai who will also be able to consume imported products and energy cheaply.

Interesting theory. Starting today, each Thai will consume a bag of rice and buy a dozen hard drives each day just because they can't sell abroad

[farang000999]

you realize that you can shift production to things desired by society...

[Bpuumike]

Very confusing.

If you cannot export your products because your currency is too strong, that means that the price of those products go down and will be consumed in your own country resulting in a higher standard of living for the average individual Thai who will also be able to consume imported products and energy cheaply.

So who is this bad for?

Those who own the factories and farms and those who do not wish to see a more advanced society with a greater distribution of wealth, the same people who make sure that Thailand never ranks higher than 100 globally in education or freedom of speech.

Now your'e thinking. Look at what China is doing now.

[yoshiwara]

Very confusing.

If you cannot export your products because your currency is too strong, that means that the price of those products go down and will be consumed in your own country resulting in a higher standard of living for the average individual Thai who will also be able to consume imported products and energy cheaply.

Interesting theory. Starting today, each Thai will consume a bag of rice and buy a dozen hard drives each day just because they can't sell abroad

I just wonder if anybody is pushing this deluded nonsense in any of the Thai universities.

Edited February 14, 2013 by yoshiwara

[Rancid]

Perhaps this total Pillock hasn't noticed there is a currency war in play? Australia also has a strong currency, and they see no positive effects at all. That aside the baht hasn't appreciated against the dollar as such, the dollar is being devalued by rampant money printing and a zero interest policy to maintain their debt courtesy Helicopter Ben. Japan is also on the game now amongst others. The world economy is a mess and as have commented before I don't see it ending well, not for the 99% without prioe notice at any rate.

[Lancelot]

The Thai Baht. One of the most protected, artificially inflated currencies in the world. Has been between 29-32 Baht/dollar since I visited in 2002. Where's George Soros when you need him?

= one of the most ridiculous statements on THB i heard since 2002

p.s. you didn't even get the range right. take a look when USD/THB was above 40 and of course above 32:

Nice reply Nam.