Thai Baht - The Perfect Model

[autanic]

Hi Everyone

This isn't the usual thread, hoping and praying that I can get more Thai Baht for my native dosh, but a very brief explanation of why is works the way it does.

The Currency of Thailand is the Thai Baht as you probably know already.

Lets say a Mr Englishman comes to Thailand with £2000 sterling cash. He is bringing Pound Sterling into Thailand to exchange this money for Thai Baht. Almost all of this money will find its way into the Thai Economy as a Tourist. Hotels, Restaurants, Female Entertainment and so on. He will spend money. The money he has left he will probably exchange in his native Country not Thailand.

So lets look at this transaction, £2000 cash is brought into the Thai Economy supporting businesses, jobs etc. Foreign money is usually exchanged at Banks or Exchanges but inevitably ends up in a currency reserve.

As more people come to Thailand the more these foreign currency reserves build up. This is why the Thai Baht performs well because there is ready influx of foreign currency being brought into the country either through atm machines as emoney or as cash.

Currency exchange rates are fixed partly on the countries foreign reserves, and strength of the economy, which in Thailand tourism plays a large part.

The fewer tourist arrive the more favourable the it is to be a tourist as the baht weakens and so boosts the number of tourists because of it. (Self correcting).

The more tourists the more the Thai Baht strengthens and the tourists get less for their money. But this strengthens the economy.

This makes Thailand Currency the Thai Baht, actually one of the most stable currencies in the world and very capable of handling shocks or influences from it larger Neirbours to the North/North East. China.

You could say The Thai Baht is the perfect currency model.

[TheAppletons]

Yeah, that's how global currency markets function. It's all based upon tourism.

[autanic]

Yeah, that's how global currency markets function. It's all based upon tourism.

Trade and in Thailand, Tourism is Trade.

[wump]

You might wanna check how much stuff is actually made in Thailand for export...read up on clothing, HDDs, cars, shampoo... you name it. Tourism is a tiny, tiny fraction of the trade.

[chiang mai]

But, but, but...tell me that you're not suggesting the value of THB is determined solely by 13% of GDP (tourism) and is unaffected by the remaining 87%!!

FWIW those "currency reserves" you talk about do not grow solely because of British tourists, they accumulate because 75% of Thai GDP is based on exports (regardless of whether made entirely in Thailand or not) with overseas countries and these are paid for in foreign currency.

[Briggsy]

Let's say Thailand wants fossil fuels.

Mr Thai takes his 50 Million Baht to the Gulf States, changes it into dollars and buys fossil fuels. The next day, he does the same. You could say the U.S. Dollar is the perfect currency model.

[STUDMEYER]

Let's say Thailand wants fossil fuels.

Mr Thai takes his 50 Million Baht to the Gulf States, changes it into dollars and buys fossil fuels. The next day, he does the same.

This.

[Crazy chef 1]

Perfectly proofed in 1998...

[oxo1947]

You & your friends have come to this conclusion over a few Changs......haven't you.................

[martijn12345]

While you're story is correct, you are missing the bigger picture. The exchange rates are not fixed but decided on in an open market where bid meets ask. The biggest influences here are the central banks who print X amount of money and set the interest rate. Then investors are looking for a return on investement. Which is either done by the interest rate or by a growing economy (rise in GDP). Next to the returns, there is also a risk element. Sure in Thailand you could get a higher return on your invested money, but there is also a bigger risk it all goes down the drain. So in times of uncertainty you will see money leaving the develloping nations and going into more safe assets. Usually Japan (yen) and the US (USD) and when the crisis is not Greece, the Euro zone, specifically Germany/Swiss/Holland/Scandinavia.

[HerbalEd]

Your economics thesis just got a failing grade. Study more and try again later.

[Dustdevil]

Let's say Thailand wants fossil fuels.

Mr Thai takes his 50 Million Baht to the Gulf States, changes it into dollars and buys fossil fuels. The next day, he does the same. You could say the U.S. Dollar is the perfect currency model.

The Chinese want reserve currency status for their yuan, but Chinese millionaires buy houses in California and London and their government mismanages their economy at home to an egregious degree of incompetence and other sad adjectives. So the Baht is a better currency. And truth be told, I'm enjoying how it's gone from 32 to the $ not long ago to 36 yesterday.

[Time Traveller]

Almost no currency exchange rates are fixed. And none of them have their exchange rates determined by the amount of foreign reserves.

Exchange rates a determined by supply and demand.

[CrummyJuggler]

Thailand's official unemployment rate is an extremely low .56% (under 1%). Such a low rate will lead to inflation as to hire an employee you must take them away from another employer, usually that means you pay more and the cost of human resources goes up. If the price of labor goes up to much, manufacturers will move to cheaper locations (self-correcting as you point out). Therefore, Thailand has economic reasons to bring more workers into the workforce, which could mean more youth, elderly, women or allowing more foreigners to work. Or taking men, for instance moto-taxi drivers, and moving them up the food chain into manufacturing jobs (just an example). Growing the economy strengthens the baht.

Tourism accounts for around 10% of Thai GDP, a large single item but still only 10%. For comparison, Philippines overseas foreign workers remit (send back) currency that accounts for 10% of PI GDP. Something to ponder.

[Jeffkp]

Thailand's official unemployment rate is an extremely low .56% (under 1%). Such a low rate will lead to inflation as to hire an employee you must take them away from another employer, usually that means you pay more and the cost of human resources goes up. If the price of labor goes up to much, manufacturers will move to cheaper locations (self-correcting as you point out). Therefore, Thailand has economic reasons to bring more workers into the workforce, which could mean more youth, elderly, women or allowing more foreigners to work. Or taking men, for instance moto-taxi drivers, and moving them up the food chain into manufacturing jobs (just an example). Growing the economy strengthens the baht.

Tourism accounts for around 10% of Thai GDP, a large single item but still only 10%. For comparison, Philippines overseas foreign workers remit (send back) currency that accounts for 10% of PI GDP. Something to ponder.

A friend drives a tuk-tuk here in Chiang Mai. He tells me that as the economy worsens more men are renting tuk-tuks and trying to make a living. This increased competition is, of course, driving down what drivers can charge. The result is drivers working 12 hour days and taking home an average of 500 Bhat or less.

Evidence suggests that there is massive under-employment in Thailand.

[swissbie]

Thailand's official unemployment rate is an extremely low .56% (under 1%). Such a low rate will lead to inflation as to hire an employee you must take them away from another employer, usually that means you pay more and the cost of human resources goes up. If the price of labor goes up to much, manufacturers will move to cheaper locations (self-correcting as you point out). Therefore, Thailand has economic reasons to bring more workers into the workforce, which could mean more youth, elderly, women or allowing more foreigners to work. Or taking men, for instance moto-taxi drivers, and moving them up the food chain into manufacturing jobs (just an example). Growing the economy strengthens the baht.

Tourism accounts for around 10% of Thai GDP, a large single item but still only 10%. For comparison, Philippines overseas foreign workers remit (send back) currency that accounts for 10% of PI GDP. Something to ponder.

The official unemployment rate is a laugh as is the official near zero inflation. Millions of Thais just don't want to work or are farmers who aren't working the whole year (all not registered as unemployed). Cost of living rises steadely, so the salaries have to increase too. That would be no problem with rising productivity in line, but that's an other story here. Political instability and natural desasters (as the big floods) let big companies move to other countries, together with capital outflows, that's what's weakening the baht.

[Ghostnigel]

Children, listen....

2+2=4

3+3=6

Are you writing this down.....?

[SunLover2]

Foreign currency only ends up in true "reserve" if it is in excess of need and the economy runs in surplus. Else it is recycled.

A personal finance example: you own $2,000 in gold, but owe $3,000 in credit card balances. Do you really have a gold reserve in excess of your obligations? More a chosen store of value i believe.

Currencies are basically fungible. One can buy them conveniently on the open market if so desired, and do not have to wait for them to flow in via tourism.

SunLover

[Thailaw]

The OP forgot to start his post with "Once upon a time" so that everyone would know that it is a fairytale.

And the key missing part in the OP's story of the " Perfect Model" is the "flip side", where the Government imposes outrageous taxes on anything and everything imported to discourage anything produced/manufactured outside of Thailand from being sold in the country to allow it to control the value of the Thai Baht and also, under pressure (and payment) from domestic businesses, to reduce competition from abroad -- check the price of imported wine thanks to the protectionist pressure from the Thai beer and whiskey industries.

So, with very little domestic demand for the Dollar (or other foreign currencies) (other than for oil products, which have been relatively cheap lately, and Dollar denominated debt), the GoT is able to control the value of the Baht at pretty much any value that it chooses below the "market value" by letting its foreign currency reserves accumulate (the reverse (i.e., maintaining a stronger than market exchange rate) is virtually impossible in the long term as many governments have discovered in the past, and will no doubt be taught again in the future). This is a "standard" approach used by export based economies, like China, Indonesia and Thailand. And right now, there is a race to the bottom in Thailand as it has allowed its currency to be relatively over valued in relation to the other Asian currencies, and the other Asian countries are also in a devaluing mode. It helps to be small and irrelevant -- you get missed by fools like Jack Lew ("we're going to hold them [China] accountable").

The "Perfect Model"? -- hardly. But, in all fairness to Thailand, the other countries playing in the currency exchange market are not doing any better or even as well as Thailand. If Thailand gets a 4 out of 10 for its handling of the value of the Baht, the US Federal Reserve gets (generously) less than 1. And, giving them that high a number depends on their actions regarding interest rates later this month/this year. It really is a market driven by the "bigger fool" theory, and Thailand is far from the biggest fool.

[Shiver]

It is one of my usual moans as a 'bar stool expert economist' talking the well trodden path of visa/pasports etc. If I am here bringing money into the economy, why do they make it so hard for me to comply with the paperwork.

I've written here before that they need to be careful with the exchange rate because they need to consider imports like electricity from Laos etc, but most things are export products. I can understand that, but why hinder cash imports? I'll stop there as I don't want to rant and I'm not on a bar stool yet (maybe later).

[Naam]

The Currency of Thailand is the Thai Baht as you probably know already.

you don't say!

[Naam]

Let's say Thailand wants fossil fuels.

Mr Thai takes his 50 Million Baht to the Gulf States, changes it into dollars and buys fossil fuels. The next day, he does the same. You could say the U.S. Dollar is the perfect currency model.

The Chinese want reserve currency status for their yuan, but Chinese millionaires buy houses in California and London and their government mismanages their economy at home to an egregious degree of incompetence and other sad adjectives. So the Baht is a better currency. And truth be told, I'm enjoying how it's gone from 32 to the $ not long ago to 36 yesterday.

You Sir, should be nominated for the Gobble Prize "...possesses a wealth of no idea about China's economy"

please list any country that can match the facts as specified below:

From 1979 until 2010, China's average annual GDP growth was 9.91%, reaching an historical high of 15.2% in 1984 and a record low of 3.8% in 1990. Based on the current price, the country's average annual GDP growth in these 32 years was 15.8%, reaching an historical high of 36.41% in 1994 and a record low of 6.25% in 1999.

[ExpatOilWorker]

Children, listen....

2+2=4

3+3=6

Are you writing this down.....?

Can you repeat the first one again?

This is hard stuff to remember!

[manarak]

Yeah, that's how global currency markets function. It's all based upon tourism.

Trade and in Thailand, Tourism is Trade.

Hi hi hi

I would like to live in the world you describe... but you are right. Tourism is very important for the Thai Baht, you just fail to provide the proper perspective.

FYI, Thailand's GDP is about 400 Billion USD, of which about 8.5% are due to tourism. Thailand's main source of foreign currency are EXPORTS (did you hear about that?) which currently sum up to about 200 billion USD a year.

Besides a country's credit rating, the balance of payments or current account balance is what most influences a currency's value. Thailand's balance of payments has always been positive since 2001 and growing, and amounts to around 31 billion USD in 2010, but the political problems brought it down

http://www2.bot.or.th/statistics/ReportPage.aspx?reportID=644&language=eng

2013 was negative by 5 billion USD and 2014 was almost balanced (-1 billion).

According to TAT, there were 26,7 million tourists in Thailand in 2013, with an average stay of 10 days and average spending of 4500 baht per day. If (!) these figures are true, Tourism would contribute about 40 billion USD yearly to Thailand's balance of payments.

BUT: this is in contradiction with GDP figures, where tourism is said to only contribute 8.5%.

But any way the figures are put or corrected, tourism still seems to be a great boon to Thailand's balance of payments and a significant help for the Baht's value.

[aboctok]

Very sad that things have come to this. In times gone by, we'd cheerfully accept a gentle piss-take.

[Ghostnigel]

Children, listen....

2+2=4

3+3=6

Are you writing this down.....?

Can you repeat the first one again?

This is hard stuff to remember!

Haha, thanks mr Oilworker, I thought i might add something more demanding on your brain cells after reading the OP...

Here goes...

2+2=?..........anyone?

[sandyf]

Almost no currency exchange rates are fixed. And none of them have their exchange rates determined by the amount of foreign reserves.

Exchange rates a determined by supply and demand.

Only fully convertible currencies, about 40 percent of currencies, are freely traded and subject to market forces.

Partially convertible currencies can only be traded with government approval and non convertible are not traded.

It is not that long ago that the SBV issued a warning to brokers over trading the VND without approval.

The Yuan is unique in that it is partially convertible as CNY onshore and fully convertible as CNH offshore.

Although there are currency regulations in place,as far as I am aware the Thai Baht is a fully convertible currency.

[chiang mai]

Almost no currency exchange rates are fixed. And none of them have their exchange rates determined by the amount of foreign reserves.

Exchange rates a determined by supply and demand.

Only fully convertible currencies, about 40 percent of currencies, are freely traded and subject to market forces.

Partially convertible currencies can only be traded with government approval and non convertible are not traded.

It is not that long ago that the SBV issued a warning to brokers over trading the VND without approval.

The Yuan is unique in that it is partially convertible as CNY onshore and fully convertible as CNH offshore.

Although there are currency regulations in place,as far as I am aware the Thai Baht is a fully convertible currency.

THB is not fully convertible, BOT continues to place restrictions on its export and the amount that foreign banks can hold.

[sandyf]

Almost no currency exchange rates are fixed. And none of them have their exchange rates determined by the amount of foreign reserves.

Exchange rates a determined by supply and demand.

Only fully convertible currencies, about 40 percent of currencies, are freely traded and subject to market forces.

Partially convertible currencies can only be traded with government approval and non convertible are not traded.

It is not that long ago that the SBV issued a warning to brokers over trading the VND without approval.

The Yuan is unique in that it is partially convertible as CNY onshore and fully convertible as CNH offshore.

Although there are currency regulations in place,as far as I am aware the Thai Baht is a fully convertible currency.

THB is not fully convertible, BOT continues to place restrictions on its export and the amount that foreign banks can hold.

You may well be right. I have never seen a definitive source, only conflicting references to the convertibility.

[Naam]

Almost no currency exchange rates are fixed. And none of them have their exchange rates determined by the amount of foreign reserves.

Exchange rates a determined by supply and demand.

Only fully convertible currencies, about 40 percent of currencies, are freely traded and subject to market forces.

Partially convertible currencies can only be traded with government approval and non convertible are not traded.

It is not that long ago that the SBV issued a warning to brokers over trading the VND without approval.

The Yuan is unique in that it is partially convertible as CNY onshore and fully convertible as CNH offshore.

Although there are currency regulations in place,as far as I am aware the Thai Baht is a fully convertible currency.

THB is not fully convertible, BOT continues to place restrictions on its export and the amount that foreign banks can hold.

You may well be right. I have never seen a definitive source, only conflicting references to the convertibility.

here's your definitive source (my bank in SG):

Dear Client,

Thai Baht Currency Restrictions

Further to the Bank of Thailand’s Measure No. 33/2003 (Additional Measure to Prevent Thai Baht Speculation), which came into effect in October 2003, XYZ Bank, Singapore Branch is subject to restrictions affecting its holdings of Thai Baht currency. These include the following:

Maintaining THB accounts in Thailand for settlement purposes only, where settlement means the settlement of securities transactions and cash payment transactions. The exception is for deposits of a tenor of at least 6 months or more.

Forfeiture of credit interest on its accounts (other than deposits of a tenor of at least 6 months or more)

Ensuring that the aggregated end of day balances for cash accounts with all financial institutions in Thailand do not exceed THB 300 million (the “Daily THB Limit”)

Imposition of deposit charge on THB account balances.

In relation to the Daily THB Limit, XYZ Bank, Singapore Branch will be required to adjust its Thai Baht balances in all its client accounts to be compliant with the permitted level as determined by the Thai authorities on a daily basis. As such accounts may include balances in Thai Baht held on your behalf, it is critical that we are able to adjust client THB balances to ensure compliance.

Accordingly, at any time that you are holding a long position in THB, we reserve the right in our absolute discretion and without prior notice to you to convert your holding of THB, in whole or part, into United States dollars at the prevailing spot rate.

Yours truly,

XYZ Bank, Singapore Branch