Ford Scrap Up to $1 Billion of New Thailand Investments

[Coss]

Because I'm an idiot, economically speaking, can you let me know why the Thai baht is stronger, now that the airport is sinking, and large outfits such as Ford and Toyota seemingly don't want to play?

 

Cheers

 

Coss

[Weird]

I'm guessing it probably has to do with the fact that the strengthening baht is coming mostly from Thailands export of goods. So even with the slowing of investment in Thailand itself, until the demand for cheap goods hits an equilibrium with the rising baht, you can probably expect it to keep rising, ceteris paribus.

 

Of course I've only taken the basic economic classes which I slept through so I could be completely wrong, but I'm sure somebody will come by and enlighten us all.

[Gadfly]

Taking a short, mid and long perspective, the Baht should appreciate relative to the dollar. The rise has been disruptive because of the manner in which the Bank of Thailand has intervened in this appreciation.

 

The basic problem here is not the appreciation, but the manner in which the Bank of Thailand specifically, and economic policy makers in generally in Thailand (they are the same, which is another problem), have responded to the appreciation. The Ministry of Finance and the Bank of Thailand simply do not trust markets and are adopting a paternalistic approach to the economy which is overtly hostile to foreigners. OK, now let me explain why the Baht is appreciating relative to the dollar.

 

First, think of money as you would any other product in the sense that its value is determined by supply and demand. There is now greater demand for Asian currencies generally. Why? The weakening US dollar and the US current account deficit have generated cash flows into Asia currencies since 2005. This increases demand for Asian currencies. Higher demand means, relatively speaking, higher "prices".

 

Interest rates were also high in Asia because of fears about inflation. When interest rates go up in a currency, demand for that currency tends to also go up since you can earn more in that currency.

 

But this was non-core inflation. Non-core inflation was high because of higher oil prices, but core inflation has not been that high. What does this mean? It means it was pretty obvious from the outset that the inflation we saw earlier this year was only temporary; it would only last as long as oil prices were high, and oil prices would eventually have to come down.

 

Other major Asian currencies, such as the Singaporeans, reacted by lower interest rates. This is the classic and preferred means of reducing demand for a currency. If you lower the interest rate, you lower the return an investor gets from simply holding your currency, and this reduces demand for your currency.

 

But Thailand did not lower rates even after the inflation rate dropped. The Bank of Thailand kept rates up to boost up the stock market, and everyone suspects (knows) this was politically motivated. The Bank of Thailand is not an independent institution; it is both regulator and monetary authority, and this is a major problem in Thailand.

 

Instead of lowering rates, they intervened in the currency markets. But this didnâ??t work. Actually, it made matters worse, since this sort of intervention is an open invitation to currency speculation. Everyone knows the Bank of Thailand will sell off Baht (increase the supply) to keep the Baht artificially cheap. They now also know that the Bank of Thailand will go to ridiculous lengths to keep the Baht cheap.

 

Because of the 19 December capital controls and the Bank of Thailandâ??s insistence that it acted properly, we can be confident of one thing: the monetary authorities donâ??t know what they are doing.

 

In the mid to long run the Baht should increase. Why? In the long run exchange rates should move towards levels that would equalize the prices of an identical basket of goods. This makes sense if you think about it. All other things being equal, a Big Mac or Latte should cost the same anywhere. This is the whole concept behind the Big Mac and Starbucks Latte indices; these are light hearted ways of roughly predicting long term currency movements. And, as a very general guide, they work.

 

If you take a look at the 27 May 2006 edition of The Economist, you will see that Thailandâ??s currency is substantially undervalued. It should rise in value. You will also see an excellent one page summary of generally accepted principles pertaining to long term currency changes.

 

Long term changes in the relative valuations of currencies do not create serious economic problems. Short and sharp changes do. They make business more unpredictable. This is the real problem.

 

Now the economic policy makers in Thailand have added to this problem through capital controls that caused the market to drop 15% in a few scant hours. The Bank of Thailand and other policy makers have also disclosed a nasty streak of economic nationalism. The governor of the Bank of Thailand actually tried to justify the capital controls by saying they "only hurt foreigners".

 

This wasnâ??t true, but the point here is the fact that she not only thought a policy that â??only hurts foreignersâ? is OK, but that it is OK to say this publicly.

 

And now, the same group behind the capital control debacle â?? they are all part of the same clique â?? want to change the Foreign Business Act in such a way that foreigners will be required to sell of their interests to Thais. These are businesses that have been here for 20 or 30 years. The government admits that it is changing the law.

 

In response to criticism of this change, the Minister of Commerce (part of the same clique as the Minister of Finance of the governor of the Bank of Thailand), said â??civilized countriesâ? have these laws. More recently, he insulted the Japanese Ambassador, telling him Thailand doesnâ??t need Japanese investment.

 

Will the currency continue going up â?? well, maybe not. It could crash. I donâ??t know. But one thing is clear: the governmentâ??s economic policy is totally off the rails.

[..]

You have also heard that Unilever chose not to move to Thailand recently? I am sure for the same reasons. http://www.news.com.au/story/0,10117,21153413-1243,00.html?from=public_rss

 

Cheers,

SD

[cavanami]

Doing business, especially manufacturing is difficult for many reasons...such as...

 

poor infrastructure

taxes

low quality workers

poor work ethic

difficult to source materials

 

I looked to have some items manufactured in Thailand and decided to go to Malaysia, which worked very well!

[jitagawn]

Gadmeister the Economicsmeister-

Thank- you for taking the time to explain this to those of us that never did go to an economics class-Appreciate your insight-

If you ever need any expert advice in the acquisition,conservation or sale of fine art or antiques feel free.,,do drop me a line.

[shygye]

[color:green]But Thailand did not lower rates even after the inflation rate dropped. The Bank of Thailand kept rates up to boost up the stock market, and everyone suspects (knows) this was politically motivated.[/color]

 

I don't follow this point. High interest rates hurt stock markets for 2 reasons.

1) Increases the cost to businesses to finance their ongoing operations.

2) Shifts money to currency markets where investors can get a good yield with much lower risk than the stock market.

[Paillote]

 

But Thailand did not lower rates even after the inflation rate dropped. The Bank of Thailand kept rates up to boost up the stock market, and everyone suspects (knows) this was politically motivated.

 

Care to explain the above? That makes no sense. Stock markets prefer a lower rate. Makes investments cheaper and currency lower. Dont see any reasons why SET should be different.

 

Paillote

[Nervous_Dog]

DEll is outsourcing a lot of global back office stuff in Malaysia - announced last week

[Old Hippie]

Maybe LOS labor costs are getting to high relative to quality of work?