THE BAHT BALANCING ACT

[ThaiHome]

THE BAHT BALANCING ACT

Currency's strength may dismay exporters, but meddling in the markets could cause more problems than it solves,

Writer: Parista Yuthamanop

Published: 3/08/2009 at 12:00 AM

 

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A strong baht can mean cheaper oil, machinery, raw materials and medicines. But it can also cause a string of difficulties for exporters. For manufacturers in competitive markets such as hard disk drives, a strengthening baht eats into their margins. Buyers would then look elsewhere for more reasonable deals.

 

The baht, now at 34.02 to the dollar, has strengthened by about 2% since the beginning of the year and by 6% since March. Manufacturers of products with little to no imported content such as the agricultural sector are relatively unaffected.

 

Exports account for roughly 70% of the Thai economy and they have tumbled in the first seven months of the year. The decline is mainly from quantity, as prices have remained stable.

 

The baht's appreciation, in fact, has been in the middle range of regional currencies since March, but exporters want a weak baht because they say the government's priority should be economic growth.

 

The surge in the trade surplus caused by the slump in imports has underpinned the strength of the baht since the global recession took hold late last year. Current account income from trade and services totalled $2 billion in the first five months of the year.

 

A turnaround in global optimism has spurred investors to return to East Asia and other emerging markets. The Thai stock market recorded inflows of $124 million, compared with $136 million in Indonesia, $300 million in India and $1.5 billion in South Korea from July 16 to 22, according JP Morgan.

 

 

Are exporters and importers caught in a zero-sum game?

 

Kobsidth Silapachai, head of capital market research at Kasikornbank, said concern voiced by China and other countries that the US was addressing its economic crisis by expanding the budget deficit and printing money was one factor behind baht appreciation.

 

China has kept its yuan firm to encourage its trade partners to use its currency for settlement in place of the dollar.

 

Regional countries' trade relations with China have increased in the past few years. Thailand's export market share to China has risen to 13% from 6% over the past several years. There is upward pressure on the baht because of an expectation that Thai exports will gain from China's economic growth.

 

"China increased flexibility to the yuan in July 2005, but it fixed it against the dollar again in the middle of 2008. This was to prevent its exporters from losing competitiveness. The Chinese yuan has a large impact on the baht because of the increase in intra-regional trade," Mr Kobsidth said.

 

Apichai Boontherawara, president of the Export-Import Bank of Thailand, said a stronger baht would inevitably affect exporters in terms of local revenues.

 

"[Export] profits decrease after converting dollar earnings into baht. But the extent depends on whether they hedge currency risks. If so, the impact will be less. And if the baht strengthens faster than other regional currencies, it will affect price competitiveness," he said.

 

Baht volatility also makes it difficult for exporters to quote prices. If left unfettered, a hedging cost will be transferred to the exporters, he said.

 

"In the long term, competitiveness will come from lower cost of production. By increasing value in their products, exporters can reduce the impact of the strengthening baht on their margins to 10% from 20%," he said. "I think the key is whether the baht has appreciated more quickly than the currencies of our trade competitors."

 

The Bank of Thailand's view is that global demand is weak and importers have better bargaining power. Therefore, a policy to weaken the baht is unlikely to increase exporters' sales.

 

"The baht has not appreciated unduly. It moved from 35 to a dollar at the beginning of the year to 33 and to 34 to the dollar now. The baht has not caused Thai exporters to lose competitiveness," said Tarisa Watanagase, the central bank governor.

 

The Nominal Effective Exchange Rate has appreciated by 1.3% since the end of 2008. The NEER is calculated by export value in dollar terms with trade partners and competitors.

 

The current account had a surplus of $11 billion the first five months of the year. Capital inflows have increased in part because of Malaysia-based CIMB's investment in BankThai, said Suchada Kirakul, the central bank's assistant governor for Financial Markets Operations.

 

"The degree of appreciation is insignificant. In 2006, the NEER was up by 10%," she said. "Malaysia has a high current account surplus. The ringgit has appreciated less than the baht because the economy has huge capital outflows."

 

Thailand does not have large capital outflows because the government's Unremunerated Reserve Requirement on short-term capital outflows imposed between the end of 2006 and February 2008 deterred capital inflows, she said.

 

Upward pressure on the baht could decrease as inventories get whittled down, meaning businesses would likely import more in the second half of the year.

 

"Weakening the baht will cause the cost of living to increase. When production costs increase, producers pass them on to consumers. Who will protest for consumers?" Ms Suchada asked rhetorically.

 

 

 

[cavanami]

...and the cost of living has not increased in LOS??? WTF, it has increased a bunch!!! Food, medical, petro, bus fare, like every farkin thing has increased...does this guy have his head where the sun doesn't shine???

[ThaiHome]

I think his point was if the baht weakened further there would be even more cost increases, particularly with imports and especially oil which impacts just about everything.

TH

[SurinBum]

...and the cost of living has not increased in LOS??? WTF, it has increased a bunch!!! Food, medical, petro, bus fare, like every farkin thing has increased...does this guy have his head where the sun doesn't shine???

Never mind the messenger, Cav. It's the messege and the control of how we are asked to perceive the world around us. You certainlt wouldn't expect anything really challenging or deeper unconventional inquiries from the likes of the Post, would you? Don't be critical towards the dronish author of this article, but instead question why they need to propagate their agenda.

[SurinBum]

Nothing will change until we decide to consciously not participate in the deluded and corrupt-fed system. Be non partisan in the game. Independent and self-sufficient. Live your protest.

[cavanami]

Errrr, because the media is completely controlled in LOS and most other places?

 

Look at the "Cost of Living" in the USA...good ol' Prez. Clinton took out all the items that really make up the cost of living; gasoline, to name one.

COL is all BS!

[HeartThais]

Actually, most of the articles/opinions they publish seem to promote active weakening of the baht. This is as fresh a voice as I've heard on the topic.

 

Anyway, pound is coming back around driven again by positive bank news more than anything else. Housing data is neutral. Consumer spending and personal credit is poor. Credit markets are still poor. But sterling is getting a big lift now that it seems unlikely the BoE will have to start owning all the UK banks. Barclay's reported good today.

 

Unfortunately for dollar, world recovery is bad for it. Now that the crisis is passing, time for everyone to think about getting rid of them again without driving the price too low.

 

Euro continues to baffle me. And so do the rosy economic reports coming from the ECB. I swear they are all on ecstasy. I still think there will be a reckoning.