Thailand: getting worked up about the rising baht

By Jake Maxwell Watts and Gwen Robinson in Bangkok

The heated debate in Thailand about whether the central bank should intervene to stem the biggest rise in the baht in 16 years intensified this week as a survey of Thai companies revealed that almost 10 per cent of entrepreneurs claim they would go out of business if the baht rose further to 27.90 to the dollar.

Thailand’s currency was hovering around 28.90 to the dollar on Thursday, down from 28.56 last week, but still nearly 6 per cent higher than at the beginning of the year. The baht’s steady appreciation has been largely driven by inflows of foreign capital seeking strong returns from Thailand’s booming economy and exiting Japan.

The survey found that a further 12.4 per cent of companies would lay off staff if the baht reached 27.90 to the dollar, while 24 per cent said that currency strength would hit their order volumes and profitability. In announcing the survey results, Thanavath Phonvichai, UTCC director, echoed calls by the influential Federation of Thai Industries for the central bank to slash interest rates from their current level of 2.75 per cent.

More significant, the FTI has called for the imposition of capital controls, in an echo of earlier attempts to control hot money flows.

Despite the howls of pain from exporters, however, a closer look at the survey results shows there is more to the figures than at first glance. After a poor performance for Thai exports in February, March proved a more successful month, with exports reaching Bt598bn ($20.76bn) – an increase of 4.55 per cent from a year earlier, according to the Thai commerce ministry.

Meanwhile, Nattawut Saikua, the deputy commerce minister, told local media on Tuesday that of 98 exporters that ceased trading in March this year, nearly 20 per cent blamed the rising baht as a contributing factor. Yet, in the same period, 900 new exporters registered with the ministry.

That, of course, does not mean all Thai exporters are doing well. As a result of the Thai government’s populist rice subsidy programme, Thai rice exports are less than half the level they were in June 2011, according to industry officials. Instead of being sold abroad, the rice is being stockpiled at prices well above the market rate, leaving rice exporters complaining that they have no choice but to trade in non-Thai rice to remain in business.

Rubber prices are another cause for concern in Thailand, one of the world’s leading producers and exporters of the commodity. Thailand, Malaysia and Indonesia together account for around 70 per cent of global rubber exports, but are battling to control prices, which hit a three-year low in September last year.

The political pressure on the Bank of Thailand to cut interest rates from the current 2.75 per cent continues to grow – from government as well as big business. But so far, bank governor Prasarn Trairatvorakul has remained stubbornly opposed, despite his recent acknowledgement that currency appreciation has “moved beyond fundamentals”. Last week the debate turned personal, when the Thai finance minister and deputy prime minister Kittiratt Na Ranong was asked whether he had thought about replacing Prasarn. He replied: “I think about changing the BoT chief every day”.

Most analysts are sanguine about the impact of the stronger baht. Sanjay Mathur, head of Asia-Pacific economic research at RBS, told media in Bangkok on Wednesday that he foresees currency intervention by the central bank in the foreign exchange market, which would slow – although not halt – the pace of baht appreciation, possibly to about 28.25 to the dollar by year-end, according to RBS forecasts.

That intervention, in turn, should boost the local-currency bond market, drawing more foreign buyers in the growing search for yield, he noted. Thailand’s 10-year bond yield is about 3.4 per cent, compared with the US benchmark at 1.7 per cent. Inflation is a potential risk but not of immediate concern, added Mathur. Even with the possibility of a “modest” rate cut by the central bank’s monetary policy committee in coming months, Thailand with stable growth, is likely to remain attractive to foreign investors, according to Mathur.

And that’s regardless of where the baht has got to.

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