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Published on July 12, 2007

The situation demands that the central bank take more aggressive action to rein in the baht - more than it has done so far.

Although the baht remains in line with some regional currencies - with 7-per-cent appreciation since the beginning of the year - no one can guarantee that it will not continue to creep ahead of its neighbours.

The US dollar has weakened against most currencies. Yesterday, the euro briefly struck a record pinnacle against the dollar amid US housing-market concerns and the prospect of rising interest rates in the euro zone. The European single currency touched US$1.3787 in early deals, an all-time record high. It later pulled back to stand at $1.3739.

There are many regional currencies now weaker than the baht, especially important rivals like Vietnam and China, which do not have a managed-float exchange-rate regime. Only the Indian rupee and Australian and New Zealand dollars are stronger than the baht.

Since the beginning of the year, the baht has appreciated by 7.4 per cent, higher than the 6.8 per cent of the Philippines peso, 3.4 per cent for the yen, 2.9 per cent for the yuan and 2.7 per cent for the ringgit.

Foreign capital alone has pushed the baht up increasingly over market expectations as exporters find themselves in a difficult situation.

The appreciating baht could spiral if the central bank lets it move freely, without proper intervention.

Bank of Thailand (BOT) Governor Tarisa Watanagase said the central bank would not step into the market to weaken the baht if the appreciation were caused only by capital inflows. The foreign inflows will continue if foreign investors realise they can buy stocks with cheaper currencies, she said.

However, the central bank did intervene in the market on Tuesday because the baht's rise that day was largely attributed to exporters' panic selling of dollars.

Tarisa's point is reasonable, given that the country's economic fundamentals remain sound and the low price-to-earnings ratio of Thai stocks. The political situation seems to be improving with a general election promised for the end of the year.

Asian stock markets have been attractive for foreign funds seeking to evade dollar assets due to concern about the United States' twin deficit, which has never been abolished. Inflow of about $20 billion (Bt680 billion) has been experienced in regional markets in the first half of the year, compared with only $8 billion in the same period last year.

No one knows whether the inflows will continue. In addition, the baht may go north to an unknown level. Exporters could not afford to sell their dollar incomes when they realise that the baht is stronger from the capital inflows. The later they sell dollars, the fewer baht in income they will receive.

An exporters' sell-out would put additional pressure on the baht, which would result in a never-ending expectation of a strong baht and a continuation of the sell-out behaviour.

Tarisa is optimistic that portfolio investment will correct itself when foreign investors are satisfied with their returns, but again, no one knows how long it will take.

As a result, the BOT needs to slow down the rate of the baht's appreciation to cool the psychological effect on the currency's expectations. Although the situation is no worse than at the end of last year, it could cause huge damage to the real sector.

Many exporters accept that they will not see the baht at 36-37 to the dollar again and just want a stable unit before adjusting themselves to the future. Small and medium-sized enterprises do not know how to hedge their foreign-exchange income.

Exporters have struggled to survive the strong currency by lowering their baht incomes, as some companies have shut down or laid off employees.

Only some exporters can take advantage of the strong baht, as their imported raw-material goods for manufacturing and exporting are cheaper. Most manufacturers have no idea why they have to import machinery for investment as domestic demand has been sluggish.

The economy might pick up in the second half as forecast due to improving consumption, followed by investment at a time when business confidence recovers and an elected government is set up with clear policies. An economic recovery could boost private-sector income along with reducing the appreciating baht.

In contrast, the economy might not recover if the political situation does not improve, or even gets worse. Business and consumer confidence would not return, nor would there be a rise in consumption and investment. This would keep domestic demand in the doldrums.

Eventually, the baht could no longer benefit from the acceleration of imported goods. On the positive side, it could be weaker when foreign investors draw back their money due to a lack of confidence in the country.

No matter what the future holds, the BOT should not wait and see but rather jump into the exchange market to let Thai farmers, manufacturers and exporters survive - because they are our economy.

Anoma Srisukkasem

The Nation