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Published on September 12, 2007

The Charoen Pok-phand Group has forecast that the political and economic situation will be back on track in the third quarter of next year, which means the baht's appreciation will be prolonged by at least one year.

Senior executive vice president Veeravat Kanchanadul said government spending and investment, particularly on mega-projects, would commence moderately around the end of this year. Increasing imports would help to slow down the strength of the baht, which has appreciated by 12.8 per cent over the past 13 months.

"If a general election is organised at the end of the year, the new government would be formed in February. The situation would return to normal in the third quarter next year," Veeravat said at a press conference yesterday.

He is optimistic that the baht will not become too much stronger due to a decreasing trade surplus, but it will constantly need the Bank of Thailand's attention to keep it stable.

However, he expressed concern about the baht's volatility if there is a reverse in the trend of the US federal fund rate. Markets expect a cut of half a percentage point from the current rate of 5.25 per cent at next week's Fed meeting.

The managing head of SCB Securities' office of the chief economist, Sethaput Suthiwart-narueput, said in a separate interview yesterday that the baht was expected to appreciate to Bt32.50 next year due mainly to a weakening US dollar.

This will attract foreign capital inflows into Asia, as investors will tend to reduce their dollar-asset holdings, Sethaput said.

Veeravat said CP Foods had been only slightly affected by the appreciating baht, as it has naturally hedged 20 per cent of both its exports and imports and has bought baht forward contracts for the rest of its export income.

The company has increasingly diversified export income into euros over the past four years, now accounting for 30 per cent of its total forex income. Currency management has therefore reduced the impact from the strong baht against the dollar, he added.

Moreover, the company has added value to its commodity products by developing finished products with labelled brand names. It has also found a niche market by promoting health foods. This has increased bargaining power on price changes.

Concerning its business strategy over the next year, Veeravat said his company had continued to replace exports of raw meat with finished goods labelled with brand names and to expand investment in neighbouring countries. The strategy will reduce the impact from the strong baht.

However, CP Foods has faced higher costs from the increased price of corn, accounting for 55 per cent of animal feed, after the United States - the world's largest corn exporter - cut off corn exports and turned to corn for ethanol production instead. The rising price of corn will push up meat prices around the world, Veeravat said.

The company has therefore tried to promote corn farming instead of off-season rice and to encourage corn production in neighbouring countries.

Veeravat called for the incoming government to rebuild consumer confidence in order to bolster purchasing power, which would allow the economy to move on amid the risk of an export slowdown.

The government's investment in mega-projects along with private consumption and investment have been in the doldrums over the past few years. Private investment has been deferred due to concerns about consumer purchasing power, although capacity utilisation in many projects has reached 75 per cent and demands expansion, Veeravat said.

Exports, at the same time, have expanded at a higher-than-expected pace. The  balance of payments, current account and capital movements have also been impressive. The balance of payments is in surplus to the tune of US$5 billion (Bt174 billion) so far this year, putting pressure on the strong baht.

 Anoma Srisukkasem

 The Nation