Treasury Outlook

Soon after the twotier exchangerate system was abolished in February 2008, the baht embarked upon a yearlong weakening trend that took it from Bt31.20 to the US dollar to Bt36.20. (Note that the baht declines in value if the amount of baht required to purchase US$1 increases.)

In recent months, however, a new trend has appeared. By last week, the baht had strengthened back to almost Bt34.

It remains to be seen if this trend will be as broad and longlasting as the previous one.

The baht's recent strength has been supported by Thailand's strong trade surplus and foreigninvestment inflows. These factors lead to more dollars coming into the country to buy baht, which means the currency gains in value.

The trade surplus in the first four months of the year was $8.4 billion (Bt289 billion), against a deficit of $1.9 billion in the same period last year. While exports have declined sharply, imports have been collapsing by even more.

Money has also been coming into the country via portfolio inflows. In line with improved sentiment about a global recovery, international investors have been returning to emerging markets like Thailand. Over the past six weeks, net inflows to purchase Thai bonds and stocks have totalled more than $800 million.

Both these factors have been a big help for the baht, but neither appears reliable nor sustainable.

The trade surplus could be hurt as imports pick up - oil and other commodity prices are increasing, while requirements for capital goods imports could also rise by yearend, due to local investments.

Meanwhile, portfolio flows are inherently short term. In particular, recent market optimism is based on the hope of a recovery in the global economy. Surely, though, this remains some time away.