Capital inflows to Thailand have broken all records over the past four months, totalling US$11.5 billion (Bt433 billion) and creating the main reason for the rising value of the baht against the US dollar.

Bank of Thailand (BOT) governor MR Pridiyathorn Devakula yesterday also attributed the growing strength of the baht to US government efforts to reduce its trade deficits by making the dollar cheaper. This, he said, was pushing up other currencies as well as the baht.

He issued stern advice to exporters, urging them to "seriously adjust themselves" to a stronger baht, in order to avoid damage from the new financial environment.

"Due to the speed and value of the capital inflows, it was impossible for the baht not to have appreciated," he said.

"It would have been dangerous had we resisted the uptrend in the baht. If we had kept [the baht] at 40 against the greenback, foreign investors would have considered it undervalued, resulting in even further inflows. Therefore, we could not control the situation, and the baht became stronger."

However, the central bank will monitor the baht closely, in order to ensure that it does not move in a rapid or volatile manner, so that exporters will suffer as little as possible. He declined to disclose how much the baht would be allowed to move, saying simply the change should be smooth.

"Exporters should change their way of thinking and realise that the baht must change [to become stronger]," the BOT governor said after a meeting of the Exchange Equalisation Fund (EEF).

His message was similar to that from economists and analysts, who have advised exporters to adjust themselves to the market mechanism, instead of calling for BOT intervention. Some exporters have proceeded to change their management procedures to learn to live with the new situation.

"Don't believe anyone who says the baht will depreciate," said Pridiyathorn.

The BOT governor said the baht had risen 8.2 per cent since the beginning of the year. This recent appreciation has been much stronger than that of other regional currencies, such as the 6-per-cent appreciation of the South Korean won in the same period. This has resulted in the central bank intervening in the currency market, like in other countries in the region, to help lessen the impact on exporters.

He said that when measured from the end of last October, the baht had appreciated 7.5 per cent, less than other currencies had, including a 9-per-cent rise in the won and a 13-per-cent hike in the Indonesian rupiah.

The central bank believes the country's competitiveness has not been affected, considering first-quarter export growth of 17 per cent, with 14 per cent growth in volume and 13 per cent in value. Although a stronger baht affects exports, the economies of trading partners continue to expand.

However, foreign investors have left US assets for the Asian markets, he said.

Thailand has been affected more than other countries from the amount of capital inflow, considering its economic size, because of its low price-to-equity ratio and rising investment.

Finance Minister Thanong Bidaya, who is also an EEF member, said the baht appreciation had been in line with other currencies.

He said there were both losers and gainers from the stronger baht.

The agriculture sector has been worst affected, but the Finance and Commerce ministries will find ways of lessening the impact.

The BOT governor said that in addition to pressure from capital inflows and a weakening dollar, the baht is feeling the influence of an expected revaluation of the Chinese yuan. However, the baht is now expected to strengthen more slowly than other currencies, and some pressure will be relieved when the yuan's value is established.

"We have been [getting] stronger faster than the other currencies for four months, so we would [now] appreciate less than them. This would make me happy," he said.

Despite its affects on exports, he pointed out that a stronger baht would help reduce the cost of imports, particularly that of oil.

Pridiyathorn said it was not the central bank's intention to keep the baht strong to control inflation and that the high capital inflows were not caused by interest rates that were higher in Thailand than in other countries.

In the EEF meeting, Thanong suggested the BOT's key policy interest rate was high enough. He said he believed the central bank could control inflation, so the interest rate should not rise again.

Anoma Srisukkasem

The Nation