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Published on July 27, 2007

Labour will be laid off. Social disruption will ensue. If it opts for policies that favour a weaker baht, exporters will enjoy the benefits and will feel no urgent need to adjust in order to stay competitive.

If you ask Tarisa Watanagase, the central bank governor, about the appropriate level of the baht, she won't tell you. But you can get a clue by reading a lengthy article "Who did what to curb the baht", written by MR Pridiyathorn Devakula, Tarisa's former boss, earlier this week.

Pridiyathorn spelled out clearly that he did not agree with Dr Virabongsa Ramangkura's suggestion that the baht be kept at Bt36 to the US dollar or weaker to prop up Thai exports. Pridiyathorn said exporters would enjoy it too much if the baht were to be kept at Bt36 to the US dollar. In his opinion, an appropriate range would be Bt34-Bt35 to the US dollar. Then he also said that an exchange rate of Bt32 to the US dollar would be damaging to Thailand.

So you can bet that the central bank will put up a big fight by buying up the dollar heavily to prevent the baht from surging beyond Bt33.

But will it be able to do so as financial markets expect that the baht will continue to strengthen to Bt30? Can the central bank resist the market forces of a strong baht brought about by the huge trade surplus and also by capital inflow into Thai equities? What kind of foreign-exchange policy should the central bank pursue when most of Thailand's competitors are also intervening heavily in the foreign-exchange markets to keep their currencies competitive?

These are difficult questions and there is not a single magic answer. Pridiyathorn blamed the exporters for staying complacent in 2005 when the baht was rather weak, trading at more than Bt40 to the US dollar. The exporters did not plan for their futures. They had known all along that the US economy was facing a drastic adjustment incurred from its twin deficits. Capital was flowing out of US dollar assets to other parts of the world, particularly Asia, in search of higher yields.

Since exporters have done little to buy new equipment and upgrade their productivity, they are vulnerable to the exchange-rate appreciation. Imports have remained far below exports, reflecting the reluctance of Thai industry to kick off new investments in a grand way to jumpstart the economy. As the US dollar gets weaker, the baht becomes stronger, undermining the competitiveness of Thai exports.

Now that the baht is trading in the Bt33 to the US dollar range, the leaders of Thai industry have come out to make a noise. They have sent out a clear signal that if the central bank can't keep the baht weaker, Thai industries will soon have to close their shops. Thai Silp South East Asia Import and Export Co Ltd is a case in point. The textile company went bankrupt and laid off 5,000 to 6,000 workers, partly due to the strong baht though mostly due to mismanagement.

The Surayud government responded with a knee-jerk reaction. No government can sit still when a huge number of workers are laid off like this. If a dozen factories went out of business like this, the government would not survive. It has finally agreed to go along with the recommendations of business leaders and push out a package of foreign-exchange liberalisation measures. This would allow Thai residents and companies greater flexibility to manage their foreign currencies. The package will not have a short-term impact, but it should help to reduce the pressure on the baht over the medium term.

In the meantime, the central bank has been cautioned to manage its foreign-exchange policy with greater balance to save Thai industry.

Some economists, such as Dr Supavud Saicheua of Phatra Securities and Dr Teerana Bhongmakapat of Chulalongkorn University, would prefer central bank authorities not to mess too much with foreign-exchange intervention. Market forces should be allowed to play a greater role in the management of the Thai economy, they argue.

Besides, buying up the dollar to add to the country's foreign-exchange reserves comes with a cost. Teerana has calculated that between 2002 and 2006, the social cost to the country of the central bank's foreign-exchange intervention was more than Bt100 billion. The other day, Finance Minister Chalongphob Sussangkarn cited the figure of Bt160 billion as the total cost of the intervention.

Yes, it is about time that Thai industries make the transition to higher-value production so that they can survive in an increasingly competitive world. They may need to go abroad to diversify risk and look for new opportunities, as Taiwanese and Japanese firms have successfully blazed the trails. Not many Thai companies have a strong track record of foreign direct investment.

But in the immediate short term, the central bank still can't brush off its responsibility to come up with the right policy mix to support a competitive currency. It just can't allow the baht to be dragged up quickly, from Bt40 to Bt33 in one-and-a-half years just like that.

The Thai central bank must manage the foreign exchange with flair, like the Singaporeans or the Japanese.

I am not a total believer in market forces because the Japanese have been keeping the yen at 120 to the dollar to support their exports. They do not seem to believe totally in market forces.

Still, the Thai central bank should send out a loud and clear signal to Thai exporters that they must adjust or die.

 Thanong Khanthong