Beware of baht fluctuations, BOT official warns businesses

She, however, said the dollar would strengthen in the long run.

BOT assistant governor Suchada Kirakul said this week that the baht would not be a oneway street of depreciation, as per¬ceived by some. A lower trade and currentaccount surplus, and cap¬ital outflow, would lead to depre¬ciation of the unit. But capital inflow and fluctuation of the dol¬lar could also weaken the baht.

"There is both good and bad news from the US economy, so the dollar is not only on a stronger trend, but it could be weaker some times," she said in an inter¬view with The Nation.

She insisted the BOT would stabilise the baht and keep it at an appropriate level - one which warps neither internal nor exter¬nal stability. A depreciating baht could spur inflation but an appre¬ciating baht could dampen the country's competitiveness.

The central bank does not want to prevent the currency from appreciating in order to lower inflation. But it also does not want the baht to be so volatile that it would put pressure on inflation, Suchada said. She added that inflation targeting remained a goal of monetary poli¬cy.

"The Kingdom's trade account might not get worse and the bond market is attractive, which could lure foreign investment. It is not a oneway street. But the dollar is likely to appreciate in the long term," she said.

The assistant governor said currencyhedging exposure of exporters and importers should be balanced in a bid to prevent any additional pressure on the baht.

Due to fears of the baht weak¬ening, importers have increasing¬ly bought foreign currencies in the future market. Exporters have sold export income in the spot market after tremendous forward selling last February.

The exposure is currently in equilibrium, as importers' expo¬sure increased from 20 per cent to 29 per cent while that of exporters reduced from 59 per cent to 30 per cent.

Suchada said the baht's depre¬ciation was partly due to falling surpluses in the trade and current accounts. The country recorded a trade deficit of US$500 million (Bt17 billion) for the first seven months of the year, compared with a trade surplus of $4.1 billion in the same period last year.

The currentaccount surplus dropped from $5.8 billion in the first seven months of last year to $2.2 billion in this year's first seven months.

"The trade deficit was not large. If exporters and importers constantly and in a balanced way hedged their currency exposure, the baht would not be under pres¬sure," she said.

The country's oil imports have been astronomical compared with many countries, lessening the trade and currentaccount sur¬pluses.

The Kingdom's oil dependency was 7.9 per cent of gross domestic product in 2007, compared with 7.7 per cent for Taiwan, 7.4 per cent for South Korea and 3.2 per cent for the Philippines.

Huge imports of gold are another key factor in dampening the trade account. In the first half of the year, gold imports recorded about $2 billion, compared with $894 million in the same period last year.

Moreover, Suchada said all countries in the region had expe¬rienced capital outflows, as for¬eign investors were worried that Asian economic growth would not be as high as in the first half of the year.

Thai investors have also put pressure on the baht, as they have incessantly taken money out of the country with partial or no hedging, as a result of the central bank's policy to increase invest¬ment channels.

The baht is still in line with other currencies in the region as well as major currencies, although it is under more pressure because of the political turmoil. The coun¬try's competitiveness has not been affected.

About $19 billion of net capital inflow was evident in the Asian region in 2006, before turning to net capital outflow of $63 billion in 2007. So far this year, the region has seen net outflow of $42 billion.

The assistant governor insisted that excess liquidity remained to serve rising demand in the future although many countries have encountered credit crises.

The Kingdom has accumulated liquidity over the past few years due to the high currentaccount surplus and capital inflows with low investment.

Commercial banks have more than Bt900 billion of excess liq¬uidity, of which Bt400 billion is in shortterm bonds and Bt500 bil¬lion in deposits at the central bank.

This excludes longterm bonds that the banks have in their port¬folio.

"Currently, the central bank continues to absorb liquidity and the banks continue to deposit or lend to the BOT, reflecting the excess liquidity," said Suchada.

Amid the world's credit crunch, international organisations have been interested in issuing baht bonds as they come at a lower cost although they converted them into dollars.

She said if the banks wanted further liquidity, they could seek it in the market through various channels. And the central bank may not issue bonds to absorb liq¬uidity.