Baht Faces Volatility Next Year

Domestic economic factors will likely con¬tribute to the depreciation of the baht. However, external factors could also play a role in strengthening or weakening the cur¬rency.

The current account deficit, political instability and economic slowdown will be the main factors putting pressure on the baht next year.

Bank of Thailand (BOT) deputy governor Atchana Waiquamdee said domestic condi¬tions could contribute to the baht losing value. But at the same time, recession in the world's largest economy, the United States, could put pressure on the dollar and result in a stronger baht.

However, Usara Wilaipich, a senior econ¬omist at Standard Chartered Bank (Thai), predicted that a combination of external and domestic factors would lead to the baht's depreciation, particularly in the first half of next year.

The country's widening current account deficit and capital outflows to correct the US financial crisis will weaken Asian currencies including the baht, she said.

"We will hardly see any foreign direct investment next year. And we could scarcely see portfolio investment in the first half but there is a slight hope in the second half," said the economist.

The Kingdom's current account deficit in 2009 is likely to be a result of sluggish exports and decline in tourism.

Falling foreign demand from trading part¬ners has already worsened export income and will continue for some time. And drop in for¬eign tourists due to the decline in their dis¬posable income is eroding tourism revenue.

Usara forecast that exports would contract next year and tourism income would drop by more than 50 per cent, largely due to the glob¬al economic downturn. This would widen the current account deficit, resulting in a weak¬er baht.

Plummeting sales of the dollar due to lower foreignexchange incomes will lead to the baht's depreciation. The pressure on the baht will be even more if import growth remains high or is higher than export growth.

In the first 10 months of this year, the coun¬try has already posted a current account deficit of US$1.9 billion (Bt65.8 billion). The results are starkly in contrast with the BOT's latest projection of a $1.4billion surplus for the entire year.

The BOT will revise the forecast for the new year in January from the current esti¬mated surplus of upto $3 billion.

Atchana said political instability and the economic slowdown can eliminate foreign capital inflows and augment foreign outflows, leading to depreciation of the baht.

Usara said the baht, so far this year, has weakened at a slower pace than other region¬al currencies, with about 4 per cent depreci¬ation compared with doubledigit deprecia¬tion of other currencies.

These figures indicate that its value was not supportive of the export sector as export prices were relatively higher than those of rivals.

"Foreigners acknowledge that the baht is overvalued, which will worsen the current account deficit rapidly and increasingly than expected. This would bring about speedy weakness of the baht," she warned.

The BOT deputy governor, however, said the baht could move in the opposite direction if the dollar was weaker due to the end of risk aversion and continuing deterioration of the US financial crisis, which had a worsethanexpected impact on the real sector.

The US current account deficit and soar¬ing public debt could also bring about depre¬ciation of the dollar.

Experts forecast that US housing prices would continue to diminish and the balance sheets of financial institutions would become worse in April.

Usara said the US financial crisis remained, reflected in the extraordinarily high Libor rate rather than the federal fund rate. And US financial institutions continued to need recapitalisation.

"As long as the correction in the US remains, the capital will continue to flow back to the US," said the economist.

As a result, the US dollar would be stronger against the euro and Asian currencies, includ¬ing the baht in the first half of next year.

But capital flows could be back in the region in the second half if the US problem was manageable and Asian countries could recover more rapidly than the US and the euro zone, said Usara.

The deputy governor said the dollar might not depreciate if there was a correction in the US current account deficit. Household spending has been limited due to the US eco¬nomic slowdown.

Moreover, the dollar could improve if the US economy picked up at a better pace than that of Japan and the euro zone.

"The dollar can be stronger when the US economic figures are announced, which will overwhelm other factors," said Atchana.

No one can foresee which factors will have more influence on the baht. But both inter¬nal and external factors will certainly cause fluctuations in the value of the baht.

The deputy governor said the central bank would step into the foreign exchange market if the currency was too volatile.

For example, the widened current account deficit can result in the rapid depreciation of the baht. The BOT would prevent depress¬ing market sentiment on weakness of the baht, which would possibly lead to specula¬tion.

The weak baht would fuel inflation, con¬tributing to difficulties in policy management while economic growth would remain in dol¬drums.

"The baht is currently not a threat to infla¬tion. It can moderately encourage exports and improve farm income," said Atchana.

Although the central bank will keep an eye on the baht, exporters and importers should continue to hedge their transactions to pre¬vent forex risk.

They must realise that the volatility of the baht in 2009 will be much higher than in 2008, Atchana said.