Baht's decline matches that of other Asian currencies: HSBC report

The bank is forecasting a trade surplus this year of US$5.1 billion (Bt178 billion) but doubts there will be much of a currency impact.

In July 2007, the authorities amended foreignexchange regulations to allow exporters to hold foreign currencies in a bid to slow the baht's appreciation.

"In the current financial environment and political uncertainty, these changes are likely to see exporters favouring a higher portion of foreign currencies like the US dollar instead of the baht in their cash holdings," HSBC said in its "Asia Currency Strategy" report issued on Wednesday.

With foreignexchange policy supporting a weaker baht and interest rates expected to fall to a record low of 1.25 per cent, there is no key driver that will push the dollar/baht rate lower, the bank said.

Ongoing political instability and a deteriorating trade balance should sustain continued upward pressure on the dollar/baht rate. Certainly the current account will continue to look poor as tourism revenue slows sharply.

"In addition, we could see a faster slowdown in the economy as domestic demand crumbles, the service sector, especially tourism, deteriorates and necessary financial and economic decisions to stimulate the economy are delayed because of the difficult political environment," the bank said.

The inflow of foreign direct investment (FDI), another pillar of support for the baht in 2007, will likely slow dramatically this year.

HSBC expects FDI to slow to 1.1 per cent of gross domestic product this year, from 4 per cent in 2007. Thailand, the world's secondlargest pickup market after the US and Asean's largest carmaker and assembler, should see any new or maintenanceinvestment inflows slow sharply, given the drop in global automobile demand.

If funding also remains an issue, a reversal in the FDI flow cannot be ruled out.

While globalliquidity issues facing Asian currencies have largely diminished, there remain plenty of negative macro forces. One that is growing in at least potential significance is the yuan.

But essentially, while the spot market is expected to remain stable, nondeliverable forwards are at increasing risk of moving further into premium.

The first quarter will likely bring an uncomfortable coincidence of events in the form of sharply slowing FDI, a sharp decline in the trade surplus and growing impatience in China with the policy response.

Essentially, the longer this cycle persists without a meaningful regional economic recovery, the more the yuan becomes a potential source of regional instability.

"Our Asian economists are essentially subscribing to the view: 'Asia's problems are cyclical, while the West's problems are structural.' Even if this view turns out to be correct in time, it is likely to provide support for currencies in the region only over the longer term," HSBC said.

"In the short term, we do not expect to identify any measurable positive influence on Asian currencies from this source."

Investor flows into emerging markets will be driven primarily by economic developments in the West.

This presentation probably also applies to the leakage of local savings from Asia, suggesting domestic currency preferences will remain a key part of the currency dynamic.

Where these are weak - such as the Taiwanese dollar, Philippine peso, rupiah and ringgit - there is very little that domestic policy can do, short of imposing punitive interest rates, to keep capital at home. The pressure on policy is, of course, the opposite, HSBC said.

In this sense, Asia is more an absolute play on conditions in Western markets than a relative play on how Asia stacks up against elsewhere.

The weak tone in G10 economies will sustain the negative risk environment by virtue of keeping exports subdued, FDI weak and job insecurity high, the bank concluded.