Mixed views on short-term baht

Despite wide expectations of a global economic recovery next year, experts have mixed views on the shortterm trend for the baht over the remainder of this year.

Some say the baht will remain strong over the next six months, while others believe there is no reason for it to appreciate during the period - and that it could gradually weaken.

Roong Sanguanruang, chief mar¬ket analyst from the Markets Sales and Trading Department of The Bank of TokyoMitsubishi UFJ, said the baht would be stronger this quarter - hov¬ering between 33-35 per dollar - and then strengthen slightly to 32.75-34.75 in the final quarter.

He then sees the currency weaken¬ing to 33-35 in the first quarter of next year, and to 33.50-35.50 in the second three months.

"The baht is likely to be stronger in the next three to six months before depreciating in 2010," Roong said at a recent seminar.

The baht appreciated yesterday due to the optimistic view expressed by the Bank of Thailand on domestic growth. The unit traded at 34.10 per dollar as of 10.42am in Bangkok after reaching 34.04, the strongest level since July 10, according to data compiled by Bloomberg. It closed at 34.06-34.08.

The currency could climb to 34 per greenback by the end of the year, the median estimate of 19 analysts in a Bloomberg News survey showed.

Roong added that investors expect¬ed the global economy to be turning from recession to recovery, but the US authorities' quantitative easing by pumping dollars into the system would put pressure on the greenback until they could see an "exit strategy".

The dollar is expected to recover once the US government's strong stim¬uluspackage effect is fully effective.

Roong also predicts that the Bank of Thailand's policy signal rate will remain low for the remainder of this year, although government investment and spending will put pressure on longterm interest rates to trend upwards.

However, according to a recent HSBC research paper, once the tem¬porary widening of the currentaccount surplus and exporters' remit¬tance of their foreigncurrency pro¬ceeds back to the country pass, the baht will not maintain its strength.

In the past five months, the baht has appreciated significantly in line with regional currencies. Over the period, the current account totalled about US$10.9 billion (Bt370 billion).

HSBC said this large surplus would not however be sustainable, as tourism income was likely to remain weak and the fall in imports would be slower than that in exports in the second half, thus narrowing the large trade sur¬plus.

In addition, with the government's second stimulus plan expected to kick into effect soon, the bank said more raw materials and industrial machinery would need to be imported.

"This suggests the collapse of import growth has bottomed and will narrow the net demand for the baht going forward," HSBC said.

Moreover, it said the Bank of Thailand was likely to resist any fur¬ther appreciation of the baht, as it has done in the past month. The weaken¬ing of the currency would, however, be gradual and modest since the central bank is likely to limit currency volatil¬ity, HSBC said.

Bank of Thailand Assistant Governor Suchada Kirakul said the baht could appreciate or depreciate for the rest of the year, depending on both internal and external factors.

The current account is expected to be in surplus this year, she added. The magnitude of the surplus, however, will be less than that in the first half. This will reduce pressure for the apprecia¬tion of the baht.

A dampened tourism sector could contribute to a serviceaccount deficit and lower the expected currentaccount surplus this year, she added.

"If oil prices rise, resulting in an escalating import value, the current account could be in balance or show a deficit," said Suchada.

Aside from domestic factors, the baht also depends largely on what the US dollar is doing, as well as on region¬al factors.

The greenback is expected to be stronger in the short run, which would contribute to the depreciation of regional currencies.

Recovering economic conditions in the region, however, could act as a

counterfactor and cause the baht and other regional units to appreciate, she said.

The dollar is expected to depreci¬ate in the long run when the US - the world's largest economy - picks up. It could bring about risk diversification to the region, including Thailand, she added.

However, despite uncertainty over the baht's value, one thing is certain: local exporters face higher risks.

Somporn Chitphentom of the ExportImport Bank of Thailand said exporters should prepare to cope with higher risks from a host of factors amid the recession.

According to a forecast by the Economist Intelligence Unit, global gross domestic product and trade will record their first negative growth since 1982 at minus 1.9 per cent and minus 3.5 per cent, respectively. Thailand's exports are also expected to record fur¬ther negative growth.

Moreover, on top of lower orders and currency volatility, Thai exporters are facing the risk that trading part¬ners will not pay for their products. There has also been a sharp rise in bankruptcies among foreign customers, as well as an increased risk of their not collecting ordered goods, said Somporn.