It's just good insurance to hedge exchange rate risk

Last week, we saw a parade of esteemed economists urging the Bank of Thailand to lower its policy rate to fight off capital flows and appreciation of the baht. While the effectiveness of such policy recommendations is questionable, the concern is nonetheless quite real. A strong baht does hurt the Thai economy.

Predicting the baht's direction is very difficult. The success of the economics profession in forecasting exchange rates is also very thin. Unlike movements in stock markets, economists can always explain why exchange rates moved in one direction or the other. But unlike picking a winning stock, fundamentals have failed to provide an accurate depiction of where the currencies must be heading. Worse, to get it right, you must predict correctly the movement of two or more currencies at once.

Now to give my profession fair treatment, I should state that virtually all economists predicted appreciation of the baht this year to varying degrees. And it did - but no one was able to foresee the sharp appreciation that occurred during the first few weeks of January.

With the benefit of hindsight, what happened was no surprise. But perfect foresight takes more than quantitative assessment of all the moving variables in the global economy, including political factors.

So instead of waiting for economists’ correct forecasts or for uncertain policy actions from the government or the BOT, there are actually numerous ways we can protect ourselves against baht swings, both against appreciation for exporters and depreciation for importers. Think of it as insurance for your business.

It always perplexes me how little exporters hedge their baht risks, despite the pain this might inflict on their businesses. Nowadays, given the sophistication of financial markets, you can hedge in any way any time, and any amount you like. Still, the penetration even for the plain-vanilla exchange rate forward is not as high as it should be. After all, as is often pointed out, we are an exporting economy. Wouldn’t it make sense that we hedge our exchange-rate risks almost all the time?

This observation brings me back to the day when Thais used to treat insurance with distaste. Back 15 to 20 years ago, Thais viewed insurance as almost a scam, chasing us for our precious savings with little or no benefit. Maybe it offers us an insight of where hedging service is now and where it might be going. Insurance is a growing industry. While the penetration rate remains low, that is rapidly changing, thanks to the additional support |from government tax incentives and policies.

We hedge our health risk every year with health insurance, so why not buy insurance against baht appreciation for your business? Business owners need to think seriously about hedging their exchange-rate risk regularly.

Financial services also need to come up with products suitable to different levels of financial sophistication. Most banks now have dedicated desks to offer hedging services to small and medium-sized enterprises. But this is barely enough to get SMEs interested, just as Thais were not interested in insurance even with an army of salespeople dedicated to their customers. Government policies are also needed to provide extra incentives to businesses to hedge their exchange-rate risks.

One thing we know for certain, this won’t be the last time we see appreciation of the baht. Economists may not get the timing right, but all agree that 2013 is the year of appreciation. So instead of worrying about where the baht may head next, we should hedge our risks, so that we can spend extra time on things that really deserve our attention.

At the end of day, speculating on the baht is not our forte, so we should leave that to the pros.

Views expressed in this column are those of the authors and not of TMB Bank or its executives.

Dr Benjarong Suwankiri, team head of TMB Analytics, the economic analysis unit at TMB Bank, can be reached at tmbanalytics@tmbbank.com.