Several factors behind recent rapid rise of baht
The baht has grown substantially in strength against the US dollar since the beginning of the year, from 30.60 to 29.70 yesterday. This represents a rise of 2.5 per cent in only a few weeks. During all of 2012, it rose 3.0 per cent. The rapid rise of the baht affects many stakeholders including local capital markets and exporters, as well as interest-rate policy and inflation.
A few factors explain why the baht has risen so much in the first weeks of the year. First, the bond markets continue to see foreign buyers. At the end of 2011, foreigners held around 5.4 per cent of the outstanding bonds in Thai capital markets. At the end of 2012, they had increased their holding to 8.5 per cent. Net foreign buying of Thai bonds last year was US$10 billion (Bt298 billion). This represents more than four times the $2.2 billion in net foreign buying in the Thai equity markets.
Second, the 3-per-cent rise of the baht in 2012 was mid-pack among Asian currencies. The South Korean won was the best performer at 7.6 per cent, followed by the Philippine peso at 6.5 per cent, the Singapore dollar at 5.8 per cent, the New Taiwan dollar at 4.5 per cent and the Malaysian ringgit at 3.5 per cent. The currencies that strengthened less than the baht were the Chinese yuan at 1.0 per cent, the Vietnamese dong at 0.9 per cent and the Hong Kong dollar at 0.2 per cent. The Indonesia rupiah and Indian rupee actually weakened against the US dollar, by 8 per cent and 3.6 per cent respectively, because of concern about inflation.
Therefore in relative terms, the baht represents good value to hedge funds and speculators at the beginning of the year when compared against other Asian currencies, and we saw substantial buying interest from hedge fund and offshore financial institutions over the past two weeks. Correspondingly, the Thai bond market saw an inflow of $750 million during the same time frame.
Third, as the baht strengthened past several important technical ceilings such as 30.50 and 30.00, buying interest for hedging purposes by exporters added to the momentum. Meanwhile importers, the baht sellers, are holding back on hedging their exposure.
Nevertheless, there are a couple of events that are likely to result in a temporary rise in the dollar. The US currency as a safe heaven will rise whenever there is a heightened risk to the financial system. In 2013, we foresee two events that pose financial-system risks: the US debt ceiling and the refinancing of euro-zone debt.
At the end of last year, congressional Republicans grudgingly passed bills to continue tax benefits to the US citizens. It now seems that the Republicans will increase the debt ceiling to accommodate the federal budget for another three months. While this has averted an immediate showdown and allowed the markets to breathe easier, the cliche of "kicking the can down the road" remains. Within another three months these concerns will come back again as the market prices in the probability of a US credit event.
Republicans will likely put up strong resistance to raising the ceiling without a corresponding lowering of spending. The potential face-off will create uncertainties in the financial market, which in turn may result in a rise in the US dollar.
The refinancing of euro-zone debts, particularly of Greece and Spain, has not been a topic in the news for a while but that does not mean it has been resolved or will go smoothly. That uncertainty should only cause a minor interruption in the long-term rise of the baht against the dollar since 2005.
We continue to forecast that the baht will be around 28.80 to 29.00 by year-end.
Thiti Tantikulanan is head of capital markets business at Kasikornbank.