Strong baht presents both problems and opportunities
In recent weeks, the baht has surged against the US dollar. The greenback hit a low of 29.60 and bounced back to trade around 29.70. The rapid movement prompted Thai policy-makers and exporters to voice concern about the negative impact of the strong currency. Some said the Bank of Thailand should lower interest rates to slow or stem capital inflows. Some support some kind of capital control.
Let's review the effect of a strong baht. It will make our exported products more expensive in the eyes of foreign buyers. On the other hand, it will help reduce import prices and also help make energy prices lower.
For exports, I believe the negative effects will be on farm products. The lower income in baht terms will eventually affect farmers simply because exporters will calculate their net export receipts in baht to determine the purchase price of raw materials.
Meanwhile industries with high import content could spend less for imported raw materials. In turn, their finished products could be cheaper. Unfortunately, we have many more people living in or depending on the farm sector than the industrial sector. Lower export income will make them poorer.
Let's now look at the effect of measures we would implement to keep the baht from strengthening. First, reduce interest rates to close the interest gap between the baht and the dollar (reference rate is 2.75 per cent), the euro and the yen (reference rates are near zero).
I have seen foreign capital flowing into Thai bonds and equity. If we reduced interest rates, capital inflows would slow down or stop. Questions are: Should we reduce the rate to near zero? Is our economy in the same situation as in the United States, Europe or Japan? Is the interest differential the only factor for the baht's strength?
Second, should we impose some kind of capital control, that is, a tax, on short-term capital inflows? We did that once three or four years back and it caused commotion in the financial markets. I saw the baht weaken sharply, interest rates rise and the stock market lose a lot of value in one day. Are we prepared to take the risk of those effects to keep the baht from strengthening?
I believe that the BOT has made efforts to stabilise the baht's value by buying foreign-currency inflows and controlling the domestic money supply by issuing bonds into the market. We have seen the reports that our international reserves are now near US$200 billion (Bt6 trillion). If we mark to market the foreign reserves to the baht, surely we will see losses. Moreover, the central bank needs to pay interest to bondholders.
The problems now are the opposite of those in 1997. At that time, we did not have enough reserve, but now we probably have too much.
I believe first that exporters should learn how to hedge their foreign-exchange risks.
I heard someone say that hedging costs are too high. In fact, exporters are gaining some extra premium by selling dollars forward (selling dollars today and promising to deliver some time in the future). If exporters sell dollars today, the rate is 29.70, but if they do forwards, the rate for the same dollar is higher than 29.70. Therefore, I cannot understand the complaint that hedging costs are too high.
Alternatively, exporters may look to price their products in other currencies whose values are more stable against the baht.
Second, I believe the market will determine the movements and values of currencies. There are many factors causing market players to buy or sell currencies. We should be proud that foreigners are interested in investing in our country in both the real and financial sectors.
On the other hand, the strong baht presents opportunities for us to invest in infrastructure or invest offshore to strengthen our competitiveness. Therefore, let's look at the brighter side of things. We should now look for opportunities to make use of the strong baht instead of looking only at one side - the problems.
Padej Piroonsit is head of global sales at CIMB Thai Bank. He can be reached at email@example.com. The views expressed in this article are his own.