With the recent movement of the baht, especially in August, the timing seems right to recap the fundamentals behind the currency's recent shifts in value.
In 2009, it opened at 34.8 against the US dollar, before ending the year 4 per cent stronger at 33.3. However, this year has already seen a 4.2 per cent increase in value against the dollar. At the beginning of 2010, many pundits were expecting to see the baht level out at around Bt32/dollar by year-end. At the time, we argued that the baht might strengthen beyond these expectations to around Bt31/dollar. We remain firm in that view.
Both internal and external factors have led to that conclusion.
The internal factor is Thailand's balance of payments figure, which is reflecting a huge surplus in both our current account and capital account. Significant growth in the exports sector during the first half of the year has helped produce a figure of $6 billion-plus in the current account, while, the capital account added another surplus of $7.5 billion, mainly from capital inflow into both the stock markets and capital markets. These two combine as the balance of payments figure, which so far is growing faster than last year.
Externally, there are two factors. First, the yuan has become a key factor over the past couple of months after China decided to allow its currency flexibility by releasing the unofficial peg to the dollar. As a result the yuan will tend to appreciate, and will drag along regional currencies including the baht.
Second are the changes to growth expected in major economies of the US, Europe and Japan in the second half of this year. The fiscal policies these economies have used to kick-start growth will begin to have less impact, and we expect to see slower growth here. Meanwhile, the emerging economies of China and the East should continue to grow apace, allowing their central banks to normalise their interest rates sooner. This will attract more capital flow into our region, which should push up the value of Asian currencies in the second half of this year.
With this combination of external trends and internal factors, there is only one way for the baht to go in the second half of this year - up.
Nattawut Sachabudhawong is a member of the assets and liabilities management team of Siam Commercial Bank's Treasury Division.