BANK OF THAILAND governor Veerathai Santiprabhob yesterday urged exporters to hedge against volatility in the value of the baht as the country faced the prospect of trade protectionism against the backdrop of tensions on the Korean Peninsula – with “unpredictable” outcomes from the latter.
“Geopolitical risk and trade protectionism are external risks factors that could lead to high volatility in the exchange rate,” Veerathai said.
His comments follow a period of gains in the baht, confounding market assumptions that the currency would weaken against the US dollar. Market bets since last year been for the greenback to strengthen against the major currencies this year in line with the US Federal Reserve’s policy goal of raising interest rates to more normal levels.
“But the market has lower confidence in US President Donald Trump after he failed to push through key policies such as repealing Barack Obama’s healthcare legislation, and so we have seen the US dollar weakening,” said Veerathai, referring to the Republican Party’s failure to overturn the former president’s healthcare policy in Congress.
“Geopolitical risk is also playing a role as US and North Korean leaders engage in a face-off over Pyongyang’s nuclear programme. We don’t know who will blink first - Trump or Kim Jong-un.”
The Bank of Thailand has conducted a study on currency hedging, with the central bank revealing that most small and medium-sized exporters have shunned this prudential measure.
Suchot Piamchol, deputy director of the foreign exchange division, said 72 per cent of small exporters canvassed in the BOT study had done nothing to protect themselves from exchange rate volatility. Some 59 per cent of medium-sized exporters and 50 per cent of large exporters did not hedge.
Dangers in acting too late
On average, 66 per cent of all exporters did not make any hedging arrangements and only 4 per cent of them had fully hedged against currency risk.
“Many exporters hedge against baht volatility when the baht swings suddenly and that hedging at such times can make the situation even worse,” Suchot said.
He said some exporters may not need to fully hedge against currency moves if they are engaged in both exporting and importing.
An effective hedging strategy will reduce risk from exchange rate movements, especially during times of high volalility that could result in losses, said Suchot, who felt many exporters were not sufficiently aware of the risks. This was especially so for those exporters who were overconfident in taking on risk, based on their assumptions over the exchange rate. He said the purchase of options of forwards may have their costs but should be considered.
Veerathai, when asked about the prospect of central bank taking additional measures to curb the baht rally, said there could be more on the way, but added that central bank cannot move against market forces.
The central bank recently reduced the amount of short-term bond issuance in order to deter investors from parking their short-term funds in the Thai financial market; this action helped fuel the baht’s gains.
Quizzed on the move’s effectiveness, Veerathai put forward a counterfactual argument: “The question should be, what would happen if we don’t do it.”
“Among the regional currencies, the baht has been strengthening moderately within this group. It is really a problem of the US dollar weakening,” he said.
This year the baht has strengthened 4.2 per cent, while the Taiwan dollar, Korean won and Indonesia rupiah have risen 6.1 per cent , 5.9 per cent and 5.1 per cent, respectively. The Chinese yuan has added only 0.8 per cent.
Veerathai played down any concerns that a stronger baht would hurt the tourism industry.
However, Kobsithi Silapachai, head of capital markets research at Kasikornbank, said he was concerned that the stronger baht could discourage Chinese tourists, in particular, from visiting.
The central bank acknowledges that it has to do more to encourage Thai investors to invest more aboard in order to balance the capital flows.
Foreign investors see the baht as the save haven in the region due to Thailand’s large international reserves and its current account surplus. Short-term inflows could exacerbate the baht’s rally and potentially hurt Thai exporters as their goods become relatively more expensive.