Thai Baht Midlife Crisis

Thailand manages to surprise this informationally obssessed world twice in the past 12 months. First, the surprisedcoup d’etat on 19 September 2006 stunned the world out of the blue. Second, the capital control imposed on foreign capital on 19 December 2006 by the Bank of Thailand, and rightly by Pridiyathorn Devakula, the ex-minister of finance. The control measure introduced require a 30% witholding of any foreign exchange bought and exchange in all Thai financial institutions. The measure was meant to discourage against any speculative short-term flow against Thai baht, which has been peculiarly appreciating since the beginning of 2006. In fact, it has appreciated 20% against US dollars, its major trading partner.

The Situation
Why worry? Precisely the question many asked at the beginning of trend. Why be so worried about the appreciation of baht? Afterall, the US dollar withers against many currencies, particularly with Chinese economy stealing all the spotlights. The US economy started to stagger and this coupled with its huge budget and trade deficits, there was no question of why the appreciation. However, we still worry. Afterall, Thailand manages to pull itself away from the ghost of crisis purely through export. The export industries were Thailand’s economic battalion, and given its weak exchange rate after 1997 devaluation, this only makes sense. Yet, despite all exchange rate mayhem, Thai export remains strong throughout 2006. This is a good sign. It means many major Thai exports are not easily substitutable on the world market. But we must beware, this lack of substitutability is not indefinite. If things look too bleak, buyers will have to no choice but to shun away from even the most unique of Thai products.

Eventually, things turn even nastier for Thai exporters. Thai baht continues to appreciate, even after the capital control bonanza. Now we start to ask a more fundamental question: Why is Thai baht appreciating like crazy? Thai baht appreciates so strongly that it leaves many hardcore macroeconomists and international economists scratching their head. And those who think they might have the answer, here are some facts. Thai baht appreciate against all trading partners. Yes, that means, not only baht-dollar is working against us. It works against us more than any other countries in the considerations. If we look at just our trading partners, they will buy less from us and we will buy more. If we look at our trade competitors, they are gaining an edge ahead of us. Can we panic now? Sure, we can. But not all hopes are lost. BOT might be the white knights to come to our aid, eventually.

... (to be continued)