Baht seen weakening to 32.50 to US dollar on euro-zone crisis

"The euro contains huge downside risks. If Europe’s debt crisis worsens in the next three months, the euro could trade at US$1.2-$1.25, lower than the pre-subprime-crisis level,” said Usara Wilaipich, StanChart’s senior economist, in an exclusive briefing to The Nation.

That means the US dollar will be stronger and the baht will weaken against the US dollar. StanChart forecast the baht to depreciate to 32.50 per US dollar by the end of the first quarter.
Thai exporters are advised to hedge against the euro while importers with revenues in euros and yen should follow carefully the developments in the euro-zone debt crisis and currency volatility. Most importers buy materials from Europe and Japan. The yen is accounted for in this case, as the Japanese currency tends to strengthen whenever other currencies fluctuate.
The euro traded at around $1.25 before the subprime crisis. Last Wednesday, the European single currency weakened to $1.2946, the lowest level since January 11, on mounting concern over the euro zone’s sovereign debt crisis.

Given a likely worsening sovereign debt crisis in Europe, Thailand could witness slower-than-expected economic growth.
StanChart estimates Thailand’s gross domestic product to expand by 3.5 per cent next |year, against the market consensus of 4-5.5 per cent.
Despite an expected sharp recovery from the floods, Thailand, like other Asian countries, is not immune to external risks, particularly from major economies like Europe, the United States and China.
Thailand’s sharp recovery could prove temporary during the first half of next year, as restoration needs after the floods will boost domestic demand in both consumption and investment, and a large bulk of delayed export orders will need to catch up in the first quarter of 2012.
Still, external factors would force many countries to ease monetary policies to spur growth. This convinced Usara that the Bank of Thailand would need to cut the policy rate twice, 25 basis points each time, to Bt2.75 per cent.

“The theme next year will be on growth. Monetary easing is in the picture,” she said.
The euro zone is expected to plunge into recession throughout 2012 while the US economy will likely make a fragile recovery with expectation of the third round of so-called quantitative easing coming out of the US Federal Reserve possibly in the first quarter.
With likely low demand from Europe and the US, China is expected to unavoidably take a slower economic growth path at 8.1 per cent amid lingering concern over a hard landing next year. In the past 10 years, Asia’s largest economy expanded at an average of 11 per cent due mainly to its public investment for the country’s build-up and high export growth on the back of high demand from its major markets in the US and Europe.

Growth concern will likely be a theme for policymakers next year due mainly to the developments in the euro zone, and easing policies could follow to boost growth across the world. The Bank of Thailand is expected to join the easing path by cutting the policy rate two times to 2.75 per cent by the end of 2012.
“The European problem is worse than the US and it has not yet bottomed out,” the StanChart economist added.