'New approach needed'

Thailand’s financial authorities need to come up with new approaches to handle the baht’s appreciation, as the gains will probably continue for up to three years or as long as it takes for the three major economies – the United States, the European Union and Japan – to resurrect themselves from their current mess, economists said.

Usara Wilaipich of Standard Chartered Bank (Thai) and Padej Piroonsit of CIMB Thai Bank said the 1.4-per-cent spike in the baht yesterday was just the beginning of an inflow tsunami. While exporters need to seek protection, the authorities are urged to resort to new approaches – which do not need to involve draconian capital controls.

The baht yesterday gained as much as 1.1 per cent in a single day to 28.95 per US dollar, the strongest since July 1997.

“Japan’s monetary easing is a game changer. Without it, the baht would not have gained this fast,” Usara said. “Thailand may need to rebalance internal and external risks. Internally, our stability is well managed. But as three main dams are releasing huge amounts of water at the same time, we could drown. This requires us to rebalance the risks,” she said, reiterating her view that domestic rates should be cut. 

She believes the Thai economy is buoyed by stimulus measures and expectations of the Asean Economic Community, not interest rates. Lower rates are necessary, as external risks are far more worrisome than domestic stability, she said. 

Padej suggested a reversal of thinking. 

“There is no reason for the baht to stop gaining. A lot more is coming this way. It’s time we find the advantages of the strong currency, as we can no longer rely on a weak currency to boost exports. 

“When Japan was forced to strengthen its currency by 50 per cent, the economy thrived and Japanese companies started to acquire properties overseas. Likewise, Thailand can take this opportunity to improve productivity,” he said.

Both Usara and Padej are against capital controls, as negative repercussions of the controls imposed in 2006 are still remembered. 

And though they hold conflicting views on interest rates, neither Finance Minister Kittiratt Na-Ranong nor Bank of Thailand Governor Prasarn Trairatvorakul is a fan of such controls either. 

Prasarn insisted that no new measures were necessary. The central bank now relies on four policy tools: letting the baht move in line with market movements; promoting overseas investment; intervening in the foreign-exchange market; and monitoring capital flows. He said measures that ran against demand and supply, such as capital controls, would be put in place only in the event of an emergency. 

“Capital controls require thorough consideration. Brazil’s action to tax portfolio investment affects foreign direct investment. Before we resort to this, we need to consider all possible side effects,” he said.

Prasarn attributed the baht’s sharp gain to the Bank of Japan’s ultra-easing monetary policy and the Bt30-billion (US$1 billion) foreign investment in BTS Group Holdings’ property fund. Thin trading, valued at about $200 million to $400 million a day, ahead of the holidays also spurred faster movement. 

“The appreciation [of 1.4 per cent against the dollar and 4 per cent against the Japanese yen from Friday to yesterday] was too fast. It’s faster than usual,” he said.

Global funds bought $292 million more Thai government debt than they sold last week, adding to net purchases of $9.6 billion in the first quarter, official data show. That compares with $31 billion for the whole of 2012. 

Padej said: “Despite poor economic indicators in March, Thailand showed a current-account surplus [due to inflows]. I see this continuing not for the short term, but for the medium term, or three years.”

Monetary easing in the US and the EU in the past four years has flooded the global economy with excess liquidity of more than $3 trillion. Japan suffered the most last year, as the yen strengthened by 20 per cent. The new Japanese government changed tactics, deciding to inject $2.7 trillion to weaken the yen and boost the economy. 

In search of higher returns, the excess liquidity is flowing to Asia, Usara said. China now blocks the gate, India and Indonesia are suffering from current-account deficits, Northeast Asia is caught up in the tensions on the Korean Peninsula, the Philippine peso strengthened considerably in 2012, and Malaysia is about to hold an election.

Thailand is now the most promising destination. Standard Chartered Bank (Thai) targets the baht to end the year at 28.75 per dollar.

“It's no doubt that the baht could hit the end-year target sooner than expected. The Thai baht could be the world’s best-performing currency this year,” she said.