Three factors to determine baht direction if BOT/govt measures put in place

But it will make it substantially harder for offshore capital to influence the direction of the baht. 

There is a regulation already in place that prohibits non-resident baht accounts from holding more than Bt300 million overnight. This prevents offshore players from building up a large baht balance. To get around that, offshore players have turned to the Thai bond market, which offers a wide range of maturities – from 14 days up to 50 years.

Bonds up to two years long are quite riskless in terms of price volatility and still offer returns of 2.6-2.7 percentage points above comparable US dollar or euro assets.

The local bond market saw huge amounts of capital flooding in and the non-resident positions of local bonds went up from about Bt300 billion three years ago to the current level of about Bt800 billion. 

If the measures are implemented, the direction of the baht will be determined mostly by three factors:

 

Sentiment towards the baht exchange rate and the supply and demand of exporters and importers

In theory, if Thailand’s exports and imports are equal, there should be no change in the exchange rate, as the purchases and sales of US dollars against baht should net out. But in reality, the buying and interest will never be the same, because the sentiment towards the dollar/baht rate will skew supply and demand. For example, if the market sees the dollar tending to weaken, exporters will rush to sell dollars forward while importers will wait. 

 

The overall direction of regional currencies against the US dollar

In the short run, we may see certain regional currencies outperforming their peers – like the baht this year against the greenback. However, in the long term, regional currencies usually move in the same direction. 

If we look at the rate of appreciation of regional currencies from 2006-12, we see that they are quite close to one another – Singapore dollar 36 per cent, baht 34 per cent, yuan 30 per cent, Philippine peso 29 per cent, ringgit 24 per cent and New Taiwan dollar 13 per cent. 

 

Liquidity of baht in the offshore interbank market

Since offshore investors can’t park their baht in the local bond market any more, they will have to rely on the interbank swap market to manage their baht liquidity.

 If the baht market offshore is flush, offshore investors will have to sell baht and buy US dollars back as they can’t leave more than Bt300 million in their non-resident account. 

This will severely limit how much participation and influence they have on the exchange rate. 

 

 

_ Thiti Tantikulanun is head of capital markets at Kasikornbank