Thailand does not need monetary tightening like other emerging economies

Since the signalling of the tapering of unconventional monetary policy in the United States, commonly know as quantitative easing (QE), currencies of emerging market economies (EMEs) have taken a nosedive, as investors rush to exit risky plays.

Among the worst-performing currency was Indian rupee, which has suffered about a 29-per-cent slide from peak to trough this year. This means that some time this year, the Indian currency lost more than one-fourth of its value against the US dollar. By the same measurement the Brazilian real suffered a decline of about 25 per cent, and the Indonesian rupiah lost roughly 19 per cent. The baht fared a bit better, with a peak-to-trough movement of about 13 per cent. This puts the baht among the most volatile emerging-market currencies this year.

In response, big emerging-market economies, from Brazil and India to Indonesia, have pursued aggressive monetary-policy tightening over the past few months in what seems like a fight back against rapid currency depreciation. The question then comes back to Thailand: Should Thai monetary policy follow suit?

However, year-to-date figures put things into better perspective. The rupee, real and rupiah depreciated 17 per cent, 12 per cent and 18 per cent respectively from the beginning of the year. The baht, in contrast, depreciated by only 4.5 per cent net. Hence the baht’s large peak-to-trough movement can be largely attributed to its rapid appreciation early this year, out of sync from other emerging-market currencies, not from the depreciation since Fed chairman Ben Bernanke’s speech. So our currency’s fate is not sealed.

Another area where there is a stark contrast between different groups of EMEs is current-account balance, that is, how much they receive in foreign currency minus how much they pay for goods and services. For what it’s worth, trends in current-account balance may be the single most important indicator of the direction of “equilibrium” in the exchange rate, all other things being equal, of course.

Thailand may have long forgotten the discussion about current-account problems due to an overwhelming surplus we accumulated over the past decade or so after the Asian financial crisis. Hence the long spells of baht appreciation, on what some analysts refer to as the “mega-trend” of the Thai currency. 

The same cannot be said about Brazil, India and Indonesia, however. The third one is especially interesting, since Indonesia’s current account just turned to deficit in 2012, and it got wider this year. In the first half of 2013, Brazil and Indonesia have racked up respective current-account deficits US$43.4 billion and $15.7 billion. India only has released figure up to the first quarter, but they already showed an $18.2-billion deficit. In contrast, Thailand’s seven-month current-account deficit sits at a meagre $4.5 billion (Bt143 billion).

How serious are these numbers? For Brazil, the current-account deficit is wider than 3 per cent of gross domestic product now, after being just 2.4 per cent last year. India could be staring at a deficit of almost 5 per cent of GDP this year, a level that is begging for a currency crisis. Indonesia’s current-account deficit hit 4.4 per cent of GDP in the second quarter this year, after its 10-year stretch of current-account surpluses ended in 2012. In contrast, Thailand’s current-account deficit is around 0.6 per cent of GDP.

There are three ways to finance these deficits, either through inflows of foreign direct investment (FDI), portfolio investment (FPI), or with international reserves. Clearly, FDI is steady, moves slowly, and will not keep up with the rapid pace of deficit widening in these economies. Two choices are left: FPI either in the form of equity and debts, and international reserves. Neither choice is exactly healthy for the stability of exchange rates.

Last but not least, inflation rates are also unsustainably high in these three economies. Brazil, India and Indonesia are struggling to tame high inflation rates of 6.4 per cent, 9.5 per cent and 8.8 per cent respectively. So in addition to external stability, domestic stability has been poking their policy-makers in the back. In contrast again, Thailand’s inflation rate has just dipped below 2 per cent to 1.6 per cent year on year, which is worryingly low, if I may say so.

Yes, there are many other ingredients that also add to the risk of these economies, from chronic fiscal deficits, which lead to the problem of “twin deficits”, to collapsing agricultural-commodity prices against rising energy prices. But putting everything together, the only way for the monetary policy for the three large EMEs 

is to tighten to try to tame both current-account deficits and inflation together.

The story is hardly the same with Thailand’s present situation. So no, Thailand doesn’t need to follow suit in tightening monetary policy. Although EMEs may look alike on the surface, no pairs of economies are the same. And in this case, we are just different.

 

Dr Benjarong Suwankiri, head of TMB Analytics, the economic analysis unit at TMB Bank, can be reached at [email protected]. Views expressed in this article are those of the author and not of TMB Bank or its executives.