Currency hedging urged before baht

The market had been bullish on the greenback since last year as it expected the US Federal Reserve to start normalising interest rates, making the baht and other regional currencies turn to weakness.

However, the Fed has taken no action yet. It has delayed its decision on raising interest rates because the economic data of the US do not look great.

If the Fed does not make a move this December, the US dollar bullishness will end and the Fed will hold the current rate throughout next year, Callum Henderson, head of foreign-exchange research at Standard Chartered, said yesterday.

Southeast Asian currencies will gain the most if the Fed holds rates throughout next year because the prices of commodities will pick up and exports will recover.

Global currencies will take a U-turn after the end of US dollar bullishness. The baht will turn to strength again, so businesses should prepare for the ensuing currency volatility, he said.

Usara Wilaipich, senior economist at StanChart, said that if the Fed decides to hike rates in December, the baht could stay at around 35.6 to the dollar, but if it holds its course, the unit could strengthen to 35.

The Thai currency is moving towards appreciation and has a good chance of reaching 34.75 next year, she said.

Even if the Fed decides to hold US rates throughout next year, Thailand’s policy rate of 1.50 per cent is the lowest level for its economy, and the Monetary Policy Committee will keep the rate there until the third quarter of next year, Usara said.

The MPC will start taking action on the interest rate when the Thai economy shows improvement, fuelled by fiscal policy, so the policy rate will be raised in the fourth quarter of next year, she predicted.

Exports are expected to suffer a contraction of 5 per cent this year and return to growth in the range of 1-3 per cent next year, she said.

The export sector has failed to perform its role as an engine of economic growth since the 2008 financial crisis because of the slowdown in global trade and the internal structure of the export sector.

After the US-led crisis, exports enjoyed growth of 26.8 per cent in 2010 and 15.1 per cent in 2011. After that, the expansion of the export sector plunged to 2.9 per cent in 2012. It shrank by 0.3 per cent in 2013 and 0.4 per cent last year.

Usara said the shift of focus to the domestic economy under the new government economic team headed by Somkid Jatusripitak, aimed at reducing over-reliance on exports, was the right way.

The main problems for boosting domestic demand include weak purchasing power and high debt among the grass roots, who are the majority consumers in the country.

Small and medium-size enterprises are lacking working capital, so the new fiscal stimulus measures that the government is implementing are the right solution, she said.

The execution of the public investment projects will create a new normal for the economy, as public investment has been delayed for more than six years. Spending on public projects will induce more private investment.

Gross domestic product next year will run at 4.5 per cent or even higher, up sharply from the average of 2.9 per cent since 2008, Usara believes.

StanChart forecasts GDP expansion for next year at 4 per cent based on the execution of public investment projects.