Baht strengthens, exporters worry

Appreciation could hurt supply chain

PARISTA YUTHAMANOP WICHIT CHANTANUSORNSIRI

The baht yesterday rose to 34.82 to the US dollar from 34.95 last Friday on continued dollar sales by exporters.

Exporters dumped dollar positions in anticipation of the currency appreciating even further. The baht also gained ground on weak regional sentiment for the dollar.

Atchana Waiquamdee, a deputy governor for the Bank of Thailand, said the baht should weaken in the near future due to demand from importers and foreign-currency borrowers.

Exporters were selling dollars in the misconception that recent moves by the central bank to ease its Dec 18 reserve rule would lead to further baht appreciation, she said.

Last week, the central bank exempted foreign inflows into bonds or unit trusts so long as they are fully hedged through currency swaps. The programme offers alternative to the rule that effectively taxes foreign inflows at 30% for one year.

''Exporters should consider carefully as the fully hedged option is not different from the reserve requirement measure in that it helps prevent the baht from strengthening,'' Dr Atchana said.
''At some point, we expect the market mechanism to work, for instance, from [borrowers] who want to speed up payment of foreign-denominated debt [and buy foreign currency].''

Suchada Kirakul, a central bank assistant governor, said that since the rule was imposed, the baht had moved in line with regional currencies, resulting in little change to export competitiveness.

Thailand's nominal effective exchange rate (NEER) against 21 countries appreciated 0.87% from March 1 to 13 to 78.03, compared with 77.36 in February. The NEER is the exchange rate of the domestic currency compared to other currencies weighted by their share in the country's international trade.

In the first two weeks of December, the NEER stood at 77.1, compared with 76.32 in the second two weeks of the month, after the reserve rule took effect.

Another measure, the real effective exchange rate, rose 0.01% in January compared with 0.8% in December.

Songpol Chevapunyarote, head of capital markets at Kasikornbank, said exporters with no hedge contracts against their currency exposure would suffer from the baht's appreciation.
''Thai exporters hedge fewer than 40% of their total transactions on average. Last January, the cover ratio fell to just 20% to 30%, as they expected the 30% reserve requirement measure to help weaken the baht. But in general, exporters should look to hedge 40% to 50% of their total transactions,'' he said.

Santi Vilassakdanont, chairman of the Federation of Thai Industries, said the baht's current strength could force some exporters to temporarily cease operations.

Local suppliers could also come under pressure as export-oriented manufacturers turn to imported raw materials rather than local products to reduce costs.

''Some exporters could stop receiving orders to maintain their margins and wait until the baht weakens. The strengthening baht could force us to opt to import raw materials to lower our costs. This will hurt the entire supply chain,'' he said.

Mr Santi said textiles, garments, processed foods, agricultural and auto parts were most affected by the stronger baht.

Somchai Sujjapongse, an adviser to the Finance Ministry, noted that Finance Minister Chalongphob Sussangkarn had clearly indicated that the baht should be allowed to move normally.

The new minister also has directed ministry officials to refrain from criticising the country's exchange-rate policy and allow market forces to prevail.

The Bank of Thailand has come under heavy criticism for imposing the reserve rule and being slow to cut interest rates in the face of slowing growth and inflation.

But Dr Chalongphob, who himself criticised the reserve rule while serving as president of the Thailand Development Research Institute, has since thrown his support behind the central bank and brushed aside speculation that the reserve rule would be definitively scrapped.

Dr Somchai said the recent appreciation of the baht hasd a positive and negative impact on the overall economy.

According to research by the ministry's Fiscal Policy Office, each one-baht appreciation against the dollar would cut economic growth by 0.3 percentage points, due primarily to the impact on exports.

On the other hand, a one-baht appreciation would also cut the country's inflation rate by 0.5 percentage points.

Dr Somchai added that the exchange rate was likely to weaken as manufacturers increase imports of raw materials and capital goods as inventory levels drop.

''This also depends on export trends. If the country's exports continue to perform well, it will also influence the currency,'' he said.

Bangkok Post
Tuesday March 20, 2007