US rate hike fuels shift in baht policy
Thanong Khanthong says the Thai monetary authorities have been forced to shift to a weak-baht policy because of rising US interest rates.
A bias towards a weak-baht policy is inevitable after the US Federal Reserve Board put the brakes on its monetary policy to try and give the US economy a soft landing.
After mostly staying firm at Bt36-Bt37 to the US dollar over the past two years, except for a brief period late last year, the baht last week slid to Bt39 to the dollar. This followed the upward pressure of US interest rates. Higher US rates make the dollar stronger and make it more attractive for investors to hold dollar deposits. On Friday the baht was trading at around Bt39.15 to the dollar.
The likelihood is that it can go down further to Bt40 to the dollar (a level that should not harm Thai macro-economic stability) due to further upward pressure of the US interest rates. The Thai authorities have projected that the Fed funds rate may rise by another 0.75 of a percentage point.
The question is whether it will slip further to Bt43 to the dollar, as projected by Barclays Capital. Hitting that level would put prices under pressure and make life difficult for Thai monetary authorities to maintain macro-economic stability.
Amid rising US interest rates, MR Chatu Mongol Sonakul, the Bank of Thailand governor, this week gave an assurance that the Thai authorities would continue to stick to their low-interest-rate policy to support the economic recovery and facilitate the corporate debt-restructuring process. His comments signalled that the authorities were willing to let the baht slip further, for US rates were clearly on an uptrend.
A jump in the US Federal fund rate by half a percentage point to 6.50 per cent last week had a far-reaching impact on global currencies and financial markets. It also forced a shift in Thailand's foreign-exchange policy, which over the past two years was
biased towards a strong baht.
Thai short-term rates are hovering at a historical low of 2 per cent, a big gap against the US rates. But the capital controls that have been put in place will assure that speculative attacks against the baht will be difficult.
Both Finance Minister Tarrin Nimmanahaeminda and Chatu Mongol, for all their personal conflicts, share a fundamental view with the International Monetary Fund over the strong-baht policy. They believe that the baht should not depreciate too sharply because it would lead to inflationary pressure and make it more costly for Thai corporations to repay their foreign-currency debts. Besides, the Thai producers should also learn to cut costs and improve productivity to compete rather than banking on the authorities for a soft baht policy. Tarrin and Chatu Mongol were also afraid that if the foreign-currency debt, which peaked at US$70 billion (Bt2.74 trillion) before the crisis, was not brought down to a more sustainable level it might lead to a situation of chronic indebtedness.
But opponents of the strong-baht policy - from Dr Supachai Panitchpakdi, the deputy prime minister, and Dr Virabongsa Ramangkura, the former finance minister, to Pridiyathorn Devakula, the president of the Export and Import Bank of Thailand - have been suggesting that the baht should hover around Bt40 to the US dollar in order to boost exports. For a weaker baht, when converted from dollar receipts into local currency, would not only raise the competitiveness of Thai exports and farm products in the world'market but also increase the amount of money in circulation at a time when lending from banks has almost dried up.
Tarrin and Chatu Mongol have the last say, however. As a result, the baht has been kept strong, even stronger than the Malaysian ringgit. After the 1997 financial crisis, the baht plunged from Bt25-Bt26 to the dollar to Bt36-Bt37, while the ringgit slipped from 2.50 to a pegged 3.80. This currency peg, which provided stability, has become more accommodative to Malaysian exports. Malaysia has a lower foreign-currency debt than Thailand. With a floating baht, which is more flexible than the pegged ringgit, the baht can now move in a more parallel direction, if not be more competitive against the Malaysian currency.
Nonetheless, the strong-baht policy over the past two years worked to lower foreign-currency debt. Big corporations from Siam Cement to United Communications took advantage of the strong baht and low interest rates to issue bonds to repay their foreign debts. They have mostly succeeded in converting their foreign-currency debt into baht debt. Now the foreign-currency debt for the private sector has fallen from $70 billion to $30 billion.
From now on it will be a big challenge how the authorities maintain their grip on the baht amid rising US interest rates. There is a large gap between Thai rates and those in the US, making it less attractive to hold baht.
With a fragile banking sector and the slow process of corporate debt restructuring, the confidence hard won over the past two years may be slipping through the authorities' fingers. But it will not go from bad to worst for Thailand if the US economy manages to achieve a soft landing.