Baht comes under selling pressure

September 10, 1999 -- WITH the deterioration of sentiment on Asia, global traders and speculators have gone for an easy play, targeting their attack on the baht which has unwittingly become a proxy currency of the region.

Since the third week of August, the baht has rapidly been heading downhill because global currency traders have found an appetite for dollar-baht trading to make quick profits.

Unlike South Korea, Taiwan or Malaysia, Thailand still maintains a relatively open foreign exchange market. Dollar-baht trading in the spot market, where settlement is due within two working days, is not restricted, allowing traders or speculators to take short positions on the baht. Besides, baht liquidity in the offshore market remains ample.

''The baht has become a proxy of the region amid the poor sentiment on Asia. The East Timor crisis is also a major factor. But traders have found it more convenient to trade the baht than other regional currencies. The Indonesian rupiah is not an easy target because the turmoil inside the country could lead it to do something like Malaysia,'' said a dealer at a US investment bank in Hong Kong.

With the jitters having descended on the region again, heightened by the East Timor crisis, the baht has come under selling pressure -- along with other regional currencies -- for market players believe that its value will come down further.

The Thai currency, which managed to fluctuate narrowly between Bt36 and Bt38 over the past year, stayed at Bt37 throughout July. It then declined to Bt38 in the second week of August. Then a week ago the baht slipped for the first time to the Bt39 level in the New York and London markets. Yesterday, it ranged narrowly between Bt39.69 and Bt39.73 in early trade.

Dealers said speculators or traders had got involved in dollar-baht trading to take advantage of the poor sentiment on Asia, and that there was no evidence of the presence of big-time hedge funds as had been rumoured in the market.

Given a thin dollar-baht market, some small trade can easily knock the baht down. With hectic dollar-baht trading, there is a demand for baht to settle accounts offshore, pushing one-year offshore interest rates to 8 per cent compared to 5.50 per cent for local rates.

Since the baht was floated on July 2, 1997, it has acquired a new characteristic, not so different from other emerging market currencies: during an upward trend, it appreciates slowly in its value against the dollar, but in a downward trend, it falls even more quickly. That is because nobody is willing to release their dollar holdings without the certain prospect of making a profit.

Compared to the Indonesian rupiah, which also fell sharply from 6,600 to 9,000 in a month, the baht is looking undervalued against the dollar. Dealers said the chances of the baht breaking Bt39.75 were small because at that resistance level, profit-taking will take place. So the next step in currency trading is a buy-baht-sell-dollar pattern.

The local scene has added to the baht jitters. A dealer from a foreign bank in Bangkok said the baht had come under heavy selling since the beginning of this month because both Thai companies and Japanese firms doing business in Thailand had rushed to repay their foreign debts, for fear of having to bear higher costs from the local currency slide.

''I should estimate that the outflow is about US$500 million to US$1 billion, which is good enough to shatter the baht to this level,'' said the dealer.

Japanese companies are due to close their accounting books in the second half of the year ending September. And it is time to do some adjustment. Local Thai companies that have to repay foreign debts, will also see their earnings decline when they report their financial results for the third quarter.

There is a prospect of fresh capital flowing into the country to counter the outflow. Standard Chartered Bank will soon be paying the authorities almost Bt13 billion ($300 million) for a 70 per cent stake in the Nakornthon Bank. Other banks and companies are also raising money through stocks and other instruments to add to liquidity.

The sharp movement of the baht, however, disturbs the monetary authorities, for they do not want the currency to move too abruptly and are forced to intervene sporadically to calm the volatility. Finance Minister Tarrin Nimmanmahaeminda has emphasised that the authorities will not intervene in the foreign exchange market to support the baht, but will let it adjust itself in line with market fundamentals. He and the banking authorities have been trying to follow the middle path in the management of foreign exchange policy.

However, this near-Bt40 level -- which makes the dollar overvalued -- should satisfy some local economists who have been calling for the government to pursue a weak baht policy to prop up exports. M R Pridiyathorn Devakula, the president of the Export and Import Bank of Thailand, has said that a weaker baht at this present level is likely to help Thai exports, particularly farm products which will reap more than 40 per cent in baht terms.

BY THANONG KHANTHONG