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Economics – Markets – Strategy
Currencies
Thai baht – tracking Asian currencies lower
The sharp appreciation of the THB in the first 3.5 months of 2008 can be attributed
to the return of democracy to Thailand in Dec/Jan and the end of capital controls
in Feb. Since peaking at 31.00 on Mar 19, the THB has been weakening with its
counterparts in Asia. In reviewing the THB, we find that the factors that were
responsible for a stronger THB in the past two years have weakened in 2008.
In 2006 and 2007, the appreciation pace of the THB quickened against the USD.
This was easily explained by the aggressive build-up in foreign reserves, which
started to overtake external debt from Apr 2006. One major contribution to the
foreign reserves was the current account balance, which reversed from a deficit
into a surplus in 2006, and proceeded to report a record USD14.9bn surplus in
2007. Playing a major role here was export growth exceeding import growth.
Interest rate cuts in 2007 also helped real GDP growth to rise for four straight
quarters to above 6% YoY in 1Q08. Quarterly inflation stayed low below 3%
YoY in 2007. Equally important is the appreciation in Asian currencies in the
past couple of years, thanks to aggressive US rate cuts.
Several things changed in 2008. The most important challenge comes from record
oil prices, which is hurting both inflation and the trade balance.
The customs trade balance reversed from a surplus into a deficit totaling USD3.0bn
in the first four months. This was attributed to a 39.6% YoY surge in imports
outstripping export growth of 21.4% during this period, which contrasted with
the 8.7% import growth and 18.0% export growth posted in 2007. Take note
that USD/THB was range-bound between 38.2 and 42.0 when import growth
overtook export growth in 2004 and 2005.
Between Aug07 and May08, headline CPI inflation surged to 7.6% YoY from
1.1%, while core inflation quadrupled to 2.8% from 0.7%. With the policy rate
at 3.25%, the Bank of Thailand (BOT) will be increasingly pressured to hike rates
to keep core inflation within the official 0-3.5% target band. Unfortunately, the
central bank is facing resistance to hike rates from the new government’s progrowth
economic policy. If policymakers fail to agree here, inflation has the
potential to spark social unrest and add fuel to coup rumours.
In the end, we anchor our THB view on one thing that policymakers agree upon.
Both the BOT and the finance ministry believe that the THB should be aligned
to Asian currencies. Given our expectation for the USD to stay firm into 2Q09 on
the back of US rate hikes, we see USD/THB extending its rise towards 35 in the
next 6-12 months.
USD/THB
forecast, eop
Latest Prev
Close 33.1 31.6
2Q08 33.0 33.0
3Q08 33.5 32.0
4Q08 34.0 30.0
1Q09 34.5 31.0
2Q09 34.9 30.9
3Q09 34.1 30.8
4Q09 33.4 30.7
BOT 1D repo rate
forecast, eop
Latest Prev
Close 3.25 3.25
2Q08 3.25 3.25
3Q08 3.25 3.25
4Q08 3.75 3.75
1Q09 3.75 4.00
2Q09 3.75 4.25
3Q09 3.75 4.25
4Q09 3.75 4.25
Latest close on Jun 11
Prev close on Mar 12
THB falls when export underperforms imports
% YoY 3mth move ave, spot
40
USD/THB
(inverted, rhs)
30
20
10
0
-10
-20
-30
Export growth
less import growth
04 05 06 07 08
30
32
34
36
38
40
42
44
Policymakers must agree to deal with inflation
% YoY, % pa
8
7
6
5
4
3
2
1
0
-1
Fed Funds Rate
BOT policy rate
TH
core CPI
00 01 02 03 04 05 06 07 08
TH CPI
37