The long-term strength of the Baht worries the power brokers



The long-term strength of the Baht worries the power brokers

Representatives of the Finance Ministry, the National Economic and Social Development Board and the central bank recently convened at Government House to discuss the incredibly strong bull run of the national currency.

The government has instructed the Bank of Thailand (BoT) to find ways of inhibiting this run, especially after the baht reached a 16-year high against the US dollar. Portents of 1997 and the economic crisis that resulted in the region and emanated from Thailand were obviously on the minds of the various officials summoned to the meeting.  

The baht reached 28.66 to the US dollar but then retreated back to about 29.35-29.70 after the permanent secretary for Finance hinted measures might be undertaken to intentionally weaken the currency. There is plenty of speculation that the Thai baht will again broach the 30 barrier to the US dollar, which will ease the concerns of policy makers.

The BoT’s Monetary Policy Committee (MPC) is under pressure to cut interest rates, which currently stand at 2.75 percent, in an effort to achieve this outcome vis-a-vis the US dollar.

Claiming that Thailand is losing its competitive edge in the region because of the strong baht, the National Institute of Administration (Nida) is pushing for a rate cut. If a cut were to happen then the result should see foreign capital inflows reduced and, if the baht weakens on the back of this, then export trade opportunities will arise.

Thailand’s inflation rate remains low at about 2.69 percent, which is down by just over half a percentage point from the early part of 2013.

The strength of the baht has also been mirrored by strong gains in the Stock Exchange of Thailand (SET). As the US market has boomed, so too has the SET, which pushed past the 1600 mark and is once again looking into the 1650 territory, for the first time since 1997.

Yet again, that fact is something that could ‘spook’ local and overseas investors, although the chances of a meltdown similar to 1997 are unlikely.

If a rate cut is announced by the BoT to weaken the baht, then it’s a strong possibility the end result would be the SET breaching the 1650 point.

The British pound sterling, which had dropped to as low as 42.81 at one point and was trading between that and not much above 44, also gained some strength to go above the 46 mark. Whether it can get back to around or above the psychologically important 50 mark will depend on how much further the baht weakens in response to the activities and pronouncements of the BoT.