Is baht appreciation
really a problem?
If so, can it be solved by the right policy?
By Jon Fernquest 
This
week's Business Focus section in the Bangkok Post focuses on the baht
appreciation and raises several questions: 1.
Has the baht been appreciating vis-a-vis
the US dollar and regional Asian currencies?
2. Will the baht appreciate against these currencies in the near future?
3. Should government policy be used to counteract baht appreciation if it happens?
2. Will the baht appreciate against these currencies in the near future?
3. Should government policy be used to counteract baht appreciation if it happens?
Today's article follows the vocabulary:
baht appreciation - increase
in the value of the baht over time (which makes Thai exports more
expensive and less competitive)
X vis-a-vis Y - X in comparison with Y
X to counteract Y - do X to reduce and offset the effect of Y
X vis-a-vis Y - X in comparison with Y
X to counteract Y - do X to reduce and offset the effect of Y
(Also see graphics with export price competitiveness, fiscal stimulus, and baht competiveness at bottom of article)
THE BAHT BALANCING ACT
Currency's strength may dismay exporters, but meddling in the markets could cause more problems than it solvesParista Yuthamanop
3/08/2009
A strong baht can mean cheaper oil, machinery, raw materials and medicines. But it can also cause a string of difficulties for exporters. For manufacturers in competitive markets such as hard disk drives, a strengthening baht eats into their margins. Buyers would then look elsewhere for more reasonable deals.
The baht, now at 34.02 to the dollar, has strengthened by about 2% since the beginning of the year and by 6% since March. Manufacturers of products with little to no imported content such as the agricultural sector are relatively unaffected.
Exports account for roughly 70% of the Thai economy and they have tumbled in the first seven months of the year. The decline is mainly from quantity, as prices have remained stable.
The baht's appreciation, in fact, has been in the middle range of regional currencies since March, but exporters want a weak baht because they say the governsment's priority should be economic growth.
The surge in the trade surplus caused by the slump in imports has underpinned the strength of the baht since the global recession took hold late last year. Current account income from trade and services totalled $2 billion in the first five months of the year.
A turnaround in global optimism has spurred investors to return to East Asia and other emerging markets. The Thai stock market recorded inflows of $124 million, compared with $136 million in Indonesia, $300 million in India and $1.5 billion in South Korea from July 16 to 22, according JP Morgan.
Are exporters and importers caught in a zero-sum game?
Kobsidth Silapachai, head of capital market research at Kasikornbank, said concern voiced by China and other countries that the US was addressing its economic crisis by expanding the budget deficit and printing money was one factor behind baht appreciation.
China has kept its yuan firm to encourage its trade partners to use its currency for settlement in place of the dollar.
Regional countries' trade relations with China have increased in the past few years. Thailand's export market share to China has risen to 13% from 6% over the past several years. There is upward pressure on the baht because of an expectation that Thai exports will gain from China's economic growth.
"China increased flexibility to the yuan in July 2005, but it fixed it against the dollar again in the middle of 2008. This was to prevent its exporters from losing competitiveness. The Chinese yuan has a large impact on the baht because of the increase in intra-regional trade," Mr Kobsidth said.
Apichai Boontherawara, president of the Export-Import Bank of Thailand, said a stronger baht would inevitably affect exporters in terms of local revenues.
"[Export] profits decrease after converting dollar earnings into baht. But the extent depends on whether they hedge currency risks. If so, the impact will be less. And if the baht strengthens faster than other regional currencies, it will affect price competitiveness," he said.
Baht volatility also makes it difficult for exporters to quote prices. If left unfettered, a hedging cost will be transferred to the exporters, he said.
"In the long term, competitiveness will come from lower cost of production. By increasing value in their products, exporters can reduce the impact of the strengthening baht on their margins to 10% from 20%," he said. "I think the key is whether the baht has appreciated more quickly than the currencies of our trade competitors."
The Bank of Thailand's view is that global demand is weak and importers have better bargaining power. Therefore, a policy to weaken the baht is unlikely to increase exporters' sales.
"The baht has not appreciated unduly. It moved from 35 to a dollar at the beginning of the year to 33 and to 34 to the dollar now. The baht has not caused Thai exporters to lose competitiveness," said Tarisa Watanagase, the central bank governor.
The Nominal Effective Exchange Rate has appreciated by 1.3% since the end of 2008. The NEER is calculated by export value in dollar terms with trade partners and competitors.
The current account had a surplus of $11 billion the first five months of the year. Capital inflows have increased in part because of Malaysia-based CIMB's investment in BankThai, said Suchada Kirakul, the central bank's assistant governor for Financial Markets Operations.
"The degree of appreciation is insignificant. In 2006, the NEER was up by 10%," she said. "Malaysia has a high current account surplus. The ringgit has appreciated less than the baht because the economy has huge capital outflows."
Thailand does not have large capital outflows because the government's Unremunerated Reserve Requirement on short-term capital outflows imposed between the end of 2006 and February 2008 deterred capital inflows, she said.
Upward pressure on the baht could decrease as inventories get whittled down, meaning businesses would likely import more in the second half of the year.
"Weakening the baht will cause the cost of living to increase. When production costs increase, producers pass them on to consumers. Who will protest for consumers?" Ms Suchada asked rhetorically.
(Source: THE BAHT BALANCING ACT, Currency's strength may dismay exporters, but meddling in the markets could cause more problems than it solves, Parista Yuthamanop, 3/08/2009, link)
Vocabulary:
a balancing act - a
difficult situation where two factors must be balanced (intervention
for exporters but intervention can fail like it did in 1997)
dismay - a strong feeling of fear or worry caused by something unpleasant
meddle - interfere, enter into a situation not of your concern (none of your business)
meddling in the markets - buying and selling in markets when it is not your job or responsibility to do this
a strong baht - when the baht has a high value compared to other currencies making Thai exports more expensive
a string of difficulties - series of difficulties, many difficulties one after another
margin, profit margin - profit compared to net sales, most often expressed as a percent of sales or total revenues less total expenses
eats into their margins - reduces their margins
with little to no imported content - few of the parts in the finished product were imported
exports account for roughly 70% of the Thai economy - exports are about 70% of Thailand's GDP
have tumbled - have falled suddenly by a large amount
the decline is mainly from quantity [of exports] as prices have remained stable - demand for exports has fallen while prices have remained the same (which means supply has also fallen, exporters have cut back on production)
baht's appreciation - the value of the baht rising compared to other currencies (usually the dollar)
the government's priority - the most important thing to do or achieve for the government
a surge - a sudden increase
trade surplus - when exports are greater than imports
surge in the trade surplus caused by the slump in imports - a decrease in imports cause an increase in the trade surplus
X has underpinned Y - X has supported and strengthened Y, X has served as a foundation for Y
a turnaround in Y - a change in Y
optimism - a feeling that the future will be better
pessimism - a feeling that the future will be worse
spurred investors to return - caused investors to return
a zero-sum game - a situation where some players win and others must lose
a win-win game - a situation where all players can win
addressing its economic crisis by expanding the budget deficit and printing money
the yuan - the name of the Chinese currency
kept its yuan firm - prevent the Chinese currency from moving
market share - the percentage of customers in a market that a company has
increased flexibility to the yuan - allowed the Chinese currency to move more
fixed it [the currency] against the dollar - made the currency exchangable for a fixed amount of dollars (so ther currency now moves up and down with the dollar)
inevitably - will happen in the future for sure
would inevitably affect exporters - will affect exporters for sure in the future
hedge risk - protect against risk of loss due to changes in the value of stocks, commodities or currencies
hedge currency risks - protect against loss due to changing value of currency
fetter - to control, to tie up to prevent movement
left unfettered - not controled or restricted, not prevented from moving
has not appreciated unduly - has not appreciated by too much
effective exchange rate, trade weighted effective exchange rate - gives an average exchange rate for all the countries that a country does trade and invesment with, calculated with a weighted average big trade partners given greater weight in the average (Source: Princeton Encyclopedia of World Economy, p. 337, link)
nominal effective exchange rate (NEER) - effective exchange rate not adjusting for inflation (nominal)
current account - trade account, exports less imports บัญชีกระแสรายวัน
current account surplus - exports more than imports มูลค่าของการค้าขายซึ่งมูลค่าการส่งออกสูงกว่ามูลค่าการนำเข้า
capital inflows - investment money coming into a country
remunerate - to pay for work that someone has done
unremunerated - work done but not paid for
X deterred Y from Z - X made Y not want to do Z
inventories get whittled down - inventories get reduced
weakening the baht - making the baht less valuable compared to other currencies (this makes Thai exports cheaper)
the cost of living - what people have to pay for things needed for everyday life like food, clothing, and shelter
costs increase, producers pass them on to consumers
asked rhetorically - asking question to make statement (not to really ask a question)
dismay - a strong feeling of fear or worry caused by something unpleasant
meddle - interfere, enter into a situation not of your concern (none of your business)
meddling in the markets - buying and selling in markets when it is not your job or responsibility to do this
a strong baht - when the baht has a high value compared to other currencies making Thai exports more expensive
a string of difficulties - series of difficulties, many difficulties one after another
margin, profit margin - profit compared to net sales, most often expressed as a percent of sales or total revenues less total expenses
eats into their margins - reduces their margins
with little to no imported content - few of the parts in the finished product were imported
exports account for roughly 70% of the Thai economy - exports are about 70% of Thailand's GDP
have tumbled - have falled suddenly by a large amount
the decline is mainly from quantity [of exports] as prices have remained stable - demand for exports has fallen while prices have remained the same (which means supply has also fallen, exporters have cut back on production)
baht's appreciation - the value of the baht rising compared to other currencies (usually the dollar)
the government's priority - the most important thing to do or achieve for the government
a surge - a sudden increase
trade surplus - when exports are greater than imports
surge in the trade surplus caused by the slump in imports - a decrease in imports cause an increase in the trade surplus
X has underpinned Y - X has supported and strengthened Y, X has served as a foundation for Y
a turnaround in Y - a change in Y
optimism - a feeling that the future will be better
pessimism - a feeling that the future will be worse
spurred investors to return - caused investors to return
a zero-sum game - a situation where some players win and others must lose
a win-win game - a situation where all players can win
addressing its economic crisis by expanding the budget deficit and printing money
the yuan - the name of the Chinese currency
kept its yuan firm - prevent the Chinese currency from moving
market share - the percentage of customers in a market that a company has
increased flexibility to the yuan - allowed the Chinese currency to move more
fixed it [the currency] against the dollar - made the currency exchangable for a fixed amount of dollars (so ther currency now moves up and down with the dollar)
inevitably - will happen in the future for sure
would inevitably affect exporters - will affect exporters for sure in the future
hedge risk - protect against risk of loss due to changes in the value of stocks, commodities or currencies
hedge currency risks - protect against loss due to changing value of currency
fetter - to control, to tie up to prevent movement
left unfettered - not controled or restricted, not prevented from moving
has not appreciated unduly - has not appreciated by too much
effective exchange rate, trade weighted effective exchange rate - gives an average exchange rate for all the countries that a country does trade and invesment with, calculated with a weighted average big trade partners given greater weight in the average (Source: Princeton Encyclopedia of World Economy, p. 337, link)
nominal effective exchange rate (NEER) - effective exchange rate not adjusting for inflation (nominal)
current account - trade account, exports less imports บัญชีกระแสรายวัน
current account surplus - exports more than imports มูลค่าของการค้าขายซึ่งมูลค่าการส่งออกสูงกว่ามูลค่าการนำเข้า
capital inflows - investment money coming into a country
remunerate - to pay for work that someone has done
unremunerated - work done but not paid for
X deterred Y from Z - X made Y not want to do Z
inventories get whittled down - inventories get reduced
weakening the baht - making the baht less valuable compared to other currencies (this makes Thai exports cheaper)
the cost of living - what people have to pay for things needed for everyday life like food, clothing, and shelter
costs increase, producers pass them on to consumers
asked rhetorically - asking question to make statement (not to really ask a question)
