Baht to stay strong in the near future
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Given the huge American trade deficit accumulated in recent years, many predict that Asian currencies will undergoe sustained appreciation in the future.
When China's dollar reserves reached the one trillion dollar mark recently, China began diversifying and moving more of its reserves into other currencies like the Japanese Yen. This trend may continue, so exporters in Asian countries have to start planning the adjustments they will have to make to remain competitive when their currencies start appreciating and the goods they export become more expensive overseas.
In a speech this week, Thailand's central bank governor provided general guidelines on how she expected exporters would adjust to a stronger baht.
For further reading on capital controls check out this introduction from the St. Louis Federal Reserve bank in the United States. Economist Paul Krugman's analysis of Mahathir's imposition of capital controls after the 1997 Asian economic crisis is also worth reading. There is also a collection of case studies at the IMF.
Recent currency movements are a big part of this week's Economist.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Is the current strength in the baht temporary?
2. What can exporters do to deal effectively with the stronger baht in the future?
3. Why did the Thai central bank intervene in currency markets this week?
4. Is the recent rapid appreciation of the Thai baht warranted by the fundamentals of the Thai economy, according to the central bank governor?
5. What other challenges besides a stronger baht will Thai exporters face in the near future?
6. What made exporters vulnerable during the 1997 economic crisis?
7. Have exports become a more import part of the Thai economy since the 1997 economic crisis?
8. What factors make an export product more vulnerable to baht appreciation?
9. What examples are there of other Asian countries adapting their export industries to currency appreciation?
10. What regulations can be reduced to help reduce baht appreciation? Why?
11. What percentage of total imports is oil?
12. What is Thailand's world ranking in its amount of foreign trade?
13. What factor is affecting Thailand's competitiveness compared to other Asian economies?
14. Under what conditions will the current interim Thai government sign an FTA with Japan?
Bangkok Post Article: November 17, 2006
Baht to stay strong in near future
Exporters need to work togetherPARISTA YUTHAMANOP
Exporters should improve financial controls and seek closer collaboration with each other to deal with the long-term trend towards a stronger baht, according to Tarisa Watanagase, the governor of the Bank of Thailand. The baht is expected to continue appreciating as the US dollar declines due to global financial imbalances.
However, she said that the central bank had intervened in the foreign-exchange market yesterday to send a signal to investors to stop speculating on the baht.
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''Exporters should maintain cash flow at an appropriate level. They should avoid over-expanding, which occurred during the economic crisis,'' she said.
''They should form a network and build alliances both domestically and internationally, especially in the case of small and medium-sized enterprises.''
She also suggested that exporters upgrade product quality and boost efficiency through cost-cutting measures.
The share of exports has increased to 67%, from 38% of gross domestic product in 1997. The sector has created five million jobs, a high proportion of the country's total labour force.
She said appreciation of the baht had had limited impacts on exports. Low import-content and labour-intensive exporters would be relatively more affected, she said.
''Exporters should study Japan's experiences. It faced a sharp yen appreciation in the early 1970s, but has gradually improved to become one of the world's leading exporters,'' she said.
Dr Tarisa said the central bank would soon relax capital control rules to facilitate capital outflows and boost exporters' competitiveness.
One measure is to increase the maximum outstanding balance allowed for foreign-currency deposits to $50 million from $10 million. The other is to extend the period for foreign-currency holdings to 15 days from seven days. It will also raise the maximum level of local investment in offshore securities.
Commerce Minister Krirk-krai Jirapaet said a key ministry policy was to improve exports of goods and services.
''Oil accounts for 28% of total imports. This means we trade rice, rubber and tapioca to buy oil. If we do not strive to be a trading economy, what can we do?'' he questioned.
Mr Krirk-krai said the economy now ranked 25th in the world in terms of value of international trade. But its competitiveness, especially in terms of education, has been falling behind China, India and Vietnam.
Mr Krirk-krai said the ministry was looking forward to a resolution of disputes over the Doha round of WTO talks, as the country would benefit as a main exporter of farm products.
He also said the government would sign the Japan FTA unless it put the economy at a disadvantage.
However, the government will postpone it if public opposition is strong.
''Some people say the interim government should not sign FTAs. But why do we have a government if it can't sign good pacts?''
Vocabulary (in discussion above)
currency appreciation - currency becomes more valuable (for example if the Thai baht drops from 38 to 36 this means the baht appreciates and becomes more valuable, it now only takes 36 baht to buy one dollar)
competitiveness - the ability of a company to sell goods and services in a market compared to other companies in this market (See Wikipedia on national competitiveness)
financial controls - internal controls, procedures in a company designed to achieve objectives such as "Effectiveness and efficiency of operations; Reliability of financial reporting ; and Compliance with applicable laws and regulations" (Source; See Wikipedia on financial audit)
collaboration - to work with other people on a project or to achieve a goal
central bank - the government's bank that controls all the other banks in a country, sets monetary policy, maintains the stability of the national currency and money supply, sets interest rates and inflation targets, saves failing banks as a lender of last resort during times of financial crisis (See Wikipedia)
intervened in the foreign exchange market, intervention - when the Thai central bank buys or sells the baht to stabilise the baht exchange rate and prevent volatility, sometimes the "mere expectation or rumor of central bank intervention might be enough to stabilize a currency."(See Wikipedia on foreign exchange market)
send a signal to investors - show investors that the government will take steps to end short-term appreciation from speculation (not a long-term trend of appreciation caused by fundamental changes in the world economy)
economic fundamentals - the most important economic factors (for example technology, education, and labor productivity are the most important factors for long-term growth, increasing the money in the long run will just lead to increases in the price level)
rampant - getting worse quickly and uncontrollably
trade protectionism - policy of restraining trade between nations, through methods such as "high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over or competition." This contrasts with free trade without barriers to entry, fairness in trade and the impact of sudden freeing up of trade are important issues that also affect trade negotiations (See Wikipedia on protectionism)
cost-cutting measures - the things that a company does to reduce costs (See Wikipedia on Spend Management)
import-content (of an export product) - the imported raw materials used in a product built for export (for example automobiles manufactured for Indonesia will contain many imported parts, because autmobile manufacturing in Thailand is mainly final assembly)
relax rules - reduce regulations (so that more capital and investment money can flow out of the country)
capital account - "public and private international investment flowing in and out of a country. This includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies." (See Wikipedia on capital account)
capital control rules, capital controls - restrictions on the trade of assets across international borders (See Wikipedia on capital controls)
balance of trade - exports - imports, when exports are greater than imports the country has a trade surplus, when imports are greater than exports, a trade deficit (See Wikipedia on balance of trade and balance of payments)
foreign-currency deposits - deposits in Thai banks that are in foreign currencies such as the dollar (normally Thai bank deposits are obviously in baht)
the Doha round of WTO talks - the current round of WTO negotiations, which is supposed to benefit devloping countries (See Wikipedia on Doha round)
an interim government - a temporary government (between elected governments)
Answer Key:
1. Is the current strength in the baht temporary?
Probably not, the baht is "expected to continue appreciating as the US dollar declines due to global financial imbalances."
2. What can exporters do to deal effectively with the stronger baht in the future?
Exporters should 1. improve financial controls and 2. collaborate with other companies. The central bank governor suggests that exporters "should form a network and build alliances both domestically and internationally, especially in the case of small and medium-sized enterprises."
3. Why did the Thai central bank intervene in currency markets this week?
The Thai central bank intervened to "send a signal" to speculators to stop speculating.
4. Is the recent rapid appreciation of the Thai baht warranted by the fundamentals of the Thai economy, according to the central bank governor?
No, according to the central bank governor "the baht is too strong considering economic fundamentals" and investors are "over-estimating market returns."
5. What other challenges besides a stronger baht will Thai exporters face in the near future?
a. Greater competition from China, Vietnam and India.
b. Greater trade protectionism
6. What made exporters vulnerable during the 1997 economic crisis?
They over-expanded and failed to "maintain cash flow at an appropriate level," meaning that the costs and debt payments associated with expansion, far exceeded business revenue.
7. Have exports become a more import part of the Thai economy since the 1997 economic crisis?
Yes, exports have increased from 38% to 67% of GDP (Gross Domestic Product). The export sector has also created 5 million jobs.
8. What factors make an export product more vulnerable to baht appreciation?
a. Low import content: If the product uses these imported raw materials, these raw materials will become less expensive when the baht appreciates.
b. Labour intensiveness: As the baht rises in value, the cost of Thai labour compared to other countries increases.
9. What examples are there of other Asian countries adapting their export industries to currency appreciation?
The Japanese yen underwent great appreciation in the 1970s but Japan still managed to mainatain its position as the world's leading exporter.
10. What regulations can be reduced to help reduce baht appreciation? Why?
Relaxing capital control rules will help reduce baht appreciation:
"Dr Tarisa said the central bank would soon relax capital control rules to facilitate capital outflows and boost exporters' competitiveness.""One measure is to increase the maximum outstanding balance allowed for foreign-currency deposits to $50 million from $10 million. The other is to extend the period for foreign-currency holdings to 15 days from seven days. It will also raise the maximum level of local investment in offshore securities."
Two different inflows and outflows of money into and out of Thailand affect the baht exchange rate (the price of the baht for people in other countries).
First, there is money paid out for imports and money received for exports. This is the trade balance. It changes relatively slowly.
Second, there is foreign money coming into Thailand buying stocks and bonds and going into bank loans to Thais. There is also Thai money going out of Thailand to invest in other countries. This is the capital account.
"Capital control rules" regulate the outflows. Outflowing money is more controversial than inflowing money since Thailand is not as rich as western countries and many feel that Thai money should be invested in Thailand.
By making it easier for investment money to flow out, the supply of baht on the foreign exhange market for baht will increase. If supply increases, the price of baht will fall, meaning the baht will appreciate less, or maybe even depreciate.
11. What percentage of total imports is oil?
Oil is 28% of imports, a very large percentage.
12. What is Thailand's world ranking in its amount of foreign trade?
Thailand is "ranked 25th in the world in terms of value of international trade."
13. What factor is affecting Thailand's competitiveness compared to other Asian economies?
Education in Thailand is "falling behind" education in China, India, and Vietnam.
14. Under what conditions will the current interim Thai government sign an FTA with Japan?
It sign an FTA with Japan unless it puts Thailand "at a disdadvantage."
