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Strong Thai baht stirs worries for exports

Too much good news means currency headed for more upside

The Thai baht has risen steadily against the dollar recently, outperforming regional peers and sparking worries that the country's exports would become less competitive.    © Reuters

BANGKOK -- The Thai baht has staged a strong recovery against the dollar after suffering a brief sell-off earlier this year, but central bankers and senior government officials are increasingly worried that continual strength in the currency could hit exports.

"We feel uncomfortable that some park their funds in our short-term bonds," Central Bank Gov. Veerathai Santiprabhob told reporters on the sidelines of a Stock Exchange of Thailand event recently. "We have more inflow than our neighbors who do not have such strong buffer like Thailand's."

He said, though, that there was no "imminent" need for Thailand to increase interest rates, an about-face from a comment made earlier that suggested the central bank may tighten monetary policy after the release of data showed gross domestic product grew by a solid 4.6% in the second quarter from a year ago.

Other central banks in the region have had to hike rates to protect their currencies, but the baht's strong performance has put the Bank of Thailand in a different position.

The baht hit 31.11 against the dollar mid-April, a level not reached since October 2013 and marking the strongest rate it is trading at under the military regime. Exporters have since complained that the strong currency has made their products uncompetitive.

The baht fell to 33.52 against the dollar mid-July, in line with a broad sell-off in emerging market currencies and as the dollar strengthened. But it has rebounded lately to around 32.63 against the greenback. So far this year, the baht has lost just 0.2% in value against the dollar, compared with a 8.4% fall in the Indonesian rupiah and 7.6% drop in the Philippine peso.

Despite sluggish economic growth since the junta seized power in 2014 and amid global uncertainties, the baht has held its ground, thanks to Thailand's high current account surplus and foreign exchange reserves.

Thailand's current account balance accounted for 10.8% of GDP in 2017, the eighth highest in the world, based on data compiled by the International Monetary Fund. By comparison, the ratio is negative for countries such as Turkey and South Africa, whose currencies have seen sharp sell-offs.

Yet, the baht has further upside, as investors will continue buying the currency in anticipation of a rate hike, analysts say.

Motoko Miyano, senior vice president at Sumitomo Mitsui Bank's Bangkok Branch, expects the central bank to tighten monetary policy in line with its regional and global peers, to create some space to lower the rates for future downturns while the economy is expanding. Benchmark interest rates have been stuck at 1.5% since a rate cut in April 2015, near the all-time low of 1.25%. The central bank has not raised rates since 2011.

According to a Reuters poll, 10 of 24 analysts surveyed expect an interest rate rise by the end of the year and three of them think that the decision could be made as soon as the next central bank meeting on Sept. 19.

"Gov. Veerathai seems to be smoothing the ground toward a rate hike by making frequent comments," SMBC's Miyano said. "He doesn't want to trigger an increase in the baht."

But some government officials are resistant to the idea of a rate rise. Finance Minister Apisak Tantivorawong told reporters Thursday: "I ask the press to tell the Bank of Thailand that exporters have complained about the impact of the strong Thai baht. If the rate hike will be sometime soon, there will be an inflow so the central bank needs to be cautious."

There is yet another reason for investors to plow into the baht. Thailand is heading for a general election next year, raising hopes for a return to civilian rule for the first time in more than four years.

On Wednesday, the final two laws required to hold the general election were published in the Royal Gazette, the government's public journal, after they had been passed by the king. Although a date has yet to be fixed, an election will have to take place within 240 days, or by early May, according to the constitution.

"Clear progress on elections to be held in the first half of 2019 would provide better sentiment and support extra inflows to the baht and other Thai assets on top of inflows based on the [economic] fundamentals," said Tim Leelahaphan, an economist at Standard Chartered Bank.

He said that it would be similar to the boost in inflows in August 2016 when a national referendum resulted in a vote for the adoption of a new constitution, a key step toward holding the election.

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