Authorities play it cool | Bangkok Post: business

CURRENCIES

The Bank of Thailand and the Finance Ministry have shown great tolerance for the surge in the baht, which yesterday touched 29.09 to the US dollar, yet another post-1997 high.

Unmanageable risk from the flood of liquidity produced by the US, the EU and Japan to tackle their economic woes is one explanation. Sounder domestic economic fundamentals are another.

The central bank seems more inclined to let market forces influence the foreign exchange market.

Prasarn Trairatvorakul, governor of the Bank of Thailand, has said the rapid appreciation of the baht on Monday and Tuesday mainly reflected improved sentiment in the Thai economy relative to others in East and Southeast Asia.

Around the region, Malaysia will hold a general election mid-year, heightening business climate risk, Indonesia is mired in a current account deficit, and South Korean exports stand to be seriously affected by Japan's depreciating yen.

Mr Prasarn said foreign holdings in the domestic bond market have increased over the years.

But it remains more attractive than others in the region, as the lower proportion of foreign holdings creates better opportunities for investors to rotate their portfolios.

The Finance Ministry has affirmed that no "non-market measures", meaning capital controls, will be implemented.

Analysts say the Thai market previously underperformed its regional peers in the wake of domestic political turmoil and the flood crisis, and this year's foreign capital inflows partly reflect investors' attempts to catch up.

This was also triggered by news of the US backing away from the fiscal cliff at the start of the year.

The US Federal Reserve's announcement of an indefinite time frame for US$85 billion worth of asset purchases per month and Japan's policy of increasing money injections into the economy guarantee the global economy will still have increased liquidity on its hands for the foreseeable future.

Bank of Thailand data show foreign capital inflows to the local bond and equities markets totalled $2.83 billion in January, a 2.5-fold increase year-on-year, with most of it into short-term bonds.

But the inflows decreased to $200 million last month, with some weeks recording net capital outflows in response to election news in Italy and negative developments in the euro zone.

In 2006, the central bank extensively intervened to address a strengthening baht, followed by imposition of a 30% unremunerated reserve requirement.

The difference now, however, is the domestic economy is enjoying strong demand growth and the global economy is is expected to see some improvement in the second half of this year.

Analysts feel policymakers' greater tolerance this time around could be a bid to support structural adjustments to make the economy more productive and expand the domestic demand base.

The central bank and the ministry also hope any effects of the capital inflows will be countered by more outbound investment, imports and foreign debt repayment.

Kobsidthi Silpachai, the head of capital market business research at Kasikornbank, said the central bank has delivered a clear message of handing over the job to the private sector by hedging contracts.

However, he voiced concern about the heavy burden on exporters.

But Barclays Capital analysts wrote in a report that they do not expect the central bank to take action in the near term to stem the baht appreciation.

They expressed confidence Thai economic fundamentals are strong enough to shoulder the strengthening currency.

Baht appreciation of 4.5% to the dollar is not seen as significant, and the yen's weakness has been positive for the Thai economy, said the report.

"The baht's appreciation of more than 20% against the yen over the past six months has been a strong positive, given that imports from Japan account for 7% of gross domestic product. Moreover, as an important part of the Japanese automotive sector's supply chain, lower import prices support corporate profitability and make re-exporting more competitive," they wrote.

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