More bang for bucks, but how low can the baht go?

More bang for bucks, but how low can the baht go?

As the local currency continues to weaken, some are predicting further falls and are moving their earnings and savings offshore, while others are staying put and hedging their bets.

Fluctuating: The Thai baht, US dollar and Chinese yean have all been volatile in recent trading. Photo by EPA
Fluctuating: The Thai baht, US dollar and Chinese yean have all been volatile in recent trading. Photo by EPA

Late last month, when the baht was 35.95 against the United States dollar, Jeremy (not his real name) withdrew half a million baht from his bank account and sold them for US dollars at a foreign exchange dealer on Asok Road.

“He [the dealer] said it’s already going down; you’re not going to get a better deal on Asok,” said the expat, who works as a consultant in Bangkok.

He put the cash in a giant envelope which he put into his carry-on bag and boarded a plane to Cambodia, where he exchanged another 300,000 baht with a Chinese dealer. The money was put in a fixed term deposit at a local bank, where he is getting 4.75% in annual interest.

While it may seem like an extreme example, Jeremy is among a group of professional expats who earn their salaries in Thai baht and are transferring their money overseas for fear that the baht may further depreciate.

“It’s a serious problem,” said Jeremy, who has seen his salary drop by 30% in value compared to two years ago. “Imagine if you have savings in Thai baht: you need to be earning either a 30% gain on the stock market to even it up or else you’re going to be losing a sizeable chunk of your income.”

Last week, after the Thai currency slipped beyond the 36-mark against the US dollar to hit a six-and-a-half-year low, analysts started to wonder how low it will go, and whether or not the government has control over the situation.

BETTER NOW THAN NEVER

In April 2013, when the baht was 28.5 to the US dollar, Jeremy was changing about US$1,000 a week until he exchanged roughly $15,000 in total.

Too high: The Bank of America Merrill Lynch's Rohit Garg says the baht is overvalued. Photo courtesy of Rohit Garg

For Jeremy, who plans to spend the majority of his income in his home country, converting his baht now would mean he would receive more US dollars than if he waits until the baht further depreciates.

“I have been saying since last year that the baht will probably fall to about 40. Everyone laughs at me when I say that, but at this point we are within earshot of that psychological level,” he said. “In addition, currencies tend to move in five-year trends and consistently overshoot analysts’ predictions.”

Two years later, in April 2015, Prime Minister Prayut Chan-o-cha announced on his weekly TV address that the Bank of Thailand (BoT) was closely watching the currency and has prepared measures to tame it, which some analysts saw as a coded message for devaluing the currency.

The BoT also made two unexpected cuts to its benchmark interest rate this year, putting downward pressure on the currency. Since then, the drop has accelerated, from 32.4 baht against the US dollar to 36.1 on Tuesday, the lowest since 2009. On Friday it was trading at 36.06 baht.

Santitarn Sathirathai, head of Southeast Asia and India economics at Credit Suisse in Singapore, said although the weakening trend has been driven by deliberate policy control — with the BoT buying the baht and selling dollars — the speed of the recent move was due to global market sentiment.

“This was why we think the BoT has been intervening in the foreign exchange market in the past two months, especially in July, in order to smooth the depreciation rather than resisting it outright,” said Mr Santitarn. “They do want to see the currency weaker, but dislike volatility of the kind that we saw in July and early August.”

The BoT declined to comment on the Thai currency for this article, saying a “one-week silent period” policy prohibits staff associated with the monetary policy committee from talking about the issue ahead of a meeting next Wednesday.

A REGIONAL PERSPECTIVE

Despite the baht’s 13% decline in the past year, Thailand’s currency is depreciating at a mild rate compared with that of its regional peers such as Indonesia and Malaysia.

On the move: Despite its poor performance compared to the US dollar, the Thai baht has fared better than other currencies in the region. Further devaluation should reap benefit for exports and tourism.

The Indonesian rupiah dropped to a 17-year low last Thursday and the Malaysian ringgit is at its lowest level since 1998, mainly due to political unrest in Malaysia and capital outflows from both countries. The regional trend also followed China’s devaluation of the yuan last month, a move widely viewed as a way to help boost exports as economic growth slows.

Rohit Garg, a vice-president covering Asian currency and rates at the Bank of America Merrill Lynch, said on an effective exchange rate the baht was and is overvalued, meaning the country’s exports will be relatively expensive and imports cheaper.

“Even at current levels it looks overvalued by about 4-5%,” said Mr Garg, who added a reasonable range for the baht would be 37-38 baht per US dollar.

Merril Lynch is forecasting the baht to go to 36.5 by the end of this year and to 38 by the end of next year. “In some sense, the BoT has actually moved from explicit monetary easing to a foreign currency exchange devaluation policy,” Mr Garg said.

The slowing domestic economy has caused the BoT to cut its key interest rate twice this year, while the National Economic and Social Development Board cut its 2015 GDP growth forecast to 2.7-3.2%, down from 3-4% in May. It also slashed its full-year export forecast to a 3.5% contraction from 0.2% growth.

On the political side, the National Reform Council’s surprise rejection of the draft charter means that general elections will be pushed back to about April 2017, so an elected government is not expected to assume power until the second half of 2017 at the earliest, which Merril Lynch sees as a factor that increases uncertainty and may sideline investors.

“While overall reaction in Thailand has been subdued, we believe that the long-term market implication is negative. The political uncertainty has been extended by about one year which means, in our view, that private investors will remain on the sidelines for longer, wanting more clarity about Thailand’s political landscape before diving in,” according to a recent report.

PULLING THE REINS

Colin Markee, the founder of a hospitality consultancy firm, has lived in Thailand for 10 years and has seen the baht go from 40 per US dollar to 29. “We get used to the instability of just about everything,” said Mr Markee. “Not only do you learn to roll with the punches and be patient, but people like myself both benefit and are frustrated with it simultaneously.”

A year ago, the 38-year-old opened a restaurant business, using a US credit card for some of the start-up capital.

Sell now, buy later: With analysts saying the baht is heading further down, those earning foreign currencies are enjoying a windfall. Photo by AFP

Since the repayments must also be converted to US dollars, the recent drop in the baht has made this more expensive.

However, at the same time, Mr Markee is often paid in US dollars for his consulting and thus benefits from the baht’s loss of strength.

But there is another side to the expat story. For Kate Jackson, from the United Kingdom, the weak baht gives her more incentive to stay and keep working.

“I was considering going to the UK for a number of weeks while I took respite between projects, yet with the baht low against the pound, I would be worse off and therefore it limits me to how much time and the plans I would make while in the UK,” she said.

“In this case it saddens me to be separated from home, unlike pensioners, travellers or expats who get paid in pounds or dollars.”

Analysts expect the baht to further depreciate in the next 12 months, with Credit Suisse estimating the baht will reach 37 to the US dollar, implying some mild depreciation against key trading partners.

Mr Santitarn attributes the further drop to Thailand’s “serious competitiveness problems” because of an unfavourable export product mix, uncompetitive cost structure for many industries and stagnant labour productivity.

“A weaker foreign exchange rate may not solve the problems, but it can help ease the pain,” he said, adding that a weaker baht also helps boost revenue in baht terms for exporters.

UNDER CONTROL

Last month the stock market index dropped to its lowest level this year, closing at 1,382.41 points. Foreign investors have withdrawn a net 93.96 billion baht from domestic equities since the start of the year, according to stock exchange data.

Last month alone, the figure was 44.3 billion baht — the largest monthly outflow since November 2013.

Mr Santitarn said some outflows of investment might be desirable given the baht had been too strong and that has hurt Thailand’s exporters and manufacturing competitiveness.

However, he considers this far from falling into a situation of massive capital flight out of the country, at this point. Most economies experiencing such problems tend to have years of high inflation, hurting the currency’s ability to act as a store of value, said Mr Santitarn. “Our inflation has been well managed, and if anything the problem now is that it is too low,” he said.

George McLeod, a manager at PricewaterhouseCoopers, said the BoT’s managed reduction of the baht shows they are in control of the situation and the flexible approach could stimulate exports and tourism.

“The BoT’s apparent following of the market-driven devaluation of the baht is sensible given the potential uptick in some sectors and the muted downside in others,” Mr McLeod said.

“It appears that the BoT is cognisant of the risks associated with sharp currency declines, as has happened in some other emerging markets.

“Hopefully the fundamentals of the Thai economy continue to hold, and improve, despite uncertainly in other emerging markets.”

In preparation for a possible loss, Deimos Security, a consulting firm, has opened offices in Hong Kong and is expanding to other areas in the hope they do not need to pull out of Thailand. Some firms in the same industry have already left for Hong Kong and the US, said founder David Grey.

“I am a bit worried. I think that as the Thai baht drops, Thais will lean towards China and their financial system, which is highly overrated and inflated, as well as corrupt,” Mr Grey said. “This may lead to the baht falling even harder when the Chinese system crashes in 2016.”

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