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The baht tracked steadily downward in 2000 as political uncertainties and poor market sentiment led local businesses to seek US dollars.

 

CURRENCY

Local and regional vagaries hit baht

PARISTA YUTHAMANOP

Domestic political uncertainties and the volatility of regional currencies pushed the baht steadily downwards against the US dollar throughout 2000.

From a high of 36.9 baht to the dollar in January, the baht fell steadily, hitting a low of 44.35 for the year in November before climbing back to around 43.5 in December 2000.

Six interest rate increases by the US Federal Reserve over the past two years in an effort to engineer a "soft landing" for the US economy helped push the dollar higher against other major currencies.

By early December, the US Federal Fund rate stood at 6.5%, well above the domestic baht rate of 4.5%.

The dollar also gained as tensions in the Middle East led investors to seek safe havens in dollar-denominated assets.

By mid-December, new economic data from the US pointing to a downturn in growth led Fed chairman Alan Greenspan to say that clear signs of a slowdown were evident, with company profits declining.

Most market analysts took this to mean that the Fed was now shifting to a neutral, or even accommodating stance on monetary policy, and would likely cut rates in 2001.

Domestic and regional factors also played an important role in the bahtûs decline.

With recovery tenuous, the Bank of Thailand steadfastly maintained its loose monetary policy stance, with 14-day repurchase rates kept at 1.5% throughout the year.

The Monetary Policy Board maintained that low interest rates were crucial for stimulating growth and supporting debt restructuring, despite the impact on the currency.

Political uncertainties, both in the region also helped put pressure on the baht and other Asian units throughout the year. Political turmoil in Indonesia and the Philippines and uncertainty over the Japanese economy led the overall depreciation trend of Southeast Asian currencies.

Riots in Indonesia and growing political tension led many investors to exit the country on fears of slowing structural reforms, with the rupiah tumbling to a low of 9,360 to the dollar in July.

The Philippine peso also fell to a record low of 51 to the US dollar over a growing political scandal surrounding president Joseph Estrada, and while Korea looked poised to register double-digit economic growth for 2000, confidence in financial system reforms diminished.

Political uncertainties in Thailand heading into the January election also contributed to the bahtûs decline, despite a record export performance, high foreign reserve levels and steady current account surpluses.

Leading candidate Thaksin Shinawatra, head of the Thai Rak Thai Party, led many analysts to express concern whether his populist policies would cause the country's fiscal position to deteriorate in the medium-term.

Poor market sentiment over the bahtûs short-term position led local corporations and importers to seek dollars to cover purchases or refinance foreign debt.

Comments by the central bank that it favoured a slightly weaker baht to boost exports also encouraged market participants to take long positions in US dollars.

Curbing volatility

While the central bank publicly maintained its policy to allow the baht to move freely based on market forces, officials issued numerous warnings throughout 2000 that it was determined to strictly enforce capital controls to guard against speculation.

Regulators significantly expanded reporting requirements imposed on foreign exchange transactions. Starting Nov 1, local banks were obliged to submit detailed reports on each transaction exceeding $5,000.

The central bank said the new requirements were aimed at boosting its ability to monitor market trends, as well as serving as a warning to would-be speculators and banks that any violations would be dealt with harshly.

In late November, the settlements system was hit by a sudden crisis, as offshore players were unable to access baht to settle transactions owing to tougher curbs imposed by the central bank.

Money market rates jumped sharply, with many banks unable to close their positions at the end of the day due to the lack of liquidity. The central bank opened a special window at the end of November to allow traders to access baht to close their positions, but at a discount of 1.2 baht per dollar from the market rate, equivalent to a penalty rate of over 1,000%.

Regulators announced the 50 million baht limit on non-commercial trades would be strictly enforced on same-day and forward deals.

Loose policies

Weak domestic demand and low industrial capacity utilisation helped to keep inflation low throughout the year, despite the weaker baht and the sharp jump in global oil prices.

Despite rising producer costs, headline inflation declined from an average 2.2% in the third quarter to 1.7% in October and November, helped by a fall in food prices.

Core inflation, with energy and food prices stripped out, was 0.8% in November, well within the 0-3.5% target range set by the Monetary Policy Board.

Inflationary pressures in 2001 was expected to ease, the policy board said in December, owing to the anticipated slowdown in the US economy and in global trade.

The MPB believed that maintaining low interest rates would help stimulate private investment and domestic consumption and strengthen economic recovery.

Low domestic rates has also led to a wave of debt refinancing by large corporations, either from bank loans or bond issues.

Foreign-currency debt repayments have averaged around $1 billion per month since the beginning of 2000.

Total stock of foreign currency debt has declined to $83.9 billion as of September 2000, compared with $95.6 billion at the end of 1999.

Private sector foreign debt as of September totalled $48.8 billion. However, debt with a maturity of less than one year was only $14.81 billion as of September 2000.

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