Bring the baht down to earth

Bring the baht down to earth

A day before the end of last year, the baht touched a fresh six-year high as it fell below the 30-mark to 29.9 to the US dollar. A strong local currency has sparked concerns that it may create pressure on the economy.

In fact, concerns are still mounting despite the fact the baht depreciated again above the 30-mark after the start of the new year.

Siam Commercial Bank's Economic Intelligence Centre (EIC) estimates the baht will hover between 29.5 baht and 30.5 in 2020. An appreciation by 8% of the baht last year -- the highest globally -- has hurt the country's exports and tourism sectors, both of which are key driving engines of the economy.

The Bank of Thailand has admitted the baht appreciated at a rate which far exceeds the economic fundamentals. The situation has put the central bank in a dilemma -- should it take more action or let the economy suffer further?

The Bank of Thailand has also stated that a strong baht is both good and bad. While exporters, overseas Thai workers, or those who earn in foreign currencies are suffering, importers, buyers of foreign goods and services, and people with foreign debts are benefiting from a strong baht.

However, the central bank has not realised the full-scale of negative consequences as a result of a strong currency. For example, numerous people were laid off following the closure of factories as exports suffered. Meanwhile, the agricultural sector -- which can usually cushion the negative effects of the manufacturing sectors -- has also suffered from low export income.

The strengthening baht is mainly due to a structural factor as foreign investors are starting to see the currency as a "safe haven" backed by ample foreign reserves. While the central bank may take pride in the baht's comparative strength, it cannot overlook the associated negative effects and thus must take responsibility to deal with the strong baht.

As the bank admits that the strength of the baht is not in line with the fundamentals, it should not pass on the responsibility to business operators by telling them to hedge in order to protect their forex risk.

It is definitely not an easy task for the central bank to devalue the baht in this climate. The bank governor, Veerathai Santiprabhob, admitted that interest rate cuts, which used to be an effective tool to deal with a strong baht are no longer the "strong medicine" that can cure it.

However, he cannot keep clinging firmly to his rationale that the baht's strength is not consistent with the fundamentals. The bank needs to do something.

The central bank has tried to minimise currency intervention fearing that such a move might cause the country to be put on a monitoring list of currency manipulators by the US Treasury Department which could cause further trade sanctions.

Given such geopolitical dimensions, the bank needs support from the government and other state agencies.

Prime Minister Prayut Chan-o-cha made the right decision recently by ordering the formation of a joint committee comprised of the Finance Ministry, the National Economic and Social Development Council and the central bank to deal with the strong baht.

The government may have to support the central bank when it has to make a decision to apply its "stronger medicine" despite the fact that it may bring about unfavourable consequences.

In the meantime, the bank must listen to reasonable recommendations of other agencies. It does not need to fight the battle against the strong baht alone.

Editorial

Bangkok Post editorial column

These editorials represent Bangkok Post thoughts about current issues and situations.

Email : anchaleek@bangkokpost.co.th

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