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Thai Baht Gains Value, Thailand Loses Exports


Over the past several years, the Thai baht has been gaining strength against the US dollar.  The baht is reaching highs that have not been seen since the 1997-1998 Asian Financial Crisis.  Recently, the baht has traded at 33 to the US dollar1.  This appreciation has a direct effect on…


Over the past several years, the Thai baht has been gaining strength against the US dollar.  The baht is reaching highs that have not been seen since the 1997-1998 Asian Financial Crisis.  Recently, the baht has traded at 33 to the US dollar1.  This appreciation has a direct effect on exports, which accounts for about 60% of the Thai economy2.  This is a concern to those in power, and corrective measures have been taken, though nothing has yet made a difference.

What Happened?

The root of the currency appreciation is thousand of miles away, in the United States.  The US dollar has been weakening over the past several years, just as the baht has been gaining strength.  The end of 2006 proved to be especially difficult for the US economy. Net capital inflows to the US dropped from 84.9 billion in November to 15.6 billion in December3. 
       
As the prospect of a domestic recession looms in the minds of American investors, Thailand glows with investment possibilities.  As the US economy suffered, capital moved from the US to Thailand, where the economic prospects were brighter4.  This rush of new capital into the economy drove up the value of baht.

The Effect on Exports

Thailand’s neighbor countries have also seen the appreciation of their currencies, but not at the same level.  In the past year Taiwan, China, the Philippines and Malaysia have gained a slight edge on Thailand in the export market due to the strengthening of baht5. 

Thai baht appreciation poses a serious concern to Thailand’s competitiveness as an exporter. As exports play a big part in Thailand’s GDP, a significant drop in exports would be a major blow.  As it is, experts fear that the appreciation of baht, paired with economic slowdowns in major trading partners will prevent Thailand from reaching its export goal of US $145.22 billion in 20076.  Fears about exports added to the prediction of an economic slowdown of 0.5% for Thailand in 20077.
 
Measures Taken

To reduce the amount of foreign capital coming into Thailand, the Bank of Thailand introduced capital controls in December 2006.  Unfortunately, this also had an effect on the Thai stock market, resulting in the biggest one-day drop in Thai history8.  The capital controls were lifted shortly after.  Experts say that despite this failure, the bank of Thailand is capable of helping the baht.  If interest rates were cut, for instance, it may reduce pressure on the baht by reducing the gap with foreign rates9. 
 
The government is offering a solution of its own.  Because the country is taking in more foreign capital than it can absorb, the government is suggesting a new approach called the sufficiency economy philosophy10.   Under this scheme, Thailand would become less reliant on exports.  Companies would invest in human resources, research and development, and long-term business goals11.  Through this scheme, Thailand’s economy would develop without using exports and foreign capital as a foundation.

The rise of the baht is changing the Thai economy.  Either the central bank will have to step in and adjust interest rates to keep Thailand competitive on the export market, or the very structure of the economy will need to adopt policies that are less export-based.  Currently, no policies have been able to stop the baht from appreciating.  This seemingly unstoppable force may be something that Thailand has to learn to live with and work around.

Source: www.asiaecon.org |

 

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