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July 13, 2007

The Cost of the Strong Baht
The closure and strange reopening of the Thai Silp Southeast Asia Import Export company has been accompanied by the sound of pigeons coming home to roost. Company executives suddenly and without warning closed the factory gates on Wednesday, throwing five thousand workers out of their jobs and having a serious negative impact upon local businesses in the area. Management blamed the strong baht, which has eroded the competitiveness of manufacturing companies such as Thai Silp which depend on low costs to make their work for international brands such as Nike and Adidas profitable.

Others talked darkly about a new factory opening up in Vietnam and past mistakes by management. The workers took to the streets to protest and traffic was disrupted; the press largely took the side of the workers, especially since it appeared that company executives were trying to weasel out of making legally required severance payments. Talks with government officials followed and the Thai Textile Institute (TTI) was persuaded to make a transfer of 40 million baht to the company. This morning the factory is back in business and the workers have their jobs back – although for how long this will last is not known.

The TTI has for a while been warning of the closure of a number small textile and garments factories and new reports have emerged claiming that hundreds of such companies are under threat. Measures taken by the government to deal with the strong baht have a whiff of panic about them. Reasons for the strong baht are complex and intertwining. In the first place, the US dollar is at a low rate and is likely to remain so because of worries about a collapse in the housing market there and because of the long-term managed slide of the currency to take the edge off the billions of dollars in government paper bought up by those countries, notably China, with export surpluses to spend. Other reasons relate to the bungled attempts at managing the economy by unaccountable junta-elected officials.

The imposition of capital controls and hedging requirements has led to businesses finding ways to circumvent the needless regulations: demand and supply effects have done the rest. New measures to encourage listed firms and individuals to invest overseas to reduce the value of the baht reveal a government which would benefit from close scrutiny of its decision-making processes.

At a time when there is a greater than ever need for further foreign investment to help increase the competitiveness of the Thai economy through knowledge and technology transfer, confidence is repeatedly dented by the behaviour of the junta. Since it appears likely that, if an election is ever called, it will be to ensure election of a military-friendly regime in a weak, old power elite-dominated coalition which disenfranchises the provinces, confidence will remain low for the foreseeable future. Vietnam has already benefited from changes in investment decisions and one reason investors prefer it is because the government listens and swiftly responds to business concerns where these are justified. Thailand’s future, which only one year ago seemed bright, is dark.

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