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Baht Appreciation
July 22, 2007

Baht under pressure again a decade after crisis
The Thai baht, which was battered by massive flight of capital in the 1997 Asian financial crisis, is again facing mounting pressure - this time from large money inflows into the kingdom, AFP reported.

Since early July, the Thai currency has remained at 10-year highs against the dollar with investors pouring money into the stock market, where share prices have gained nearly 30 percent since the beginning of this year.

The strong baht has alarmed Thailand's army-backed government as it put pressure on the kingdom's export-driven economy, which was already in a slump due to political uncertainty following a coup in September 2006.

Large money inflows also brought back bitter memories of the Asian economic crisis 10 years ago when the kingdom was forced to float the baht after coming under massive speculative pressure.

Capital had poured into Thailand during the breakneck economic growth of the early 1990s, but investors began to fear the baht was overvalued and pulled their money out.

As large amounts of capital fled out of Thailand in 1997, the baht collapsed, setting off a chain of Asian currency devaluations that crippled economies from South Korea to Indonesia.

Last week Finance Minister Chalongphob Sussangkarn cautioned against current capital inflows, saying there was "contingent liability that the current inflows could become outflows if the stock market starts to decline."

"That's the kind of situation we should be aware of to make sure that our international reserves are enough," the minister said. Analysts warned against the dangers of large capital inflows but argued Thailand would unlikely repeat the 1997 crisis thanks to its solid economic fundamentals, including robust exports.

"The risk of large capital inflows and outflows is always there in an emerging market like Thailand," said Albin Liew, a senior economist at United Overseas Bank in Singapore.

"But Thailand is not in a situation like '97 because its economic fundamentals are steady, the financial sector is strong, and it has strong current account surpluses," Liew said.

Yiping Huang, head of Citibank's Asia Pacific economic and market analysis in Hong Kong, agreed, saying Thailand's robust exports and sound economic fundamentals would keep a financial crisis at bay.

But the Citibank economist said the consequences of large capital inflows were "undesirable given the short-term nature of much of the capital flows and the painful memories of the financial crisis ten years ago."

Woo Yuen Pau, president and chief executive of think-tank Asia Pacific Foundation of Canada, said current capital inflows were focusing on the equity market, not short-term debts that led to the 1997 meltdown.

But Woo warned money inflows could quickly turn into capital flight if the government takes drastic measures, such as the capital controls it briefly imposed in December 2006 in a bid to halt the baht's rise.

"A sudden reversal of capital flows could have the same kind of impacts (as in 1997). That could happen through a variety of measures, such as the capital control rules imposed in December last year," he said in Bangkok.

The capital rules spooked foreign investors who saw them as a steep tax on equity investments. They quickly dumped shares, triggering the biggest-ever one-day drop on the Thai bourse in December.

The stock debacle forced the Bank of Thailand to quickly ease controls for equities and property. The central bank was again under pressure last week to rein in the volatile baht and cut its key interest rate Wednesday by 25 basis points to 3.25%.

Despite the rate cut, the baht closed again Friday at a near 10-year high of 33.65-67 to the dollar. Central bank governor Tarisa Watanagase has vowed to weaken the baht, but stressed the bank would take no extreme measures such as reimposing the capital controls or returning to a pre-crisis pegged currency system.

"We cannot do things that are extreme such as a currency peg system. We have to be moderate," she said last week. AFP

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