THB : the Big Mac Index

(update july 11, 2007. The Big Max Index has been updated. Available on the website of The Economist)

Since 2006, the THB is gaining strenght against USD. Or we should say : the USD is weakening…

In december, BOT (Bank Of Thailand) took some harsh measures in order to curb the value of THB (capital controls).

The effects on the stock exchange market and on the confidence of investors were desastrous. And it gave birth to a dual valuation : on shore rates, and off shores rates. Since, the BOT has lifted the main controls.

Despites the very poor economic achievements of the junta, despites the real slowdown of the economy… THB continues to be steady. It’s because the USD continues to be under pressure.

As for today, THB remains undervalued compared to USD (36.5). Like most of the asian currencies (it’s obvious for the 2 main : chinese RMB and japanese Yen). It’s likely that THB will continue to increase. That’s for the theoritical trend.

However, there is the issue of political situation. This is the tricky part, that many foreign investors don’t want to take in account, or can’t see. A full political crisis in the country would definitely affect the THB (money would flow out the country, in panic mode).

Here is an original index : the Big Max Index. That allows comparison, based on a single product, global, the Big Mac burger. 😉

Big Max Index (31 january 2007, The Economist).

Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

http://www.economist.com/markets/Bigmac/Index.cfm

Chart USDTHB

Oil : the weak point of thai economy

When he was Prime Minister, Thaksin decided to heavily subsidize the gasoline market.

The idea was to offer a “cushion” to the thai voters/drivers, as soon as 2004, when the price of oil started to surge on the world market . It continued in 2005, for an obvious -political- reason : the general elections…

That was part of the Thaksinomics.

This policy leaded to a debt of 100 billions THB (State Oil Fund). But the thai drivers were happy… Now they have to pay back. There is a premium on every liter at the pump, to payback the fund.

This shows the weakness of the Kingdom related to energy and especially gasoline.

Any further hike of oil prices on the world market could lead to a recession. Thais thought, for too long, that gasoline was granted. The party is over.

Right now a liter cost 29 to 30 THB. 2 years ago it was less than 20 THB.

The point to understand is on the chart 2. An individual in a european country pays already much more for his gasoline (because of heavy taxes). But he can cope with further hikes, in regard of his income.

On the contrary, thais are… naked. Any further hike would be a full blow, related to the average income. Meanwhile, the thai authorities would have no means to subsidize gasoline.

Therefore, the situation is much more dangerous for Thais than for Europeans.

It’s just a matter of time before we will see the streets and the highways of Bangkok… cleared of traffic ! Mad Max Scenarii ? Yes. But a likely one.

Gasoline Prices ($/gal)
Prices of a short gallon of gasoline in US$ around the World. Source: AA Motoring Trust via USAToday and Wikipedia. Click to enlarge.

Prices of gasoline as percentage of daily GDP
Cost of a short gallon of gasoline as percentage of daily GDP. Click to enlarge.

Some other graphics (from Bangkok Post, Energy : Reform in the pipeline)

http://bangkokpost.net/yearend2006/page31.html

The oil dependance

Price structure comparison and Prices since 2003 (in THB)

What the September Coup was really about

” Who gets the kingdom’s sceptre when Bhumibol leaves the stage?“, asked Paul Handley in his article What the Thai coup was really about (Asia Sentinel, 6 november 2006).

A that time, people were following the finger of the propaganda.

Paul Handley, him, went directly to the point, the core of the issue.