People are baffled : many currencies are droping like stone versus the USD (Euro, AUD, GBP etc.)… but the thai currency doesn’t move a lot versus USD. The THB seems in “levitation”.
I wrote already about this issue, and I showed that USD and THB were in a way… tied.
Furthermore, Thailand suffers from an acute political crisis,and starts to feel the pinch of the global financial crisis (stock market is crashing like everywhere else, and GDP is going down... like everywhere else too)… that reinforces the mystery.
If one currency should drop, think many people, it should be the THB ! 😉 Right ?
I’ve explored some hypothesis (read here) : basically, capital controls have protected Thailand from the hot money, exactly at the peak of hot money [end 2006 to beginning 2008], therefore the THB was a small market, it has been ignored by speculators, therefore less leverage… therefore easier for the BOT to “manage” currencies exchange rates.
I would like to go further by looking at the famous international foreign currency reserves of the Bank Of Thailand.
First a few facts :
-the reserves = 101,33 billions USD as november 14 2008 (or 108,99 billions if we include the “net forward positions” = the commitments from the BOT to buy in the future contracts of foreign currencies)
-it puts Thailand on rank #14 in the world ! (see list here)
-in january 2006… the total was 55 billions…
-the peak was reached in march 2008, with 128 billions.
-US Dollars compose “less than 60 % ” of the reserves (according to Tarisa, BOT governor). We don’t know for sure, it’s a secret of course…
-how the BOT increases of decreases these reserves ? Simple : by buying and selling. When a thai company receives a payment in USD from a customer abroad, the company will convert those USD (sell) against THB (buy). Don’t laugh, it was compulsory (read here)… But this rule has been scraped first in july 2007, and then in february 2008.
-It happened on a large scale between end 2006, 2007, until beginning 2008. The BOT was buying like crazy the USD… to curb the fall of the USD and minimize the increase of the THB.
The official motto was “Save The Exports”. If the THB increases too much, then exports can suffer (thai products become less competitive).
Let’s remember that during this period of time the USD was CRASHING versus virtually all the currencies in the world.
Here is a first chart, with the total reserves and the exchange rates USDTHB.
You can see that something happened in march 2008 (the yellow line) : the trend changed. At this date, Thailand scraped the…. capital controls that were imposed in december 2006.
Since then, the situation has reversed ! The USD is gaining strength. And the BOT’s reserves… are going down ! It’s even more obvious if we look at the % of change year on year.
How can we explain this ? Here are a few ideas (without any order) :
-the BOT doesn’t buy anymore USD… on the contrary, it sells some USD in order to curb its increase, and to support the THB. The BOT tries to manage the trend, at its own pace, in order to avoid a rapid depreciation of the THB. This could explain the “mystery” : many other currencies are falling much more quicker than the THB, versus USD.
-But… but… maybe it’s not so simple. If we believe the BOT, the reserves are composed of “less than 60 % of USD“… Let’s assume that the other 40 % are composed of Euros… Because the Euros is falling versus USD… the total amount of the reserves (expressed in USD ) would… decrease ! Right ?
Of course it’s an absurd example, but you get my point. 😉
-in any case why the BOT is so obsessed by the exchange rate USDTHB ? Because USD is the main trade currency. Who pay in Euro ? The UE countries (10 % of total exports). But the bulk of exports (and imports) are paid in USD of course.
-Now, something bothers many people : a lower THB would boost the exports. And it would be perfect because the dark clouds of a crisis are coming fast. So why the BOT doesn’t allow the THB to depreciate versus USD (following the global trend), like many thai politicians are asking for ?
-well, maybe they want it but they prefer to do it slowly, because they are still afraid of inflationary pressures, what we call the “second round effects” (let’s not forget that until august, inflation was a big problem, with the oil crisis).
-maybe they are afraid… of the amount of imports and the trade deficit. Yes, we have a trade deficit (3,3 billions USD, since january). A lower THB would of course make the problem worse.
-maybe, they were betting on huge spendings/imports thanks to the famous “mega-projects“. To keep the THB strong would have helped.
-maybe they think that if they let the THB go it would be compounded by the natural flows (foreigners are leaving the stock market, therefore they sell THB to buy foreign currencies, and get out of Thailand) leading to a depreciation TOO FAST and TOO STRONG.
-maybe, it’s political. It could sound ridiculous, but the BOT is not really a friend of the current gvt. Tarisa was nominated under the Junta… The current gvt wants to boost the economy with lower interest rates… The BOT has resisted this in the past… They could drag their feets, in order to put the gvt in a difficult position.
-maybe, there is a calendar problem : they’re waiting to cut interest rates, before to let the THB go downward frankly. (An interest rate cut is scheduled for beginning of december, read here).
-maybe it’s just poor analysis. The BOT is a follower. The people at the BOT are conditionned, like all central bankers. They follow patterns. So confrontred to a crisis never seen, they just don’t understand the scale of the problem and continue to apply the same patterns to analyse the situation.
So as you see, the problem is complex. And it’s very difficult to make any forecast (I know you are disappointed 😉 ) because we have too many variables, plus a global environment never seen before.
However, on the short term, I think the BOT won’t resist the temptation to let the THB going down versus the USD. Because exports start to suffer, and it’s going to get worse. Many countries will choose this path.
But after… with the risk of a collapse of the dollar (yes I’m a member of this sect)… plus the political situation in Thailand… it’s impossible to “envision” the thai currency’s future.
Better to buy lottery tickets and light some candles at the temple (as far as accuracy is concerned). 😉