The Strengthening Thai Baht and What to Do About It

The thai baht spiked over 1% yesterday to its highest level since July 1997. <Spiked against the US dollar which fell against every currency traded by a similar percentage yesterday
– Stick>

Why is this happening and what does it mean for the future?

First, some background. The Thai baht has historically always been fixed to another currency. Pre World War 2 it was fixed to the British Pound and during the War it was fixed to the Japanese Yen (at 1:1 parity).

Starting in the 1950’s the baht was fixed to the USD, first at 20.8 and then 20, until 1978. It was then re-pegged at 25 baht to the dollar where it remained until the fiscal crisis of 1997.

In that year for the first time the baht was allowed to float and quickly was halved in value, reaching a low point of 56 THB: 1 USD in January, 1998. With some ups and downs, it has steadily re-appreciated back to its former value and yesterday finally reached its strongest level since it was first floated some 16 years ago.

So why the long term strengthening and what happened recently?

It is important to remember that currencies strengthen or weaken depending on the international demand for that currency. If people want to invest in Thailand, they must buy baht to do so, driving up its value. If people do not want to invest in a country, they sell that currency. The USD has been weakening over the last decade since investors feel there are better places to put their money, especially with US interest rates being virtually zero.

There are a number of factors which have been driving the baht higher but it is hard to distinguish among these factors as they are all inter-related.

Leaving politics aside, it is difficult to deny that there has been stability in the country since the last election. Although there are always simmerings under the surface, the global community sees for the first time in years a Thailand that has achieved some measure of political stability.

The Thai economy is also growing. The Asian Development Bank is projecting 5% annual growth for next 2 years, buoyed in some part by the government's 2 trillion baht infrastructure development projects. Exports are growing at 10%/annum.

Stability and a strong domestic economy lead to increased foreign investment. Many companies, especially the Japanese, are announcing plans to build and invest in Thailand. Foreign direct investment (FDI) in Thailand soared to 84 billion baht in the first two months of this year, with Japanese businesses investing the most.

This is all helped by the fact that there is a lot of money sloshing around the system. The US Fed, in order to help get the US economy out of its recent problems, has been increasing the money supply and easing credit. A lot of this money created is going to Asia, and specifically Thailand. The Euro crisis is having a similar effect, as European companies are forsaking investments in their home territory and searching for better value in Asia.

Foreign holdings of local bonds reached their highest level since 1994.

That all explains the recent strengthening of the baht, but what has happened in the last few days to accelerate the growth?

We must look to Japan. Japan’s strong yen has been smothering their growth. Quite recently the Bank of Japan took serious measures to weaken the yen, and we can see that for the first time in a year the dollar has strengthening against the yen. In the last few days the yen has plummeted from 93 to the dollar to almost 100.

So if you were a Japanese company, with no investment opportunities in your country, and a belief that if you held on to yen it would lose value, what would you do? Invest somewhere else, of course. But with increasing tensions between Japan and China, other countries (certainly Myanmar and Vietnam) but also Thailand, look very favorable. So the Japanese are pouring money into Thailand, thus forcing up the baht.

In fact, while the baht was appreciating 1.4% against the USD in the last few days, it appreciated 4% against the yen in the same period.

Other factors: the IPO of the BTS alone brought in a billion dollars of foreign investment.

Global funds bought almost another $300 million more Thai government debt than they sold last week.

It is not out of the realm of possibility to expect that the baht will be the world’s strongest performing currency this year as there are no indications that anything that has happened recently would change.

Of course, we might see a return to political instability, which should cause some weakening of the baht, or a resumption of the euro crisis and tensions in the Korea might cause a flight to the dollar as a safe haven currency.

But barring some unforeseen event, we must assume a continued strengthening of the baht, perhaps to 28:1 USD or even less.

Now much of the damage has been done, and if you hold money outside the country it has unfortunately lost a great deal of its spending power in the Kingdom already. But it is never too late to make wise investment decisions. You might want to consider:

1- Moving as much money as possible into Thailand and deposit into baht savings accounts

2- Investing in the Thai stock market or a Thai mutual fund

3- Buying Thai property and/or real estate

4- Moving to Cambodia

The plain fact is that the days of cheap living in Thailand are gone, possibly forever. While there will always be good reasons to live here, if you are simply looking for an inexpensive place there are other countries that will offer you more value for your money. Complaining about this isn’t going to help, taking action is the only proper course.

Take care,

Professor

Stick's thoughts:

This is a VERY US-centric perspective that looks at the USD : THB pairing without looking at the currencies of other Western nations. A couple of weeks ago the Pound Sterling bought less than 44 baht on the streets of Bangkok while today it gets 44.5. The New Zealand dollar was getting 23.7 baht but today gets 24.6. I think the CAD and AUD might get a smidgen more baht today than they each did a couple of weeks ago. Thai baht strength is one issue, but I think US dollar weakness is part of it.