A year after Thailand’s worst floods in seven decades devastated the economy, currency forecasters are betting the baht will outperform its Southeast Asian peers next quarter as Japanese companies commit more funds.
Nissan Motor Co. (7201), Japan’s second-largest automaker, pledged last month to invest 11 billion baht ($359 million) in a second factory as the government is making efforts to prevent a repeat of the disaster that closed plants and deluged industrial estates. Toyota Motor Corp. (7203), Asia’s biggest car manufacturer, announced it will boost production in Thailand to cater to increasing demand in emerging markets.
Prime Minister Yingluck Shinawatra is spending more than 2 trillion baht to construct roads, bridges, drainage systems and flood barriers to spur growth that economists predict at almost 15 percent this quarter, compared with a 9 percent contraction in the year-earlier period. The currency may appreciate 1.4 percent by the end of March, beating gains of 1.3 percent in the Indonesian rupiah, 1 percent in the Malaysian ringgit, and 0.5 percent in the Singapore dollar, according to Bloomberg surveys based on total returns including interest income.
“The infrastructure plan will add to foreign investment and growth,” Enrico Tanuwidjaja, an economist in Singapore at Royal Bank of Scotland Group Plc, said in a Nov. 28 interview. “Japanese investments aren’t leaving after the floods, they’re increasing. We remain constructive on the baht.”
The currency, which traded at 30.65 per dollar as of 10:09 a.m. in Bangkok, has strengthened 3 percent in 2012, after declining 5 percent last year, according to data compiled by Bloomberg. RBS predicts the baht will climb 2.2 percent to 30 before the end of March.
Japanese companies, the Southeast Asian nation’s biggest foreign investors, accounted for 65 percent, or 249 billion baht, of the projects approved by the Thai Board of Investment in the first nine months of 2012, according to the Japan External Trade Organization. The board sanctioned 93 billion baht of Japanese investment in the same period last year.
Japan’s Honda Motor Co. (7267) and Western Digital Corp. (WDC) of the U.S. were among international companies forced to close plants in the fourth quarter of last year when the floods swamped industrial estates north of Bangkok and affected 839 factories. Asset losses amounted to 630 billion baht, while economic damages totaled 795 billion baht, according to a finance ministry estimate in January.
Flood walls for the factory estates have been built at a cost of about 5 billion baht, while the government is preparing to award 324 billion baht in contracts to local and overseas firms to revamp the water-management system in areas including the Chao Phraya river basin, an area the size of Florida with Bangkok at its base.
“Japanese investment into Thailand has been rapidly increasing,” Yoichi Yajima, representative of the business support center in Thailand at Jetro, said in a Nov. 27 interview in Bangkok. “I’m not sure if all the companies are really satisfied with the flood-prevention works, but it doesn’t matter, they still want to come here because there’s more business opportunities than at home.”
BlackRock Inc. isn’t so positive on the outlook for the Thai baht. Faster growth will probably accelerate inflation while the central bank may find it difficult to raise interest rates amid the reconstruction from the floods, according to Neeraj Seth, the Singapore-based head of Asian credit.
The Bank of Thailand kept its benchmark interest rate unchanged on Nov. 28 at 2.75 percent after cutting it by a quarter of a percentage point in October for the second time this year. Core consumer prices, which exclude fresh food and fuel, rose 1.85 percent in November from a year earlier, compared with a 1.83 percent gain in October and the 2012 peak of 2.77 percent reached in March.
“I would probably be still neutral on the Thai baht,” Seth, whose company managed $3.67 trillion globally as of the end of September, told reporters in Singapore on Nov. 26. “The key is at what point would you see the central bank making a U- turn in terms of monetary policy? They might actually be a little bit behind the curve, which means it’s not necessarily positive for the currency in the short term.”
Thailand’s pace of growth is also drawing overseas investors to stocks and bonds. The $346 billion economy may expand 5.35 percent this year, compared with a rate of 0.1 percent in 2011, according to the median estimate of economists surveyed by Bloomberg.
The benchmark SET Index of shares climbed 30 percent in 2012, the best performance among five of Southeast Asia’s biggest markets. Global funds boosted holdings of Thai equities by $1.8 billion this year, set for the largest annual net purchases since 2010, exchange data show. Foreign investors poured $28 billion into sovereign debt, according to figures from the Thai Bond Market Association.
Thailand may also attract foreign investors who see it as a gateway to Myanmar, where President Thein Sein’s democratic reforms have led to an easing of economic and political sanctions, according to Royal Bank of Scotland’s Tanuwidjaja.
Toyota’s Thai unit will provide support as needed to serve the market in Myanmar, Kyoichi Tanada, president of Toyota Motor Thailand Co., said in Bangkok on Nov. 7. Akio Toyoda, head of Toyota, based in Aichi prefecture, Japan, announced a plan to boost annual production in the Asian nation to 1 million vehicles in the “near future” from this year’s estimate of 880,000.
“The Greater Mekong sub-region, which includes Thailand and Myanmar, would allow Japan to serve the Chinese market without having to locate in China,” Tanuwidjaja said.
Nomura Asset Management Co. is holding more of the baht than the benchmark it uses to track performance this year because of its low volatility and appreciation outlook.
A measure of expected exchange-rate movements used in pricing options was at 3.9 percent for the baht, compared with 4.7 percent in the Indonesian rupiah and 4.4 percent for the Philippine peso. The measure for Thailand has dropped from the year’s high of 7.93 percent in January, according to data compiled by Bloomberg.
“We like the Thai baht as we believe monetary policy has been even-keeled,” Thomas Kemmsies, the head of fixed-income securities in Frankfurt at Nomura, which managed $281 billion globally as of the end of 2011, said in an e-mail on Nov. 29. “Its growth and inflation outlook mix has improved and is holding up well.”