Thailand's economic problems, especially in trade, have increased speculation about a baht devaluation. For now, Bangkok is defending its currency, but at a cost to its economic outlook, which had started to brighten, and to its stock market, a vital destination for emerging-market money.

Thailand's trade woes stem from a currency that is partly linked to the rising dollar and to competitiveness problems: The Thai minimum wage is higher than pay in Indonesia, China, and Vietnam. Hence, exports fell 0.1% in 1996, the worst showing in a decade. And the current account deficit remained at 8% of gross domestic product--the same high ratio as Mexico's in 1994 when the peso was devalued.

Exports will do a bit better in 1997. For the first four months, they are up 1% from a year ago (chart), while tight monetary policy has cut imports by 5.2%. The trade gap so far in 1997 has narrowed to 129 billion baht ($5 billion) from 166.2 billion baht in 1996.

To quell baht-bashing, the Bank of Thailand on May 9 issued a bold-print statement "absolutely" denying plans to alter the exchange-rate formula. The exact formula is a secret but is mostly weighted toward the U.S. dollar. One reason to defend the baht is that already shaky Thai banks are heavily exposed to dollar-denominated loans, which would be more expensive to repay after a devaluation. So the BOT has tried to reduce imports and attract foreign funds by hiking interest rates. But with predictable results: On May 12, the government cut its real GDP growth forecast for 1997 to a 9-year low of 6%, but private forecasters think 5% is more likely. Real GDP grew 6.6% in 1996.

Speculators still think the BOT protests too much. And devaluation worries, along with prospects for lower profits, slower growth, and a budget deficit, have hurt the financial markets. The Stock Exchange of Thailand is at a seven-year low, having lost 54% of its value in the past year. But until investors feel more secure about the baht's stability, the exchange will surely fall further.

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