Thailand to Avoid Currency War as Ghost of 1997 Crisis Looms

Thailand’s Finance Minister Kittiratt Na-Ranong said the central bank should avoid fighting market forces to stem currency gains, heeding a lesson from the 1997 Asian financial crisis.

“The shadow of 1997 is there,” Kittiratt said in an interview in Bangkok. “I will never encourage Bank of Thailand to go and trade against the market-determined rate unless it’s only part of the daily stability, the weekly stability.”

The baht fell from a 17-month high this week, snapping a seven-week rally, amid speculation the central bank will intervene to halt gains. December export growth missed analysts’ estimates, prompting concern that the currency’s appreciation will pare shipments that account for about two-thirds of the economy.

Thailand is among emerging market nations struggling to handle increased inflows as monetary easing in the U.S., Japan and other developed economies spurs demand for higher-yielding assets. Prime Minister Yingluck Shinawatra raised the minimum wage throughout the country this month, putting more pressure on exporters as the government implements stimulus measures aimed at boosting purchasing power among Thailand’s 67 million people.

“In the short term, if I can hope for, I would like to see a little bit weaker baht,” Kittiratt said yesterday before flying to Davos, Switzerland, to attend the World Economic Forum. “For the exporters, a strong baht really pushed them into pressure. While they are adjusting themselves to higher human resources costs, a weak Thai baht may help them.”

Baht Devaluation

In 1997, Thailand devalued the baht to shore up a faltering economy, abandoning its policy of pegging the currency to the U.S. dollar, a move that left a legacy debt of $35 billion from bailing out financial companies. International reserves fell by 31 percent to $27 billion in 1997, according to data compiled by Bloomberg. Reserves have increased more than sixfold since then to $182 billion last month.

Lower interest rates would discourage inflows into the country, Kittiratt said, adding that the measure could be a “double-edged sword.” He said the central bank should employ measures to prevent the baht from rising or falling sharply while avoiding any moves that are unsustainable.

“The impact on this would be only a very small basis point of the exchange rate,” Kittiratt said, referring to central bank intervention to keep the baht stable. “There won’t be any effort against trading against this rate to any significant level.”

The baht advanced 2.5 percent this year versus the dollar, the most among 11 major currencies in Asia. The SET Index has increased 4.1 percent, more than benchmarks in Indonesia, Singapore and Malaysia.

Fund Inflows

Global funds purchased $3.4 billion more of Thailand’s sovereign debt than they sold this month through yesterday and poured a net $461 million into local equities, Thai Bond Market Association and stock exchange data show. Thailand’s 10-year government bond yield was 3.73 percent, compared with 1.85 percent for similar-maturity U.S. Treasuries and 0.73 percent in Japan.

Kittiratt’s remarks “lessen the pressure on the Bank of Thailand to intervene as the government is shifting attention to domestic demand from exports,” said Nalin Chutchotitham, a Bangkok-based analyst at Kasikornbank Pcl. “A stronger baht benefits domestic consumption and investment by making imports cheaper. The government is also calling for lower interest rates and a rising baht makes the case of a rate cut stronger.”

Thailand’s inflation accelerated to 13-month high in December as subsidies failed to counter rising prices of food and fuel. Consumer prices rose 3.63 percent from a year earlier after an increase of 2.74 percent the previous month, official data showed on Jan. 2.

‘Currency Attack’

Daily minimum wages have risen as much as 89 percent after two increases in the past year. Most factories are located in an area where wages rose to 300 baht per day last April, an average increase of 38 percent, according to the industry ministry.

Investors may be trying to “play catch-up” after the baht lagged behind other currencies last year, Bank of Thailand Governor Prasarn Trairatvorakul told reporters yesterday.

“From what we see, it’s not a currency attack,” he said. “The flows to attack the currency will try to dictate the market and try to build up the price. From what we see now, the selling and buying sides are not much different.”

Another legacy of the 1997 crisis is a lack of investment due to concerns over the country’s debt levels, which has led to persistent current-account surpluses, Kittiratt said. Thailand has had a current-account deficit only once since 1997, according to data compiled by Bloomberg.

‘Pleasant Deficit’

Over the long term, the government plans to invest in infrastructure to increase imports and reduce pressure on the currency, Kittiratt said. He has proposed spending 2 trillion baht ($67 billion) over seven and a half years on projects such as a railroad network to accelerate investments and put the current account into a deficit.

“We might not have to suffer with a future surplus,” Kittiratt said. “It will be for me a pleasant deficit because we are going to invest into those imports that would help yield a long-term return to the country.”

Before it's here, it's on the Bloomberg Terminal.