Thai Baht Faces Volatility Next Year
The Nation Published on December 25, 2008
It is unpredictable which direction the baht will head in next year, but exporters, importers and debtors have no doubt that it will be a phase of high volatility.
Domestic economic factors will likely contribute to the depreciation of the baht. However, external factors could also play a role in strengthening or weakening the currency.
The current account deficit, political instability and economic slowdown will be the main factors putting pressure on the baht next year.
Bank of Thailand (BOT) deputy governor Atchana Waiquamdee said domestic conditions could contribute to the baht losing value. But at the same time, recession in the world's largest economy, the United States, could put pressure on the dollar and result in a stronger baht.
However, Usara Wilaipich, a senior economist at Standard Chartered Bank (Thai), predicted that a combination of external and domestic factors would lead to the baht's depreciation, particularly in the first half of next year.
The country's widening current account deficit and capital outflows to correct the US financial crisis will weaken Asian currencies including the baht, she said.
"We will hardly see any foreign direct investment next year. And we could scarcely see portfolio investment in the first half but there is a slight hope in the second half," said the economist.
The Kingdom's current account deficit in 2009 is likely to be a result of sluggish exports and decline in tourism.
Falling foreign demand from trading partฌners has already worsened export income and will continue for some time. And drop in foreign tourists due to the decline in their disposable income is eroding tourism revenue.
Usara forecast that exports would contract next year and tourism income would drop by more than 50 per cent, largely due to the global economic downturn. This would widen the current account deficit, resulting in a weaker baht.
Plummeting sales of the dollar due to lower foreign exchange incomes will lead to the baht's depreciation. The pressure on the baht will be even more if import growth remains high or is higher than export growth.
In the first 10 months of this year, the counฌtry has already posted a current account deficit of US$1.9 billion (Bt65.8 billion). The results are starkly in contrast with the BOT's latest projection of a $1.4billion surplus for the entire year.
The BOT will revise the forecast for the new year in January from the current estimated surplus of upto $3 billion.
Atchana said political instability and the economic slowdown can eliminate foreign capital inflows and augment foreign outflows, leading to depreciation of the baht.
Usara said the baht, so far this year, has weakened at a slower pace than other regional currencies, with about 4 per cent depreciation compared with double digit depreciation of other currencies.
These figures indicate that its value was not supportive of the export sector as export prices were relatively higher than those of rivals.
"Foreigners acknowledge that the baht is overvalued, which will worsen the current account deficit rapidly and increasingly than expected. This would bring about speedy weakness of the baht," she warned.
The BOT deputy governor, however, said the baht could move in the opposite direction if the dollar was weaker due to the end of risk aversion and continuing deterioration of the US financial crisis, which had a worse than expected impact on the real sector.
The US current account deficit and soaring public debt could also bring about depreciation of the dollar.
Experts forecast that US housing prices would continue to diminish and the balance sheets of financial institutions would become worse in April.
Usara said the US financial crisis remained, reflected in the extraordinarily high Libor rate rather than the federal fund rate. And US financial institutions continued to need recapitalisation.
"As long as the correction in the US remains, the capital will continue to flow back to the US," said the economist.
As a result, the US dollar would be stronger against the euro and Asian currencies, including the baht in the first half of next year.
But capital flows could be back in the region in the second half if the US problem was manageable and Asian countries could recover more rapidly than the US and the euro zone, said Usara.
The deputy governor said the dollar might not depreciate if there was a correction in the US current account deficit. Household spending has been limited due to the US economic slowdown.
Moreover, the dollar could improve if the US economy picked up at a better pace than that of Japan and the euro zone.
"The dollar can be stronger when the US economic figures are announced, which will overwhelm other factors," said Atchana.
No one can foresee which factors will have more influence on the baht. But both internal and external factors will certainly cause fluctuations in the value of the baht.
The deputy governor said the central bank would step into the foreign exchange market if the currency was too volatile.
For example, the widened current account deficit can result in the rapid depreciation of the baht. The BOT would prevent depressing market sentiment on weakness of the baht, which would possibly lead to speculation.
The weak baht would fuel inflation, contributing to difficulties in policy management while economic growth would remain in doldrums.
"The baht is currently not a threat to inflation. It can moderately encourage exports and improve farm income," said Atchana.
Although the central bank will keep an eye on the baht, exporters and importers should continue to hedge their transactions to prevent forex risk.
They must realise that the volatility of the baht in 2009 will be much higher than in 2008, Atchana said.
_____________________________________________________
Treasuries Walk, Talk Like an Old-Time Bubble
Bloomberg.com/Michael R. Sesit Dec 26, 2008
Dec. 26 (Bloomberg) -- "I'm forever blowing bubbles, pretty bubbles in the air. They fly so high, nearly reach the sky."
So goes the refrain of a 1918 hit tune. It could have been the theme song of investors piling into the U.S. Treasury market for the past six weeks.
Investors are so eager to escape the jaws of the credit crunch that on Dec. 9 they drove the three-month Treasury bill rate to negative territory for the first time since 1929. The same day, the Treasury sold $30 billion of four-week bills at a rate of zero percent.
Meanwhile, on Dec. 24, the 10-year U.S. Treasury note was yielding 2.18 percent, compared with 4.08 percent six months ago.
The flight to U.S. Treasuries is an Armageddon trade. It reflects investors' panicked attempts to seek safety amid plummeting stock markets, collapsing property values and more than $1 trillion in losses and write-offs by banks worldwide.
Is this retreat from other markets creating a bubble in government bonds?
To Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., the answer is yes. "Treasuries have some bubble characteristics, certainly the Treasury bill does," Gross said earlier this month. "A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return."
Hard to Argue
With yields at or near record lows, it's hard to argue that Treasuries aren't in bubble-land. Surely, the time will come when yields on U.S. government securities rise and prices fall, compliments of massive Federal Reserve pump-priming, steep interest-rate cuts, huge Treasury borrowings, the eventual pick- up in inflation -- maybe even a big drop in the dollar.
The bursting of a bubble in the U.S. government bond market would be a perilous event.
First, it would cause large losses for millions of investors, especially U.S. retirees who regard Treasury securities as the ultimate safe investment.
Second, it might threaten Treasuries' status as the global "risk-free asset" and would damage the international stature of the U.S. Foreigners, who own about half of all Treasuries, might stop funding the country's growing trade and budget deficits without an increase in U.S. interest rates.
Finally, a busted Treasury-market bubble could undermine the dollar's global reserve-currency status, which in turn would spell higher U.S. interest rates, undercutting economic growth.
Hiding Place
A bigger issue may be how long U.S. government securities stay in bubble-land before bursting. Japan's experience suggests it might be years. In that case, Treasuries might not be a bad place to hide for investors who are more concerned about the return of their capital than the return on their capital.
Choosing to remain invested in a bubble market with the intent of bailing out before it implodes requires market timing. That's difficult, if not impossible, for the smartest investors.
The U.S. Treasury bubble is a direct consequence of those that preceded it. One of the axioms of the past two decades is that defusing bubbles in one part of the financial markets begets bubbles in others. Like a balloon, squeeze tightly in one area and a bulge shows up in another.
The current environment is a byproduct of bubbles bursting in metals, oil, global equities, developing-country securities and real estate.
Asia's Crisis
Go back to early 1997. Asia's smaller economies were surging, letting them maintain their over-valued currencies. When the bubble busted in Thailand that June, speculators forced the country's central bank to abandon the baht's peg to the U.S. dollar, driving the currency down more than 50 percent.
By early 1998, Thailand's difficulties had morphed into an Asian problem that by mid-July began to damage the stock prices of U.S. banks as their troubled loans mounted. Later that year, Russia defaulted and hedge fund Long-Term Capital Management had to be bailed out. The Standard & Poor's 500 Index tumbled 15 percent in six weeks, the Nasdaq Composite Index fell 30 percent in less than three months.
The Fed responded by cutting interest rates three times in late 1998. It also moved to neutralize concerns about the year- 2000 computer bug -- which never materialized -- by flooding markets with liquidity. The result averted a recession, but the pump-priming fueled the technology bubble. The Nasdaq soared 86 percent in 1999, and the S&P rallied 20 percent.
Bubble Fodder
Asian central banks added to the liquidity by buying hundreds of billions of dollars to keep their currencies competitive on world markets. To battle deflation, Japan adopted a zero-interest rate policy.
After the technology bubble popped in 2000, the Fed and the European Central Bank cut rates. These easy money policies attracted investors to stocks, bonds and real estate, fueling the latest bubbles.
Between Oct. 9, 2002, when U.S. stocks bottomed after the dot-com bubble burst, and their highs five years later, the S&P 500 doubled. By late last month, it had surrendered all of that gain.
While investors contemplate their next moves, it would be wise to keep in mind another part of the refrain of "I'm Forever Blowing Bubbles":
"Then like my dreams, they fade and die. Fortune's always hiding, I've looked everywhere."
U.S. government securities still are the world's major risk- free investment vehicle. You have to wonder, though, for how much longer.
(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Michael R. Sesit in Paris at at msesit(at)bloomberg.net
_________________
www.BahtSold.com
It is unpredictable which direction the baht will head in next year, but exporters, importers and debtors have no doubt that it will be a phase of high volatility.
Domestic economic factors will likely contribute to the depreciation of the baht. However, external factors could also play a role in strengthening or weakening the currency.
The current account deficit, political instability and economic slowdown will be the main factors putting pressure on the baht next year.
Bank of Thailand (BOT) deputy governor Atchana Waiquamdee said domestic conditions could contribute to the baht losing value. But at the same time, recession in the world's largest economy, the United States, could put pressure on the dollar and result in a stronger baht.
However, Usara Wilaipich, a senior economist at Standard Chartered Bank (Thai), predicted that a combination of external and domestic factors would lead to the baht's depreciation, particularly in the first half of next year.
The country's widening current account deficit and capital outflows to correct the US financial crisis will weaken Asian currencies including the baht, she said.
"We will hardly see any foreign direct investment next year. And we could scarcely see portfolio investment in the first half but there is a slight hope in the second half," said the economist.
The Kingdom's current account deficit in 2009 is likely to be a result of sluggish exports and decline in tourism.
Falling foreign demand from trading partฌners has already worsened export income and will continue for some time. And drop in foreign tourists due to the decline in their disposable income is eroding tourism revenue.
Usara forecast that exports would contract next year and tourism income would drop by more than 50 per cent, largely due to the global economic downturn. This would widen the current account deficit, resulting in a weaker baht.
Plummeting sales of the dollar due to lower foreign exchange incomes will lead to the baht's depreciation. The pressure on the baht will be even more if import growth remains high or is higher than export growth.
In the first 10 months of this year, the counฌtry has already posted a current account deficit of US$1.9 billion (Bt65.8 billion). The results are starkly in contrast with the BOT's latest projection of a $1.4billion surplus for the entire year.
The BOT will revise the forecast for the new year in January from the current estimated surplus of upto $3 billion.
Atchana said political instability and the economic slowdown can eliminate foreign capital inflows and augment foreign outflows, leading to depreciation of the baht.
Usara said the baht, so far this year, has weakened at a slower pace than other regional currencies, with about 4 per cent depreciation compared with double digit depreciation of other currencies.
These figures indicate that its value was not supportive of the export sector as export prices were relatively higher than those of rivals.
"Foreigners acknowledge that the baht is overvalued, which will worsen the current account deficit rapidly and increasingly than expected. This would bring about speedy weakness of the baht," she warned.
The BOT deputy governor, however, said the baht could move in the opposite direction if the dollar was weaker due to the end of risk aversion and continuing deterioration of the US financial crisis, which had a worse than expected impact on the real sector.
The US current account deficit and soaring public debt could also bring about depreciation of the dollar.
Experts forecast that US housing prices would continue to diminish and the balance sheets of financial institutions would become worse in April.
Usara said the US financial crisis remained, reflected in the extraordinarily high Libor rate rather than the federal fund rate. And US financial institutions continued to need recapitalisation.
"As long as the correction in the US remains, the capital will continue to flow back to the US," said the economist.
As a result, the US dollar would be stronger against the euro and Asian currencies, including the baht in the first half of next year.
But capital flows could be back in the region in the second half if the US problem was manageable and Asian countries could recover more rapidly than the US and the euro zone, said Usara.
The deputy governor said the dollar might not depreciate if there was a correction in the US current account deficit. Household spending has been limited due to the US economic slowdown.
Moreover, the dollar could improve if the US economy picked up at a better pace than that of Japan and the euro zone.
"The dollar can be stronger when the US economic figures are announced, which will overwhelm other factors," said Atchana.
No one can foresee which factors will have more influence on the baht. But both internal and external factors will certainly cause fluctuations in the value of the baht.
The deputy governor said the central bank would step into the foreign exchange market if the currency was too volatile.
For example, the widened current account deficit can result in the rapid depreciation of the baht. The BOT would prevent depressing market sentiment on weakness of the baht, which would possibly lead to speculation.
The weak baht would fuel inflation, contributing to difficulties in policy management while economic growth would remain in doldrums.
"The baht is currently not a threat to inflation. It can moderately encourage exports and improve farm income," said Atchana.
Although the central bank will keep an eye on the baht, exporters and importers should continue to hedge their transactions to prevent forex risk.
They must realise that the volatility of the baht in 2009 will be much higher than in 2008, Atchana said.
_____________________________________________________
Treasuries Walk, Talk Like an Old-Time Bubble
Bloomberg.com/Michael R. Sesit Dec 26, 2008
Dec. 26 (Bloomberg) -- "I'm forever blowing bubbles, pretty bubbles in the air. They fly so high, nearly reach the sky."
So goes the refrain of a 1918 hit tune. It could have been the theme song of investors piling into the U.S. Treasury market for the past six weeks.
Investors are so eager to escape the jaws of the credit crunch that on Dec. 9 they drove the three-month Treasury bill rate to negative territory for the first time since 1929. The same day, the Treasury sold $30 billion of four-week bills at a rate of zero percent.
Meanwhile, on Dec. 24, the 10-year U.S. Treasury note was yielding 2.18 percent, compared with 4.08 percent six months ago.
The flight to U.S. Treasuries is an Armageddon trade. It reflects investors' panicked attempts to seek safety amid plummeting stock markets, collapsing property values and more than $1 trillion in losses and write-offs by banks worldwide.
Is this retreat from other markets creating a bubble in government bonds?
To Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., the answer is yes. "Treasuries have some bubble characteristics, certainly the Treasury bill does," Gross said earlier this month. "A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return."
Hard to Argue
With yields at or near record lows, it's hard to argue that Treasuries aren't in bubble-land. Surely, the time will come when yields on U.S. government securities rise and prices fall, compliments of massive Federal Reserve pump-priming, steep interest-rate cuts, huge Treasury borrowings, the eventual pick- up in inflation -- maybe even a big drop in the dollar.
The bursting of a bubble in the U.S. government bond market would be a perilous event.
First, it would cause large losses for millions of investors, especially U.S. retirees who regard Treasury securities as the ultimate safe investment.
Second, it might threaten Treasuries' status as the global "risk-free asset" and would damage the international stature of the U.S. Foreigners, who own about half of all Treasuries, might stop funding the country's growing trade and budget deficits without an increase in U.S. interest rates.
Finally, a busted Treasury-market bubble could undermine the dollar's global reserve-currency status, which in turn would spell higher U.S. interest rates, undercutting economic growth.
Hiding Place
A bigger issue may be how long U.S. government securities stay in bubble-land before bursting. Japan's experience suggests it might be years. In that case, Treasuries might not be a bad place to hide for investors who are more concerned about the return of their capital than the return on their capital.
Choosing to remain invested in a bubble market with the intent of bailing out before it implodes requires market timing. That's difficult, if not impossible, for the smartest investors.
The U.S. Treasury bubble is a direct consequence of those that preceded it. One of the axioms of the past two decades is that defusing bubbles in one part of the financial markets begets bubbles in others. Like a balloon, squeeze tightly in one area and a bulge shows up in another.
The current environment is a byproduct of bubbles bursting in metals, oil, global equities, developing-country securities and real estate.
Asia's Crisis
Go back to early 1997. Asia's smaller economies were surging, letting them maintain their over-valued currencies. When the bubble busted in Thailand that June, speculators forced the country's central bank to abandon the baht's peg to the U.S. dollar, driving the currency down more than 50 percent.
By early 1998, Thailand's difficulties had morphed into an Asian problem that by mid-July began to damage the stock prices of U.S. banks as their troubled loans mounted. Later that year, Russia defaulted and hedge fund Long-Term Capital Management had to be bailed out. The Standard & Poor's 500 Index tumbled 15 percent in six weeks, the Nasdaq Composite Index fell 30 percent in less than three months.
The Fed responded by cutting interest rates three times in late 1998. It also moved to neutralize concerns about the year- 2000 computer bug -- which never materialized -- by flooding markets with liquidity. The result averted a recession, but the pump-priming fueled the technology bubble. The Nasdaq soared 86 percent in 1999, and the S&P rallied 20 percent.
Bubble Fodder
Asian central banks added to the liquidity by buying hundreds of billions of dollars to keep their currencies competitive on world markets. To battle deflation, Japan adopted a zero-interest rate policy.
After the technology bubble popped in 2000, the Fed and the European Central Bank cut rates. These easy money policies attracted investors to stocks, bonds and real estate, fueling the latest bubbles.
Between Oct. 9, 2002, when U.S. stocks bottomed after the dot-com bubble burst, and their highs five years later, the S&P 500 doubled. By late last month, it had surrendered all of that gain.
While investors contemplate their next moves, it would be wise to keep in mind another part of the refrain of "I'm Forever Blowing Bubbles":
"Then like my dreams, they fade and die. Fortune's always hiding, I've looked everywhere."
U.S. government securities still are the world's major risk- free investment vehicle. You have to wonder, though, for how much longer.
(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Michael R. Sesit in Paris at at msesit(at)bloomberg.net
_________________
www.BahtSold.com
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