Why the Baht is strong and you are suffering

Today, as we go to the exchange booths, we are seeing significant declines in the number of baht we get for our Pounds, Dollars and Euros. If you were exchanging ASEAN currencies you would not be suffering in the same way because Thailand is performing well against these currencies. Why?

With a well-developed infrastructure, a free-enterprise economy, generally pro-investment policies, and strong export industries, Thailand enjoyed solid growth from 2000 to 2008 - averaging more than 4% per year - as it recovered from the Asian financial crisis of 1997-98. Thai exports - mostly machinery and electronic components, agricultural commodities, and jewelry - continue to drive the economy, accounting for as much as three-quarters of GDP. The global financial crisis of 2008-09 severely cut Thailand’s exports, with most sectors experiencing double-digit drops. In 2009, the economy contracted about 2.8% but GDP remained positive and any effects of recession were generally not felt by a significant number of individuals as they were in the West. In Thailand there is no social security net but families stick together which also mitigated the effects without adding burden to the Thai economy.

Agriculture makes up around 12% of the economy but employs around 45% of the workforce where unemployment showed negligible growth. 44% of the economy is in industrial manufacturing but only employs around 19% of the workforce. There was an increase in unemployment in this sector but as a percentage of the total workforce it was far lower than experienced in the West.

As of April 2010, Thailand held foreign currency reserves of around USD 146.2 billion, ranking it 13th in the world in real terms and for the size of its economy, higher. In addition Thailand’s national debt compared to GDP is just under 50%, leaving it close to the best performing OECD countries and better than Germany, France, the USA and the UK by at least 20%. In other words Thailand is relatively well off in terms of real liquidity and has a very manageable debt to GDP ratio which would indicate that its economy is both robust and resilient.

Unlike most Western Nations, Thailand invested heavily in infrastructure in the boom years up to the Asian currency crash of 1997, cash which came from current account revenue without increasing debt above the governments stated and statutory limit of 50% of GDP. It could be argued that this move benefited the whole country equally. This left Thailand able to weather the 1997 storm and emerge well positioned to recover during the boom years of 2000 – 2008.

Personal debt, excessive risk by the financial sector and careless deregulation were the main contributors to the recession sparked by the collapse of Lehman Brothers in late 2008. The Thai economy suffered neither of these falls with personal debt relatively well under control and little or no participation by Thai banks in the risky derivative markets which decimated the likes of Citibank, Bank of America, HBOS, UBS and Northern Rock. The banks in Thailand stuck to the generally accepted norms of debt to equity ratios, held in check by BOT, while the western banks abandoned these standards with reckless ease in an unregulated environment.

While the global economy contracted following the recession of 2008 – 9, Thailand’s mostly export driven economy was well positioned to ride out the storm because demand continued for most of its export commodities and many of its industrial sector products. At that time, 2008 – 2009, the Thai Baht remained steady against most of its western country customers.

The core of the problem is that the Thai government between 1997 and 2010 did a great job managing our economy while the western governments did not! Globally the IMF, World Bank and most economists are worried by western trends and excesses. Europe is dealing with Greece as Portugal, Spain and Italy follow not so far behind. Because these countries abandoned their own currencies and joined the Euro Zone, they cannot make independent fiscal changes such as devaluation, probably the only real hope for Greece right now. There is also relative impotence of governments to act strongly for a number of reasons, mostly politically driven. There is such polarization in western electorates that in order to hang onto power, these governments cannot act. The UK now has a coalition which is yet to be tested on tough recovery based economic measures and the USA is facing midterm elections which makes any real change by the Democrats almost impossible. The problems faced by Greece pale into almost insignificance when compared with the woes of California and at least nine other US States. Germany too has just moved towards stalemate with the sitting government loss in a recent State election.

Only 6% of the Thai economy is based on tourism and employs around 10.4% of the workforce, many of whom are not Thai nationals but imported foreign workers. The current crisis in Bangkok is having very little short term impact on the economy because the numbers are small in overall terms and because the effect is contained to tourism and a small part of the retail (services) sector. In addition, with the oil spill in the Gulf of Mexico and contamination in Indonesia, right now there is a world shortage of shrimp, one of Thailand’s major agricultural exports. Prices are sky rocketing as I report. Add to that a slow but seemingly steady recovery in the global economy which is seeing greater demand for Thai manufactured products and the prospects are starting to look better. Osborne and Geithner might well be happy to have the offices and responsibilities of Korn Chatikavanij, their Thai counterpart!

The outlook is hard to predict unless there is an all out breakdown of law and order in Thailand - civil war. Even in that event it is even possible to see the agricultural and manufacturing sectors, the major employers and income producers, not facing too much risk because of the nature or ownership in the agricultural sector and the improved living conditions provided by the industrial sector.

But there is a lurking bogey; the strong baht itself. That’s because just as you suffer at the exchange kiosks, so do industrial customers who have to buy baht to pay for our exports. Also, instability frightens away investors who have already dropped the SET by 6 points since May 13th but the effect here is longer term and has little immediate impact on exchange rates. Thai banks do have a problem in that much of the debt default which resulted from the 1997 crash has yet to be written off but the government has that in its sights and is planning to give the BOT statutory control to finally deal with his problem. More important, the IMF and western counties have lived with Thailand’s debt issues for 13 years already and are not too concerned about the situation because BOT took some bold decisions in 1998 to deal with the situation. Thailand’s strong currency position makes resolution simpler than western countries having to deal with the same problem generated by the 2000 – 2008 excesses because their accounts are already overdrawn and ours are quite strong.

But remember one thing, back in the 90’s, prior to the Asian Crash, we were getting around 25 baht for each US Dollar so we have a way to go yet before that happens again but it could well do if the Thai government continues to do a good job managing our economy! If things go the other way we could see a return to 53 baht to your US Dollar but this time for very different reasons. Would you want to be here to collect?