The Thai baht's value against the dollar continues to fall. In exchange rate vernacular, this is called a "strong" baht: It takes fewer Thai baht to buy dollars now than it has in What does that mean for Thailand? Well, it's simple: The price of everything in Thailand has gone up 20% or more in the past year for anyone who doesn't deal solely and expressly in Thai Baht. If you'll look in the right-hand column of my blog, you will see an exchange rate area. Click on the 1-year (1Y) buttons and you can see that every major currency on the planet has lost ground to the Thai Baht over the past year. The dollar is merely the worst performer of those currencies.
So, all those companies who were planning big purchases in Thailand — an order from Japan for 50,000 computer hard drives, 30 tons of shrimp for Seattle, or a container loaded with fine Thai silk headed for Korea — are going to put them off until this exchange rate problem goes away (if they assume it will go away, or otherwise cancel them completely). This is going to cause major problems for Thailand: Thailand's export economy is going to grind to a halt eventually as people start "waiting out" what can only be... had better only be... a temporary dip in the exchange rate.
That, of course brings me to the question: What do I predict is going to happen in the long run?
No other southeast Asian currencies have been following the baht's lead: They are all weak against the Thai baht as well. Therefore Thailand can't take the other Asian economies for a ride. Only the Thai export prices are skyrocketing. This leaves foreign importers of Southeast Asian goods with the choice of going to other countries in Southeast Asia to make their purchases, which leaves Thailand markets vulnerable.
Most foreign importers have a fair amount of faith and consistency in where they obtain their product, and will bear some price fluctuation at the expense of having a consistent and reliable supplier, but given enough incentive (such as they have now), they can and will go looking in other places such as China, Indonesia and Malaysia (and even emerging Viet Nam) for better prices on the things they buy. Thai industries will begin losing their foreign customers to nearby countries with more equitable exchange rates and lower labor costs.
The first Thai industry to lose customers will be the farming sector, second will be the low-end manufactured goods sector, third will be the minerals and natural resources sector, fourth will be the service sector, and fifth and finally (should the exchange rate remain poor for long enough) will be the high-end manufactured goods sector.
The question of long-term damage to the Thai economy is one of how many customers the Thai export business loses. If the baht remains strong for more than a few more months, then it is possible that a good portion of Thailand's export customers will have looked into which other countries can provide their products.
Having looked, those customers might have leaped. Every day that the baht stays at this level, this prospect becomes more and more likely. This would cause permanent damage to Thai industries (especially the incredibly vital agricultural sector), because foreign customers aren't as quick to jump back and forth between suppliers of product as domestic ones are. This means that the lost customers of Thai export goods will not return to the Thai markets until the price of those goods (i.e. the exchange rate) is actually better than it was before the baht began its run-up. Therefore, long-term damage to Thai exports will only be completely reversed once the exchange rate climbs up to... oh... some number in the mid-40s, I would guess.
So in the end, Thailand will emerge as a damaged economy. Just how damaged is a function of how many customers the export industry loses to neighboring countries. Just how many customers they lose is a function of the speed in which the Thai baht rebounds. If the Thai baht reverses and starts to improve quickly, then of course, customers will stick around and wait out the current currency crisis. However, if exporters get the impression that the Thai baht is going to remain stuck at this level for a while, or starts to climb in such a way that it is expected to be a very slow recovery, then many export customers will jump ship for better deals in other countries.
It all remains to be seen.
So the final equation is this: (1) How many markets outside of Thailand supply the products that Thailand exports? (Or: 2) How many Thai products can be substituted for something similar, if no supply outside of Thailand exists? (3) How do the prices of other countries' equivalent (or substitute) products compare to Thailand's? (4) How cost-sensitive are the foreign importers of these products? (5) How faithful are the foreign importers of these products to their Thai suppliers?
If you have the answers to those questions, you have the answer to the currency crisis.
My best guess is that the Thai baht really cannot go too much lower. This recent drop of 5% in a single week was probably the deal-breaker. It could be defined as a "ridiculous drop"... too much for the market to bear. Therefore, this is the time when the Thai economy will really see an impact. Look for the exchange rate to start correcting itself soon. Expect to see exchange rates in the high 30's within a few months. That's my best guess.
(Of course, if the Thai government once again decides to get involved in adjusting the value of the Thai baht, then once again all bets are off.)
UPDATE:
I had wondered about the dual exchange rate that had been causing everybody (as well as my 2 different currency exchange tracking programs on my website) to quote 2 different exchange rates: The 32.1 rate and the 34.8 rate. A reader from "Aquanauts Dive Centre & Instructor Training Internships" made a good point, notwithstanding his rather rude description of my writing as "uninformed crap."
You're [sic] blog is a decent diversion, but becomes annoying when you pontificate on something you don't understand correctly.
1) WRONG -- The baht is not the strongest in 20 years. Before 1997 the baht was at 23-24 to the dollar, where it was fixed for decades. [JIP says: Actually, the 20 was a typo... I meant to type 10... don't know why I put 20... two times no less. Thanks for pointing that out. (I remember why now: I was thinking the crash was in 1987 instead of 1997. Sorry.)]
2) WRONG -- The Baht is NOT 32 to the dollar -- at least not anywhere that matters.
Since the currency controls imposed ealier [sic] this year, the Thai forex market has bifurcated. There is now an "onshore" and "offshore" market. The Offshore market is very very VERY small and, as a result, very volatile. Hence the reampant [sic] speculation and soaring Baht rate.
It's the same as the OTB market in the US. Penny stocks, little liquidity, big swings.
The "real" baht market is onshore, in Thailand, where most of the baht actually is. Here the rate, today, is 34.87. (Check the Bangkok bank website.)
So, basically, the forex rates on your website are worthless and actually less than that, as showing the had [sic] offshore rate actually scares more tourists away.
Trhe [sic] onshore rate is the one that matters. Tourists who bring travelers checks and cash them here get THAT rate. (If you pull from an ATM, though, you get the offshore rate.)
Likewise, exporters are getting the onshore rate as payments are done via bank transfers, LOCs and the like. These are all translated in Thailand and get the better rate.
It's not the end of the world. The sky is not falling. It's just uninformed crap like this that makes people think so.
8 comments:
You're blog is a decent diversion, but becomes annoying when you pontificate on something you don't understand correctly.
1) WRONG -- The baht is not the strongest in 20 years. Before 1997 the baht was at 23-24 to the dollar, where it was fixed for decades.
2) WRONG -- The Baht is NOT 32 to the dollar -- at least not anywhere that matters.
Since the currency controls imposed ealier this year, the Thai forex market has bifurcated. There is now an "onshore" and "offshore" market. The Offshore market is very very VERY small and, as a result, very volatile. Hence the reampant speculation and soaring Baht rate.
It's the same as the OTB market in the US. Penny stocks, little liquidity, big swings.
The "real" baht market is onshore, in Thailand, where most of the baht actually is. Here the rate, today, is 34.87. (Check the Bangkok bank website.)
So, basically, the forex rates on your website are worthless and actually less than that, as showing the had offshore rate actually scares more tourists away.
Trhe onshore rate is the one that matters. Tourists who bring travelers checks and cash them here get THAT rate. (If you pull from an ATM, though, you get the offshore rate.)
Likewise, exporters are getting the onshore rate as payments are done via bank transfers, LOCs and the like. These are all translated in Thailand and get the better rate.
It's not the end of the world. The sky is not falling. It's just uninformed crap like this that makes people think so.
There IS a dual currency rate - you will get far more IN Thailand than you will in the International markets. Same goes for the £GB - in-fact any commonly used tourist currency.
Anyone travelling her should bring cash or TCs NOT use the ATMs
Speculative trading is prevented by controls o the maximums you can exchange and it must be cash - i.e. foreign banks etc cannot buy higher here and sell on at home.
Ouch! Some people are real haters and need to get a life. If you dont agree with Jil then dont read or post on his blog. Get a life and let him have his. As for the Baht the sky isnt falling but the currency rate of old is returning. The Thai government has made some crucial mistakes in the world and the economy will pay for it. To keep breaking international patent laws and be incredibly insensitive to foreign investment is and will result in an international backlash. They are currently trying to control the Baht rate by buying dollars but cant do it forever and the result will be horrible. I expect the Baht to continue to get stronger probably to about 25 to a dollar by this time next year. After the elections expect massive policy changes. Which will cause even more loss of confidence in the stabilty of Thailand. Around July to August 2008 I predict the economy will collapse just like in 1997. The Baht will climb to 50 to a dollar and many locals will once again find themselves over invested and not able to produce liquid funds to pay debt. Result the Thai government will again beg foreign investers and tourists to come and spend money to save the country again. Life in Thailand is a circle but i still like it. From Jakal
Jakal: The currency rate of old may be returning, but unfortunately, prices have been adjusting to the new currency rates over the last 10 years, and they don't seem to be readjusting themselves back to their old levels.
If the baht goes to 25 per dollar, that will make the cost of a beer on Walking Street $4 a bottle... and that's at least what it costs in America last time I checked.
If the baht goes to 25 per dollar, long before it gets there, the name of this blog will become "Jil In Vientienne" and it will stay that way until your anticipated 2008 crash arrives.
I just thank got the £GB is holding up LOL. I do feel for the Yankee boys at the moment.
actually your all wrong the people at the top have already sanctioned pulling out of thailand they have been holding in the dark and now its over !
there too late to get sensible it will end up in more financial misery for thais on the ground and in the feilds
greed has been the enemy Alas !
Jill, there's certainly something to be said for your analysis, but I'd beg to disagree on a few points. It's a year later now, true. But within that year those of us who travel frequently between the US and Thailand have taken into account more than just the relative strength of the two currencies.
If you were in the US you'd be more worried at the moment about your home payment than a bottle of beer in Thailand. But if you could afford the trip, you'd still be treated to a balance of value for your vacation that would offset your additional beverage costs. Lodging, travel and food are still outstanding in the Kingdom, as is the level of service for the dollar.
Where the real problems come are in terms of major US investments. That's been a problem for years and it doesn't look like it will get much better. Japan seems to have ins, but establishing US presense in Thai markets is still over complicated and full of corruption. The "new" government (ha ha ha) is unlikely to help with the situation, and the whole show will continue to be the corrupt cluster ***k that it's been for years.
Place Thailand next to Viet Nam with respect to outside and particularly US investment, and it's clear that the Vietnamese have worked harder to attract new industries, and have at least made their general appearance to be more stable than Thailand.
Thailand needs some serious reform from the ground up that would require a new approach to honesty and accountablity in government. This reform needs to be applicable to both Thais as well as foreign investors. That the baht is presently slipping in value, even against the US dollar, is basic proof. More than anything, investment requires confidence, and what has recently occurred with respect to the government isn't very inspiring.
For industries seeking to trade with or build businesses in Thailand, this situation is even more important than the increasing costs of doing business there. Relatively speaking, the prices are still acceptable. The stability of things is what is the biggest problem.
From Mark W
I used to work as an FX trader in London and Jill forgets to mention the Buy/Sell or Put/Call of the US $. If the overseas markets differ so much from the local market then the baht has to adjust. If I can sell 1 US for 34 baht in Thailand, and I can buy 1 US for 32 baht overseas I get a guaranteed profit of 2 baht per $ a dream come true, money for nothing.. This caused the 1997 devaluation, a huge run on the Thai Baht. The rate Jill quotes is probably the mid rate (34.87 per US $) in a blog like this you have to talk about the buy and sell rates to make sense.
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