Thailand’s central bank opted not to change interest rates this week, in spite of prodding from the government to reduce borrowing costs.
In an unexpected move, central bankers in Bangkok have reversed course and now say inflation is a worse threat than a strong local currency, and have raised interest rates to fight it.
Thirteen years after the baht’s collapse drove global investors out of Thailand, the currency’s recent strength is now attracting plenty of capital to the country. Local officials are disturbed.
As it stands, the benchmark Thai overnight interest rate is already at a relatively low 1.75%, but the baht has still surged 11% against the dollar this year to become the top-performing Asian currency behind the yen.
Given the export- and tourism-oriented nature of the Thai economy, the strong baht is causing consternation in Bangkok. Most economists now think the Bank of Thailand will keep rates unchanged tomorrow in order to avoid encouraging more foreign flows.
The country has already eliminated a 15% tax break for foreign bond investors and may explore additional measures designed to keep capital from flooding into its markets.
With the “core” inflation rate trending at around 1% and gross inflation — counting food and energy costs — at around 3%, the Bank of Thailand has plenty of room to keep rates low for the duration.
In the meantime, the easiest way to get exposure to the Bangkok market is via the ETF THD (quote), although if the strong baht is actually putting pressure on Thai companies like Siam Cement, its near-term upside may be limited.
Back in 1997 when I was a much younger man, the Thai baht was the first currency to blow and the domino that eventually knocked down Russia and Long-Term Capital.
Thailand did not start this round of global volatility, and if anything the political unrest that has now led to death in the streets has been a sideshow as the rest of the world simmered to a boil.
Amazingly, the country’s SET index is only 6% down from its post-crisis highs and only 16% off its all-time peaks. That makes Thailand — despite the buildings now burning in Bangkok — a better performer than China this year.
Should it really be doing relatively well while better markets with more solid political foundations and stronger economies are getting thrown out the window? Are we going to be looking back in a year and saying Thailand has done it again?
The last few weeks of unrest have been harrowing for investors new to Thailand, but old Bangkok hands say when you see blood in the streets it’s time to buy.
After sliding over 10% since the government declared a state of national emergency on April 7, the SET index recouped half of those losses today.
Traders said news that anti-government protesters had called off a planned rally in Bangkok did a lot to soothe the market’s nerves; a similar demonstration on April 10 left 25 people dead and sent tourists fleeing.
However, Pac Rim gurus like Mark Mobius have downplayed the possibility that the situation would hurt the market over the long term. As he’s pointed out, Bangkok sells off every few years