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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: jlallen who wrote (1)	5/1/1998 9:24:00 AM
From: Henry Volquardsen	Read Replies (2) of 3536

John, At the moment the Thai Baht is back at 38.5 on the back of some investment flows. From here I suspect that over the short term the baht is headed back to the 40 to 42 range. The Deputy Finance Minister recently said he believed 40 was fair value so I don't believe the government would be unhappy with such a move. They have gotten the impact that they desired from the devaluation in that the trade account is back in surplus so I suspect they will be happy to have the baht hang out in the low 40s. The problem is the longer term outlook. Part of the reason Thailand got where they did is because the manufacturing sector is not up to par with the other tigers. That is how they got into a trade deficit in the first place. The route they have chosen is to use currency depreciation to spur an export led recovery. This is fine as long as you also make structural reforms and investments that upgrade the domestic sector. If instead you don't make the investment and just use the currency to squeeze more out of the old creaky structure, you eventually lose the currency induced advantage and wind up right where you started and have to do it all over again. It is a cycle we have seen in both major and developing economies in the past. So the question for Thailand and all the Asian currencies that got trashed last year is whether they will take the steps needed to restructure so that they can restore vibrancy to the domestic economy or will they use the currency depreciation as a short term crutch. For some, such as Korea, it appears that they are doing the right things. For others, such as Indonesia, it appears that difficulties remain. For Thailand the answer is probably somewhere in between. Henry

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