Shock float of baht sends its value plunging 18%

THAILAND bit the bullet yesterday and in effect devalued its embattled currency by allowing it to float.

The decision to float the baht came as a shock, as Thailand has been insisting for months that it would not cave in to speculative pressures. As recently as Sunday, Prime Minister Chavalit Yongchaiyudh had said that there would be no devaluation.

The Bank of Thailand (BOT) also raised its key bank rate, the rate it charges on loans to commercial banks, by a hefty two percentage points – from 10.5 per cent to 12.5 per cent – effective immediately.

While the devaluation is expected to lead to longer-term stability, the immediate impact is that it will hurt Thai companies that are burdened with foreign debt estimated at some US$70 billion (S$99.4 billion) to US$80 billion, economists said. BOT will no longer set a mid-rate for the baht. Instead, it has an “appropriate rate” in mind and will intervene in the market if the baht moves beyond that rate.

Central bank governor Rerngchai Marakanonda said Thailand would seek help from the International Monetary Fund and the Reserve Bank of Australia in handling the float.

The baht plunged on the news, but Thai stocks soared. The baht fell to a record low of 29.10 to the US dollar in offshore trading, down 18 per cent from Tuesday’s 24.60. In the domestic market, Thai banks quoted rates from 27.50 to 28.50 baht to the US dollar.

The stock market surged 41.51 points to close at 568.79 points. There were no losers.

SocGen Crosby analyst Jason Cheah said: “People bought on a knee-jerk reaction. But this is only a short-term rally.”

The latest measures follow a loss of confidence in the economy and severe attacks on the baht that forced the central bank to spend an estimated US$4 billion to defend the currency through March that cut foreign reserves to US$33.3 billion in May.

The Finance Ministry warned that an economic slowdown would result from the new exchange rate regime, but added that the managed float would benefit the country’s overall economic development. As a result of the loss in the baht’s value, Thai companies’ foreign borrowing costs will rise correspondingly. But local banks are secure as they have hedged 85 per cent of their borrowings under central bank rules, and finance companies have hedged an estimated 80 per cent of their borrowings.

A senior American Express Bank executive in Bangkok said: “Thai companies are panicking. They did not expect that the devaluation would happen so soon. Some companies that did not hedge will get hurt.”

Chris Bruton, an associate of The Economist Conferences and the Economist Intelligence Unit added: “Although Thai traditional exports – sugar, tapioca, rubber – would be assisted because exporters will take advantage of the price differential between imports and exports, the new variety of Thai exports such as high technology products would not be helped as they have a high degree of imports in their content.

“The devaluation is a very bitter medicine. It will have an inflationary impact, but later on a recession could happen.”

Andrew Maule, a banking analyst at Vickers Ballas, forecast that the baht could go as low as 30 baht to the US dollar. The last devaluation of the baht in 1994 saw the currency plunging to 27 baht before stabilising at 25 baht.

For foreign investors, the devaluation presents opportunities. David Edwards, an associate director of property consultants Brooke Hillier Parker, said: “You can now add the drop in the value of the baht of 20 per cent to the property discounts of around 25 per cent that are being offered. That means the buying price is almost 50 per cent lower, and this would encourage foreign investors to pick up property bargains.”