Friday, August 24, 2007

Rising baht bites hands that feed Thai exports

von Amy Kazmin

Economists argue that Thai companies ought to adjust to the strong currency by improving productivity.

Thai Silp South East Asia, a Thai garment exporter with 5,000 workers, had been struggling financially ever since it lost one of its biggest customers last year. But last week, as the Thai baht surged against the dollar, Thai Silp's owners seemed just to give up, locking their doors overnight and startling workers who turned up the next day to find the factory seemingly abandoned.

After angry workers blockaded the road to the airport - and under intense pressure from the government - Thai Silp reopened its doors a day later, with vague promises of state help to obtain fresh bank credit. But the shutdown raised growing concerns about the vulnerability of Thailand's labour-intensive export industries to the recent rapid appreciation of the baht to levels not seen since the 1997 onset of the Asian financial crisis.

After strengthening about 12 per cent against the dollar in 2006, the baht has risen a further 6 per cent this year, surging 3 per cent in July to hit 10-year highs.

Amid howls of anguish from exporters about the impact of currency volatility, the Bank of Thailand yesterday cut its key policy rate by 25 basis points to 3.25 per cent, while promising to ease curbs on capital outflows by Thai investors. The finance ministry also said it would refinance domestically or repay ahead of schedule an estimated $3.1bn (Euro2.2bn, Pfund1.5bn) in external debt by the end of the year to ease currency pressure.

Analysts do not expect the measures significantly to reduce what they say is long-term upward pressure on the currency, particularly while Thai import growth remains weak. But, like others taken by Thai authorities in recent weeks, the steps are symptoms of serious unease in the military-led government that took power in a coup last year, about the baht's strength.

"There is heaps of political pressure and they [the central bank] can't sit still," says Sriyan Pietersz, head of research at JPMorgan. "They have to be seen to be doing something."

Economists argue that Thai companies ought to adjust to the strong currency by improving productivity. But that is something many exporters have not had to do since the baht's devaluation in July 1997.

Thailand's overall export growth has not yet been heavily affected by the baht's rise. Many higher-value export industries - such as cars and electronics - contain a big proportion of imported components that have become cheaper as a result of the baht's strength, helping to offset rising local labour costs. But the surging currency is adding to the pressure on labour-intensive, low-cost industries such as textiles, already confronting increasing competition from rivals such as China.

Thai authorities have urged companies to reduce domestic costs and improve efficiency. But businesses complain that the baht's rate of appreciation is outpacing their ability to overhaul operations, and say authorities should do more to help.

"Instead of telling the entrepreneurs and companies in Thailand to keep changing and adapting, we have to throw back the question to the government and the Bank of Thailand: how good are they in adapting and changing their strategy and tactics to cope with the problem?" says Dej Pathanasethpong, president of the Thai Garment Manufacturers Association.