Baht appreciation to slow on central bank reforms

On July 23 the BOT said it would allow Thai state enterprises to freely hedge Thai foreign currency debts regardless of maturity. Previously they could hedge for up to one year. It also eased rules on holding foreign currency deposits. Exporters may now hold foreign currency deposits for six months -- up from three months previously.

The BOT will also allow institutional investors to invest in foreign debt securities up to a limit of US$500 million.

Usara Wilaipich, Thailand economist at Standard Chartered in Bangkok, said the relaxation of exchange controls would encourage Thai residents to invest abroad, and was part of the BOT’s efforts to "remove excessive liquidity locally and limit the Thai baht’s appreciation".

However, Wilaipich told FX Week: "The BOT doesn’t intend to reverse the dollar/baht trend, it just wants to slow the degree of the baht’s appreciation.

"It might have concerns because if the baht strengthens too fast it might hurt exports," she added. "That’s why they have to do something pre-emptively."

Wilaipich said Thailand’s current strong economy would support the baht. "This year and next year, economic growth [in Thailand] is likely to outperform the region and will be second only to China."

Irene Cheung, Asian sovereign and FX strategist at ABN Amro in Singapore, agreed: "While the measures will have a dampening effect on the Thai baht, they should not fully negate the broadly positive outlook for the Thai economy and a firming bias of the baht over time," she said. "We maintain that the Thai baht will end this year stronger, but we have trimmed our year-end target modestly to 40.8 from 40.3 per dollar."

Vasan Shridharan, regional economist at HSBC in Singapore, said the regulations "are intended to stem the baht’s appreciation, but whether they make a significant difference is very doubtful".

"Many of the Asian central banks are finding different ways to prevent currencies strengthening, including Thailand," he said. "But if the perceived rate of returns is better in Asia than in developed economies, money will find its way back into Asian economies."