Baht devaluation inevitable after Thai political turmoil

Baht devaluation inevitable after Thai political turmoil

HONG KONG (Reuter): A devaluation of the baht has become
virtually inevitable following last week's market mayhem and
political turmoil in Thailand, analysts and investors say.

"The longer they leave it, the worse it gets," said Daniel
Hemmant, currency fund manager with Guinness Flight Asia Ltd.

Political and economic uncertainty after Thursday's
resignation by finance minister Amnuay Viravan helped wipe
another 6.85 percent off Bangkok's battered stock market and
forced the cancellation of three weekly government note auctions.

Banker Thanong Bidaya was confirmed as Thailand's new finance
minister on Friday but, as Thailand's fifth finance minister in
two years, the appointment lacked confidence.

"To lose one finance minister may perhaps be bad luck. To lose
five in two years during the terms of three administrations
smacks of plain bad government," the South China Morning Post
said in an editorial on Saturday.

"(Thanong Bidaya's) long background in banking stamps him as a
figure of experience as a financial manager -- but does he have
the political savvy to navigate the treacherous political waters
which surround Bangkok?"

Fund managers hoped that the change could signal some
flexibility in the management of Thailand's fixed exchange rate
despite prime minister Chavalit Yongchaiyudh's renewed commitment
to defend the currency last week.

"Some people have suggested that perhaps a new finance team
may be a little bit pro-devaluation, although that might be
misplaced optimism," said James Wilson, institutional sales
manager at Deutsche Morgan Grenfell.

Persistent attacks against the baht forced the government to
institute capital and foreign exchange controls, closing off all
possible avenues for speculators.

"It's very volatile and I think the consensus would opt for
devaluation or depreciation sometime over the next six months but
when it happens is anybody's guess. It depends how strong the new
finance team is in supporting the baht," Wilson said.

Thailand's economy is in tatters, with punishingly high
interest rates, weak exports and a current account deficit at six
percent of gross domestic product.

"There's an element of face involved. It's hard to be very
enthusiastic until there is some definitive action taken and
things start to improve," Hemmant said.

He added better disclosure by the banking sector -- which
could reveal excessive ratios of non-performing loans -- would
speed up measures to reduce interest rates.

"And the standard way of healing a financial sector is to run
with very low interest rates and a steep yield curve," Hemmant
said.

But Geoff Lewis, chief economist at Dresdner Kleinwort Benson
in Hong Kong, warned that a devaluation was certainly not a
solution for all Thailand's woes.

"We don't think devaluation is a magic solution. The risks
have been increased by Amnuay's replacement -- but this is not an
argument about economic policies, it's an argument about
political infighting," said Lewis.

Thai bank -- Page 12