Thai economic woes hit regional currencies

Thai economic woes hit regional currencies

By Anil Penna

SINGAPORE (AFP): Strong corporate demand for the U.S. dollar coupled with Thai economic woes threaten to keep Southeast Asian currency markets on edge after short-circuiting a rally by regional units.

Regional currencies won a brief lift last week on the back of the Indonesian rupiah, shored up by punitive interest-rate hikes, before giving up part of their gains on renewed weakness in the Thai baht.

Thai corporates went on a dollar-buying spree last Friday to hedge against their foreign debt, and the baht touched the 34 level last Friday for the first time against the U.S. dollar since its July 2 float.

"It is a matter of sentiment right now. We can easily see the 35 level right away," said a treasury dealer at a large European bank here.

And the rupiah's renewed strength only opened the doors for Indonesian corporate buying of the greenback at the week-end which is expected to persist, dealers said.

Thai and Indonesian corporate players have been caught with exposure to billions of dollars in unhedged foreign debt since their central banks floated their embattled currencies.

"You have still got strong underlying, genuine demand for the dollar, especially from corporates to hedge against their debt," said Desmond Supple, head of Asian currency research at Barclays (BZW) in Singapore.

Supple said measures such as the sharp hike in short-term interest rates by the Indonesian central bank were no more than an expedient, adding that pressure on the regional units would persist.

After the newly floated rupiah breached the 3,000 level against the U.S. dollar for the first time last Tuesday, Bank Indonesia almost tripled interest rates on some central bank certificates to shore up the currency and tighten liquidity. Speculators immediately unwound their long positions on the dollar against regional currencies, but the respite was short- lived.

Markets were plunged into gloom by the disclosure by the Bank of Thailand last Thursday that it had to repay US$23.4 billion to Thai and foreign investors over the next 12 months for its failed defense of the baht.

Thai foreign reserves stood at $30 billion at the end of July -- but when the forwards commitments are taken into account the underlying reserves were just $6.6 billion.

"It kind of dampened sentiment altogether," said analyst Alison Seng at research house Standard and Poor's MMS in Singapore.

It showed Thailand, whose currency has lost a third of its value since its float, had a long way to go to "clean its books" despite winning a $16.7 billion rescue package brokered by the International Monetary Fund, Seng said.

Analysts said Southeast Asian currencies were moving in tandem, with strength or weakness in any one unit spilling over into the rest, creating a broad-based downside risk.

"So long as there is even one currency not establishing a safe level, it could trigger the rest to follow suit when it moves and adjusts downwards," said Chia Woon Khien, head of Asian research at Swedish bank Skandinaviska Enskilda Banken.

Jittery markets have for long been bracing for a dismantling of capital controls imposed by Thailand in May to restrict access to the baht to foreign players, which created a market divided into offshore and onshore tiers.

A merger of the two-tier market could cause another run on the baht and pull down other currencies.

The central bank said the controls would be removed only when the baht stabilizes, but the "consensus is that the baht will never be stable if the two-tier market is there," said Seng at MMS.

"The uncertainty will bring more pressure on the currency," she said.

Capital controls are out of sync with the IMF's philosophy of free capital mobility, and there is no way the organization will "countenance these kind of controls" after arranging such a large bailout, a foreign exchange trader said.