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.