Thai economy rebound depends on baht

Thai economy rebound depends on baht

BANGKOK (Reuter): The battered Thai economy will show signs of export-led recovery in 1998 if the baht stabilizes at 27.70 to the dollar by the end of next year, Merrill Lynch & Co said.

However, Merrill Lynch said in a report that the Thai economy would not pull out of its sharp slowdown if the government's switch to a managed float regime for the currency on July 2 leads to the baht depreciating by more than 20 percent next year.

It said the Thai currency is expected to stabilize at 28.30 baht to the dollar in the next few months and firm up during the next 12-18 months.

At 0510 GMT on Wednesday, the baht traded at 29.900 to the dollar onshore while the offshore rate was at 29.780, down from the 26-baht level prior to July 2.

Merrill Lynch said gross domestic product was likely to grow 6.3 percent in 1998 after projected 4.1 percent growth this year.

It said the baht's moderate weakening would give exports only a mild boost in 1997 by making them cheaper overseas, but it would sharply raise exports by a projected 16.5 percent in 1998 against 8.2 percent growth in 1997.

Merrill Lynch said the immediate benefit of a weaker baht on exports was offset by relatively high Thai wages which were as much as two or three times higher than those in China, Indonesia, India and Vietnam.

It said: "Thai authorities appear to have achieved a good compromise between more policy flexibilities and a one-off slump in corporate earnings without large bankruptcies."

The brokerage said more than 70 percent of listed Thai companies would post third-quarter losses due, to a large extent, to the baht depreciation.

It said for the whole of 1997, profits of listed firms were likely to fall by 25-30 percent partly because of an estimated foreign debt-to-equity ratio of 35 percent and an assumption that most corporate offshore borrowing was unhedged.

Merrill Lynch said the baht float offered little immediate help in bringing Thai interest rates down but prime lending rates should ease in the fourth quarter, by 50-75 basis points to 12.25 percent.

It said with economic recovery gathering pace next year, the average Thai minimum lending rate could fall further to 10.00 percent by end-1998.

"While corporate earnings would look ugly for the next six months, we believe equities have not fully factored in the dynamic long-run benefits of a baht freer float ... our fair value estimate for mid-1998 is an SET Index of 1,005," it said.

The composite SET stock index stood at 638.43 late on Wednesday morning.