Thailand neighbors fear domino effect currency devaluation

Thailand neighbors fear domino effect currency devaluation

MANILA (Reuter): Thailand's de facto devaluation sent tremors
through the region yesterday, and analysts warned that even if
neighboring economies were in better shape there was a risk of
contagion.

Speculators took the plunge on the Thai baht as an opportunity
to take pot shots at a number of other Southeast Asian
currencies, ignoring claims by governments that their economies
were not about to share in Thailand's misery.

"Ultimately, the Thai economy does not reflect regional
problems, in the sense that comparison between Thailand and, say,
Indonesia and Malaysia, Malaysia would put the latter countries
in a flattering light," said Desmond Supple, head of Asian
currencies with BZW Barclays in Jakarta.

But there was the danger of infection, he warned.

"The risk is you will see some similar weaknesses of the
regional currencies such as the (Indonesian) rupiah and the
(Malaysian) ringgit and the peso. On a fundamental sense it's not
justified," he added.

The Philippines has been especially hard hit, with the impact
of Thailand's economic problems having become an almost regular
event in recent months.

On Wednesday, the Philippine central bank hiked interest rates
and dumped an estimated $300-500 million in an attempt, largely
successful, to beat off any speculators trying to pull down the
peso.

The country's stock market also took a beating, with the
Manila share index tumbling almost two percent.

The Thai government, as expected, on Wednesday floated the
baht, allowing the value of the currency to be set by market
forces instead of being pegged to a basket of currencies.

The slump in the currency briefly knocked the wind out of the
rupiah, forced the Malaysian central bank to step in to defend
the ringgit and even sent rubber prices sharply lower.

About the only Asian currency to benefit was the yen, which
investors rushed to in search of refuge.

Authorities are hoping that the impact of the de facto baht
devaluation, which has already seen funds flee into the yen as a
safe haven, will be short-lived.

But analysts said the jitters caused every time Thailand's
economy took another turn for the worse also reflected a somewhat
jaded view of the region by investors, especially those in the
United States, who have been seduced by the charms of Latin
America.

"Southeast Asia has been losing out to Latin America. There
has been a huge shift there by U.S. funds," said Janet Henry,
Hong Kong-based analyst with James Capel.

However, she added, there were signs of overheating in Latin
American economies and that there was a tendency to overstate
that region's charms compared to Asia's.

Analysts point to most of Southeast Asia's strong growth
forecasts and current account deficits which, unlike Thailand's ,
mostly look manageable.

Economists say Malaysia, for example, has taken steps to
prevent any copy of Thailand's property market collapse while a
current account deficit is paid for with long-term capital, not
short-term funds.

Indonesia, too, has a much smaller current account deficit as
a percentage of gross national product than Thailand.

Most vulnerable to speculative attack appears to be the
Philippines where the authorities have so far refused to allow
anything but the minutes depreciation of the peso, arguing that
the fight against inflation is the priority.

But economists caution that the key instrument in defending
the peso -- high interest rates -- could have much longer-term
repercussions.

The risk, said Henry, who thinks Manila's central bank wants a
lower peso, was that the currency could go into freefall while
there was so much influence coming from the problems in Thailand.

"Everyone agrees the peso is overvalued," said DBS Securities
analyst Al Rillo, who urged the authorities to let the peso fall
for the sake of longer-term prosperity and tolerate a little
short-term pain.

"The high interest rate growth is not consistent with economic
growth."

Until the peso was at a more realistic level, speculators
would continue to pick on the currency, Rillo added.