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.