Thais win money battle, what about the war?

Thais win money battle, what about the war?

HONG KONG (Reuter): Thailand cried victory on Friday against speculators who sought to take out the Thai baht this week, but analysts warned the war has only just begun.

"Just because the patient survived the operation doesn't mean he'll live," said Callum Henderson, currency analyst at MMS International. "(Hedge funds) are into economic fundamentals, and in Thailand, the fundamentals haven't changed."

The baht stabilized on Friday after the central bank ordered banks to cease currency swap, or forward, transactions to offshore investors. The move forced short-term speculators out of the market, but longer positions are still in place.

"We'll see who laughs last. Right now the Bank of Thailand is laughing, but there's still a heavy position out there," said Daniel Hemmant, currency fund manager at Guinness Flight Asia.

"The fundamentals are still in place. This isn't just taking a punt because Thailand is in a bad situation, it's taking it because the policies being followed are unsustainable."

The more sophisticated hedge funds took out positions last week when hedging the baht was very cheap, he said.

"The people who got burned are the people who jumped in this week. Next time, they'll be wiser and not take out such a short- dated position," he said.

Although Thailand's current account deficit has improved to about six percent of gross domestic product from eight percent last year, exports throughout Asia have been slow to recover and offered little support to Thailand's domestic sector.

Roiled by banking and property sectors laden with bad debt, Thailand's domestic economy urgently needs lower interest rates. "But it can't have lower interest rates because of the currency peg," Hemmant said.

Thailand's problems have cast a pall across Asia, highlighting countries with similar macro-economic difficulties such as Malaysia, the Philippines and Indonesia.

"It's a kind of Darwinian selection in terms of what hedge funds look at," said Eugene Chung, Asian investment strategist at SBC Warburg. "They go for the weakest."

And the weakest, in Chung's opinion, are Asian countries who report consumer price inflation in single digits while credit growth in the banking sector exceeds 30 percent.

"We now have a much-needed slowdown in credit growth," he said. "But we live in a much tougher world in terms of global interest rates."

Current account deficits are fine if the foreign capital is borrowed to increase productive capacity, said Hemmant.

"The problem in Malaysia and Thailand is that it hasn't been. It's been going into the property bubble or the stock market or pet projects with low returns," he said.

Banks have disguised the full extent of credit growth by moving much of it off balance-sheet, while consumer price indices are all based on food, failing to reflect sectors where the inflationary pressures are being felt, he said.

Hemmant noted that the Philippines has been cutting interest rates while credit growth soared, claiming that remittances from overseas workers made up the difference.