As dollar sinks, Thais struggle to keep economy afloat

Thailand boomed on exports to the US. Now it's looking at populist incentives to stimulate growth.

from the March 25, 2008 edition

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Exporters are also feeling the squeeze. Complaints about the baht's sharp rise of nearly 20 percent against the US dollar in 2005 prompted the government to implement capital controls in 2006, a move that soured the investment climate.

Thailand's central bank removed the controls last month, causing the baht to strengthen to more than 31.2 per dollar. The currency has climbed 8 percent against the dollar since January to its highest level since August 1997, making it the top performer this year among Asia's most traded currencies.

"We are a bit worried," says Pongsak Assakul, vice chairman of the Thai Chamber of Commerce, which represents many exporters. "There is nothing much we can do about the baht. We don't mind inflows for foreign direct investment or for condos, as that helps the economy. Just don't park it here to speculate on the baht. That money is useless to us and throws off the economy."

Economists are now waiting to see if Thailand's central bank will follow the US Federal Reserve with a major interest rate cut. A rate cut would ease pressure on the baht but it would also boost inflation, which surged 5.4 percent in February, the fastest in 20 months. Thailand's benchmark rate is now 3.25 percent, a full percentage point above the Fed Funds rate.

"This is a hard time for the central bank," says Thanawat Polvichai, who heads an economic think tank at the University of the Thai Chamber of Commerce. "A rate cut would boost economic growth, but rural people may be hurt by a higher cost of living."

Besides domestic consumption, the government is also hoping to boost private investment. Political instability over the past two years has caused firms to delay investment plans, causing industrial capacity utilization to reach its highest level since just prior to the 1997 financial crash, when firms over-expanded and the baht was overvalued.

To remedy that, the government plans to spend 1.5 trillion baht ($47.7 billion) investing in mass transit and infrastructure projects over three years or so, including nine subway routes in Bangkok. While many expect the projects to be delayed, analysts say breaking ground in the second half of this year would help increase confidence and boost the economy.

"The government should take the leading role in investing in rural and urban areas," says Sompob Manarangsun, an economist at Chulalongkorn University. "If the government invests, the private sector will also invest."

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