ECONOMY / EXCHANGE RATES
Parista Yuthamanop
The government should allow the baht to appreciate freely to enable local interest rates to decrease and spur the domestic economy, said Supavud Saicheua, a managing director for Phatra Securities.
The dollar is likely to keep depreciating because the US Federal Reserve could reduce its interest rate from 3.5% to as low as 1% to head off a steep fall in US asset prices. The estimate was based on a forecast by Merrill Lynch, with which Phatra is allied.
Asian economies could see inflation risk worsen in light of the declining dollar, said Supavud.
"The depreciating dollar will push oil prices up. And the inflationary pressure will become more difficult to handle," Dr Supavud said at an economic conference yesterday at the Stock Exchange of Thailand.
By keeping the baht weak to support exports, the trade-off for the Thai economy was higher energy and oil prices in local currency terms, he said.
Additionally, the Bank of Thailand is expected to face greater pressure to cut its benchmark one-day repurchase interest rate from 3.25% to narrow its gap with the US interest rate.
The baht's appreciation would benefit imports for private investment, which would help offset a decline in exports. Private investment grew by only 3% in 2007, compared with a potential for 10% year-on-year, he said.
"We expect the Bank of Thailand to cut interest rates, but the question is how inflation will be handled," Dr Supavud said.
He said the government should allow the baht to outperform the Chinese yuan which is widely expected to strengthen by 7%, but it should have an assistance programme for labour in sensitive sectors such as textiles and furniture.
"Asian currencies should be allowed to strengthen across the board. It should be acceptable, if the baht strengthened by 10-15%," he said.
The strengthening baht would also support Asian economies' import demand for infrastructure building, he said.
"Almost all Asian economies need additional infrastructure investment. The currently high liquidity should be considered an opportunity to develop their own economic potential. They should let their currencies appreciate naturally in light of inflationary pressure," he said.
Dr Supavud said Asian economies altogether were subject to high inflation risk as they consumed relatively high amounts of imported energy.
Energy demand worldwide has been driven by the region because of rising population wealth and rapid growth in heavy industry, while demand from the US, Europe and Japan is declining as they use more nuclear power and their populations continue to age.
Many analysts were expecting the Fed to reduce its interest rate by another 50 basis points at its two-day meeting (the announcement was scheduled for 2:15 am today, Thailand time). An aggressive rate stance could help jolt the stock market but could build inflationary pressure in the US economy going forward.
"The Fed pumps liquidity into the financial market in the short term, but it risks credibility with higher inflation in the longer term. [Asian economies] should not tie their currencies with the dollar," Dr Supavud said.
He added that the Bank of Thailand should lift the 30% reserve requirement on capital inflows so that the baht would be driven by market mechanisms.
"The baht is expected to strengthen. But the one-way bet for baht appreciation will dissipate, after it rises to a certain extent," he said.
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