During the past decade, the labor-intensive, low-margin export industries that have taken the biggest knock from Asia’s surging currencies have largely migrated from Thailand.
Thai exports of high-margin products such as cars and electronics, many of which have a large import content, now outweigh significantly the low-margin products on the current account.
Usara Wilaipich, the chief economist for Standard Chartered Bank in Thailand, says: “Net, for the whole country, Thailand benefits from the baht appreciation.”
There is little sign of any slowdown. In baht terms, exports for the first eight months of 2010 were up 24 percent year on year, and continue to rise. Between July and August, when the currency was starting its meteoric rise, the baht value of exports showed a month-on-month increase of 3.4 percent. Figures released last Thursday indicate that industrial capacity utilization rose from 63.6 percent in August to 64.4 percent in September.
Sriyan Pietersz, managing director of JPMorgan in Bangkok, says: “The biggest damage would come from losing competitiveness in the export sector, but that isn’t happening.”
Mr Pietersz points out that the nominal effective exchange rate, which measures the baht against a trade-weighted basket of currencies, has risen only 6.2 percent since the beginning of the year.
Foreign direct investment has also proven reassuringly resilient. That is partly because Japan, the country’s biggest investor, has experienced even more extreme currency appreciation than the baht. In addition, investors such as Ford and General Motors, which between them have announced investments of almost $1 billion this year, are looking to long-term Asian growth.
There have been some casualties, not least the tourism industry, which accounts for 6.5 percent of GDP. Sanga Ruangwattanakul, who runs a pair of mid-range hotels in Khao San Road, Bangkok’s backpacker haven, says the average spend per customer in Mulligen, his Irish bar, has fallen from 600-700 baht ($17-$20) last year to closer to 500 baht this year, and that occupancy rates are down 30 per cent.
“Their buying power is going down,” says Mr Sanga. “They tend to book cheaper accommodation.”
But Thailand’s tourism sector is remarkably robust. Between 2004 and 2009, tourist arrivals increased 20 percent in spite of a 16 percent appreciation of the baht – not to mention a tsunami, a coup and at least two rounds of fatal political confrontation on the streets.
“No matter how the exchange rate moves, it is still going to be incredibly cheap for us westerners,” says Ciarin Wilmore, a British computer technician and repeat visitor who is in Thailand for a two-week honeymoon, as he sipped a Singha beer on Khao San Road with his wife.
Korn Chatikavanij, the finance minister, has already warned that the currency’s appreciation is part of a structural realignment rather than a short-term aberration, and used a recent speech to warn domestic industry that it had to adapt or die.
“We became manufacturers of goods to the rest of the world using our relatively cheap currency,” Mr Korn said earlier this month. “That era is over and it’s over rather quickly, so very quick restructuring and rethinking needs to take place.”
Mr Korn has said the government will not intervene to try and hold down the value of the baht, but the immediate problem that is taxing the minds of economic planners is not so much the strength of the baht but its volatility.
Investors have been drawn in by Asia’s rosy economic forecasts – Bank of Thailand on Thursday upgraded its 2010 GDP growth forecast to between 7.3 and 8 percent – coupled with the waves of cheap western cash flows into Asia in search of better returns. Of the net 227 billion baht of foreign cash that has come into the Thai bond market this year, 118 billion baht has arrived in the past three months.
Earlier this month, the finance ministry reimposed a 15 percent withholding tax on the bond revenues and profits for foreign investors but investors appear unperturbed.