Thailand: Econ Data Reflects Baht-Battle Scars - Amplifier

By PICHAYAPORN UTUMPORN
AP-Dow Jones News Service

BANGKOK -- Thailand's economy is showing new scars from the government's struggle to defend its fixed exchange-rate system.

The Thai central bank said Thursday the country's foreign reserves dwindled in April to a 16-month low of $37.3 billion, falling $800 million from March. As foreign investors bolted, the deficit in the balance of payments widened to 15.5 billion baht in April from 0.7 billion baht in March.

That marked Thailand's third monthly payments deficit in a row, a trend that analysts said hasn't been seen for seven years. It implies that Thailand, which relies on foreign capital to finance its current-account deficit, is having an increasingly hard time attracting such funds.

It also suggests, analysts said, that the Bank of Thailand may soon have to abandon its most powerful weapon to shield the baht from speculative attack - controls on the movement of baht outside the country that were imposed in mid-May.

'This is a very worrisome trend,' said Arporn Chewakrengkrai, chief economist at Deutsche Morgan Grenfell Securities (Thailand) Co. Ltd. 'It suggests that capital inflows have continued to deteriorate, and that means Thailand will eventually be forced to use foreign reserves to finance the current-account deficit.'

The central bank gave no explanation for the drop in foreign reserves between March and April, or for the expansion of the payments deficit. But economists pointed to persistent investor fears of a devaluation, worries fanned by two big speculative attacks on the baht this year.

Thailand pegs its baht to a dollar-denominated basket of currencies and doesn't allow the currency fluctuate by more than 0.16% each day. When the dollar moves outside that range, the central bank is obligated to buy or sell U.S. currency at below-market rates to rein it in.

To maintain the system, the central bank has to keep interest rates high even when the economy stalls. Prominent Thai government officials, such as Commerce Minister Narongchai Akrasanee, say the system stifled the Thai economy after 1995. Most economists agree that the currency peg is unsustainable in the long run.

As Thailand's economy cooled to its slowest rate in a decade last year, currency speculators began to bet the peg wasn't sustainable in the short term either. As a result, the baht has been attacked at least three times in the last 10 months, and the attacks have become progressively more severe.

In the most recent attack, in May, the Bank of Thailand got unprecedented aid from Southeast Asian central banks. The Monetary Authority of Singapore openly intervened in Thailand's defense, and other regional central banks, including the Bank of Japan, made supportive statements. But the Thai central bnak ultimately had to resort to informal capital controls to quell the attack, effectively shutting down the overseas forward market for baht.

The central bank's data for April portend worse news for May, analysts said. Given the ferocity of the currency attack this month, the balance of payments deficit for May could exceed 26.6 billion baht, said Dominique Maire, an economist with UBS Securities (East Asia) Ltd. in Bangkok. He said foreign reserves will decline further, signaling growing weakness in Thailand's currency defenses.

'If reserves are depleting, foreign investors are not going to be confident in the baht at all,' Arporn said. 'If the Bank of Thailand does not devalue the currency, the market is going to force a devaluation in any case. I don't even want to see the May figures now.'

A new speculative attack isn't likely for now, since Thailand has created a dual currency system that has made it prohibitively expensive for speculators to buy and sell baht. Under the system, Thai investors pay one price for baht while foreign investors pay another. But economist say the expanding payments deficit will make that system unsustainable, too.

'Foreign funds haven't been flowing into Thailand as much as we saw in the past because of the two-tier market,' said Jimmy Koh, an economist at the Institute for Development of Economic Analysis (IDEA) in Singapore. 'That's why the market thinks that the Bank of Thailand can't persistently put up the wall between the onshore and offshore markets.'

Analysts said Thailand's economy eventually is bound to improve sufficiently to revive investor confidence in the country. For now, however, the signs of recovery remain dim. In its monthly economic report Thursday, the Bank of Thailand also said its trade and current-account deficits widened slightly in March.

The current-account deficit expanded to 15.9 billion baht from 14.7 billion baht in February. The trade deficit widened to 22.2 billion baht from 21.7 billion baht in February. Both deficits, however, were much smaller than economists had predicted.

The Bank of Thailand also reported a surge in manufacturing activity in March, although the rate of private investment remained constant. The manufacturing production index grew 6.4% year-on-year from a 3% rate in February. The private investment index grew 5.9%, unchanged from February.

Exports grew 11.6% from February to 126.9 billion in March, matching economists' consensus forecast. Exports had declined 6.2% between January and February. Imports grew 14.4% from February to 149.1 billion baht in March, slower than the 20% rate economists predicted. In year-on-year terms, exports grew 4.8%. Imports fell 7.7%.

Exports have traditionally been the engine of Thai economic growth. Exports declined 0.2% in 1996, when the economy recorded its smallest expansion in 10 years. In 1997, the central bank expects export growth of 7.2% and economic growth of 5.9%.

Analysts, however, said the numbers do not signify an export recovery. Stock investors showed no sign of renewed confidence upon their release - the benchmark Stock Exchange of Thailand index closed down 4.66 points to 558.17 points.

'Overall, I'm still not bullish on Thailand because I think the manufacturing figure may be a one-off number,' said Koh of I.D.E.A. 'The picture is still very negative, with interest rates remaining high.'

Still, the Bank of Thailand said the data at least point to economic stability. 'I think the recovery will be gradual,' said Kleo-thong Hetrakul, the bank's director of economic research. 'We can expect it in the third or fourth quarter.'