Thailand's finance minister fears the country will get caught up in a currency war at a time when its own export-dependent economy is going from strength to strength. Interview by Brian Caplen.
When elephants fight it out it is the little guys that get trampled on, says Thailand's finance minister Korn Chatikavanij, referring to the stand-off between the US and China over currencies. His fear is that global trade will be disrupted at a time when Thailand's economy and exports are growing strongly and the domestic political situation appears to have cooled down. The country faces the problem of its own currency, the baht, appreciating too rapidly and pricing Thai goods out of the market.
In an interview during the International Monetary Fund and World Bank annual meetings in October, Mr Korn used the elephant metaphor twice, once in terms of the US-China conflict and, second, in reference to an absence of public discussions on the issue.
"Most of the time there is an elephant in the room and no one want to talk about [the currency dispute]," he says. "Or at least not in public. Not talking about it in public is fine because one of the problems is that it has become a political issue and a 'face' issue, and whenever face gets involved, rationality goes out the window."
Mr Korn accepts that currencies of countries with strong fundamentals such as Thailand's need to appreciate, and that beleaguered countries such as the US and many European countries need to weaken their currencies and export their way out of trouble, just as Thailand did in response to the 1997 Asian crisis.
"Currency appreciation is my biggest concern," he says. "Not the fact the baht is appreciating but that the currency markets of a number of the large economies [an oblique reference to China] are not allowed to adjust according to the same economic principles, and that creates an unfair situation. The large economies must sit down and coordinate their views as to what the reserve currencies should be doing."
Mr Korn accepts that a large hike in the value of the Chinese currency would be destabilising, but he rejects fears that a new type of Plaza Accord (the 1985 agreement that appreciated the Japanese yen) would bring about the same kind of asset bubble in China as some commentators have blamed it for doing in Japan.
"One option is a new version of the Plaza Accord. We do not object to our currency appreciating but we would like there to be a clear path and for the adjustment to be orderly.
"After the Plaza Accord, Japanese companies adjusted [to a stronger yen] and did it in a way that increased their profits. They invested in countries such as Thailand, which was a catalyst for industrial take-off in Thailand as well as the globalisation of Japanese industry. That part was successful but what brought them down were the other aspects, the purchases of property and financial assets."
Mr Korn says there are many differences between the challenges facing Japan then and those facing China now, and that lessons can be learned to avoid negative outcomes. "The relative technological advance of Japan then was greater than that of China's now," he says, meaning China has greater opportunity to overcome a stronger currency by improvements in efficiency.
Efficiency drive
This, in any case, is the strategy adopted by Thailand's government.
"We are working on a package to make 2011 an investment year for Thai corporates and state-owned enterprises alike, providing tax incentives to encourage them to bring forward their investment plans and push companies up the technological scale, to make up for the loss of price competitiveness with greater efficiency.
"There is anecdotal evidence of firms facing labour constraints and that this is holding them back from further growth. Looking at demographics [the ageing of the population], it is also clear that for Thailand to maintain its level of growth it must improve in labour efficiency. There is no better time to do it than when the economy is growing and the currency is appreciating."
Thailand's growth rate for 2010 is expected to come out at between 7% and 7.5%, says Mr Korn, with exports exceeding expectations and the consequent spillover into investment and consumption more positive than was originally forecast.
"Recovery from the political turmoil in April and May [when Bangkok was brought to a standstill by anti-government protestors] has also been quite rapid, even in the sensitive area of tourism. We anticipate tourist arrivals in 2010 to match the all-time high of two years ago of about 15 million."
Why has Thailand recovered from the international financial crisis so quickly?
"First, the Asean [Association of South-east Asian Nations] economies are among the most open in the world from both a trade perspective and in terms of capital flows. When world trade stabilised following the original crisis, we were always going to be one of the main beneficiaries. Thailand's exports are about 65% of gross domestic product (GDP).
"There is also greater diversity in terms of export destination. Ten years ago, a third went to the US, a third to Europe and a third to Japan. Now, all three of those markets combined are about a third and the biggest market is Asean itself. Since the other Asean currencies have strengthened along with the baht, this means we haven't lost competitiveness [in the Asean markets].
"China is now a significant export market. Five years ago, it was about only about 1% or 2%, now it is the biggest single market at about 12%. The Middle East is also significant, so our resilience in terms of the currency's strengthening against the US dollar and the fact that US and European consumer power has declined has not had the impact that it once would have."
Mr Korn does not think capital barriers to prevent the baht increasing in value are a solution. "Even if you tried to put up a wall against capital inflows, there is not much you can do about it for a country like Thailand.
"When you compare our fundamentals with those of the US, then our currency should appreciate. We have a trade surplus, a current account surplus, low unemployment and GDP growing at 7% to 8%.
"If you compare that with the situation in the US and then look at the debt level, even with a substantial fiscal stimulus our debt to GDP is the same as a year ago, at 43% of GDP because the economic base grew."
Thailand's stock market has also performed well in spite of being one of the most underheld markets in Asia in terms of the percentage share of foreign investment.
"The rise this year has only just about matched the improvement in corporate profits, which have been the main driver. As a result, corporate income tax has been higher than we were anticipating and, at the macro level, the last fiscal year ended with a balanced budget rather than the originally forecast deficit of 3.5% of GDP."
Stock in trade: Thailand's stock market is performing well and is working hard to overcome a shortage of foreign investment Stock in trade: Thailand's stock market is performing well and is working hard to overcome a shortage of foreign investment
Credit where it's due
A key initiative of the Thai government is to improve access of the general population to credit as a way of resolving inequality issues that are partly to blame for its political tensions. "The banking sector is working faster in the development of microfinance than envisaged and the Bank of Thailand is being asked to issue microfinance licences two years ahead of original targets.
"We did this because one of the excuses the Red Shirt [anti-government protestor] leaders used was that this was a fight about income and social inequality. It was a good excuse because it is true that one of Thailand's problems is unequal access to financial resources, with 30% to 40% of Thais not having access to formal banking. Since January we have been working on refinancing loan shark debts, we have launched programmes to provide basic finance education to villagers and created microfinance departments in the two largest state-owned banks. We are turning the post office, with its 1200 branches around the country, into a bank. With access to formal financing, some of the inequality problems should start to go away."
One big question for investors is whether the military would again intervene in politics as it did in 2006 when former prime minister, Thaksin Shinawatra, was ousted. An election is due before the end of 2011.
"If the opposition were to win the election fair and square, we as a party [the Democrat Party] would do everything we can so as not to undermine the opposition's right to govern. So many lessons have been learned since last time extra constitutional power was used through the military that one of the greatest opponents to this would be the Democrat Party. So investors don't need to be concerned at that level, they should only be concerned about the opposition's competency."
Korn Chatikavanij is finance minister of Thailand
