Thailand’s central bank voted unanimously yesterday to cut its 2.75% base rate by a quarter of a percentage point on Wednesday in an attempt to stem a sharp rise in the baht. Thailand is joining other Asian countries in setting a currency-devaluing precedent that may leave other emerging economies with little choice but to follow suit.
A measure of economic easing in the US and austerity in Europe has sent foreign investors to Asia seeking better returns and pumping up the value of Thailand’s baht, which in April hit its strongest level against the dollar since the 1997 Asian financial crisis.
What does this mean for Thailand?
This influx of foreign funds is causing big problems for Thailand, with exporters worried that their goods will become too expensive. Japanese President Shinzo Abe’s has already put in to place moves to devalue the yen which have already made things difficult for his Asian neighbors. Last week the Thai government cut its export growth forecast from 11% to 7.6% for 2013 and Thailand’s finance minister has been publicly piling pressure on the bank’s central governor to take further actions.
The Bank of Thailand is also considering additional controls, including fees on capital gains made by foreign bond holders and minimum holding periods for foreign purchasers, to discourage the flow of foreign money coming in to Thailand.
Should Thailand succeed in devaluing the baht the foreign capital that has been flowing into the country may go elsewhere–the Philippines, for example, or South Korea which has already been damaged by Japan’s currency devaluation. China, with its devalued currency may also end up the benefactor of much of the foreign funds.