Thursday, October 23, 2008

Short Thai Baht As Export-Based Economy Collapses

Oct 22nd, 2008 | By Jack Crooks | Category: Dollar & Forex

Another mouth-watering currency play from Jack Crooks. Of the Asian states, Thailand’s export-based economy is most exposed to a US recession. And political instability could accelerate capital flight. Jack says this means the Thai baht will likely drop like a stone.

This from The Sovereign Society:

You know by now that emerging market currencies are like bodybuilders on steroids.

When they get their fix of liquidity (capital flowing in) they are very powerful and outperform the major currency block by a wide margin. But if their source dries up, just like a junkie, they quickly lose strength and can crash and burn.

Among emerging Asian currencies, the Thai baht appears most exposed to global market conditions, most vulnerable to the crash-and-burn scenario. Keep in mind, Thailand was ground zero for the Asian Financial Crisis back in 1997-98. It has history. And history is bound to repeat itself!

As recession digs in across the developed world, demand is swooning. This trend is already being reflected in the price of commodities. Crude oil, specifically, has plunged like a refrigerator off a high-dive. And demand in the developed world is set to taper off even further.

Simply put: Sinking demand is very bad news for the emerging market world, especially Thailand where 70% of their gross domestic product flows from exports.

And if you’re wondering what country is the largest single importer of Thai exports, look no further than the United States. It’s safe to say Thailand is as tied into the global slowdown as anyone.

Estimates had been calling for export growth, in dollar terms, of 15-19% in 2009. But wait - scratch that. The Thai Chamber of Commerce now expects only single-digit export growth next year. Annual export growth collapsed from July to August, falling from 43.9% to 15.5%.

And that’s just the beginning of the story for Thailand…


Until lately Thailand had been suffering from surging inflation and a central bank scared to take action. Annual price growth ran as fast as 9.2% in June.

But since global demand has self-destructed and crude oil prices have sunk considerably in recent months, the inflation rate in Thailand has eased to the 6% range.

Still, that’s not so healthy. But the fact that core inflation is moving down towards more comfortable levels for the central bank means their focus is shifting towards maintaining growth. The impact of the global credit crisis on Thailand’s economy remains to be seen. But it’s no stretch to expect disappointing numbers once the dust settles on this global meltdown.

But falling growth will exacerbate already high political tensions, and vice versa.

Protests between supporters of the previously ousted government and its opponents have already prompted a State of Emergency. It has since been lifted, but the government can only hope the situation doesn’t escalate again.

We just learned that the previous Prime Minister, Thaksin Sinawatra, was sentenced to two years in prison for fraud. What this does is bolster protestors’ attempts to oust the current government, the People Power Party.

If government officials are preoccupied with the growing political crisis, then they will be distracted from mounting economic pressures. And oddly, mounting economic woes have a way of increasing political tensions because people naturally seek scapegoats for their problems.

Needless to say, the thought of yet another change of government is reason enough for foreign investors to flee Thailand. Mix it with a deteriorating export market and you’re shaving at least a percentage point off of GDP, possibly more.

Can you say capital flight? We think it comes soon.

Our sole Thai baht trade has produced 220% gains in about 2 ½ months. We expect many more profitable trades on the baht as the crushing reality of a global recession weighs on the export-dependent currency like a boulder.

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