Sixteen years after the baht's devaluation on July 2, 1997, Thailand appears to have regained its footing. Yet ample risks to economic and financial stability remain because of the volatility of capital flows and a deteriorating trade account.
Over the past three or four months, Thailand has lost a chunk of its foreign-exchange reserves in a hurry. According to the Bank of Thailand's website, as of June 21, the central bank's forex reserves stood at US$172.6 billion (S$218 billion) - down $10 billion from February's $182 billion.
During this time, the baht exchange rate has gone through sharp fluctuations. The Thai unit hit 28.55 against the US dollar in April before weakening to 31.05. A 3 baht fluctuation over a period of three months reflects the enormous risks associated with the forex market.
Thailand's foreign-exchange reserves are also under pressure from the deteriorating external account. In the first five months of this year, Thailand experienced two months of current-account surplus of a combined $3 billion and three months of deficit of a combined $6.6 billion. Overall, the country posted a current-account deficit of more than $3 billion in those five months. This explains why money is flowing out of the country.
Most people believe that the hangover from the 1997 financial crisis has completely gone. The way forward for Thailand is to gain prosperity from expanding trade and exports, from rising disposable incomes of the people, and from the relative strength of the country's competitiveness as the centre of the ASEAN region.
Finance Minister Kittiratt Na-Ranong has even predicted that gross domestic product, now 13 trillion baht, would hit 100 trillion baht by the time the government has completed its mega-infrastructure investment over the next seven years or so. But a closer look at the economic structure shows that Thailand is vulnerable to another shock.
First, foreign investors account for a chunk of ownership in the stock market. Jarumporn Chotikasthira, president of the Stock Exchange of Thailand, has said foreign interests hold about 35-38 per cent of Thai equities, the size of which is equal to the country's GDP.
This makes the Thai equity market vulnerable to a sudden outflow in the event that foreign investors sell off their holdings in a big way to meet their redemptions in their home markets.