Unlike the year 2010 when the Thai baht kept to its appreciating trend as funds continued to rush into emerging countries, the Thai baht since the beginning of this year has been exhibiting more of a twoway movement with somewhat higher volatility. Various factors and events such as the US QE2 policy, persisting European public debt problem, and Egyptian riot, have all contributed to investors’ shifting perception of risks and more capital flow volatility which, according to analysts, would become the theme of this year.
The Bank of Thailand has been absorbing part of the fluctuation in order to encourage economic stability and, to some extent, allow the Thai business sector to adjust. However, when global volatility is unpredictable, it is necessary for Thai enterprises to protect themselves by better managing their own risks.
This can be done in several ways. One easy way is to adopt a natural hedge strategy i.e. matching the currencies of cash inflows with the currencies of outflows of the business. For example, an exporter selling goods in US dollar may also like to borrow in US dollar, instead of Thai baht, to fund his business. In this way, the US dollar received from selling goods can be used to repay the loan without having to convert the whole amount of US dollar received into Thai baht and back again to US dollar for loan repayment. Another way is to simply make use of hedging instruments, such as forwards, swaps, and options, offered by commercial banks in order to limit possible losses on exchange rate if the Thai baht moves in an unexpected direction.
Another alternative could be to diversify the invoicing currencies so that the business cash flows would not concentrate in only one single currency. For instance, exporters can make arrangements to receive export proceeds in currencies such as euro, yen or yuan instead of only US dollar. Thus, losses from depreciation in one currency can be offset or reduced by gains from appreciation in another currency
Last year, Thai businesses have shown some improvement in adopting foreign exchange risk management. From January to December 2010, the hedging ratio has been rising substantially especially for exporters, while to a lesser degree for importers. As Thai baht this year is still expected to be relatively volatile, they are both encouraged to hedge against their foreign exchange risk to better manage cash flows.
Apart from Thai businesses, individuals who have foreign currency exposure should perhaps think about managing their foreign exchange risk as well. For example, when investing abroad through foreign investment funds (FIF), investors should carefully select the fund with foreign exchange hedging policy that matches their risk appetite. That is to say risk-averse investors may choose to invest in a fullyhedged fund, while those who are investing to diversify their portfolio may choose to be more open to foreign exchange exposure.
Waves of foreign exchange volatility could more or less affect anyone; hence, it is important for both companies and individuals to be able to handle their own risks. Although, it is impossible to stop the waves to hit, Thai businesses and individuals can at least learn how to surf. Once they can ride the waves, they will be well prepared and not be washed away when the bigger one comes.
The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.