Post-coup stability makes baht winner

In a world roiled by violence in Ukraine and Gaza, stability has become the watchword for investors — even if it comes in the form of a coup.

The Thai military's overthrow of the elected government on May 22 has proved a boon for the baht, the best performer among 24 emerging-market currencies tracked by Bloomberg over the past two months. Banks from Goldman Sachs Group Inc to Credit Suisse Group AG raised their baht forecasts last month, saying political risk has eased under the army junta.

Foreign investors share their optimism, pouring $5.3 billion into Thai bonds in July in the best month since April 2011, data compiled by Bloomberg show. The generals justified their overthrow of prime minister Yingluck Shinawatra by saying they were restoring peace after months of anti-government protests.

"Because there's been relative peace, a lack of tensions, there seems to be a view that things are getting back on track, regardless of who's in power," Mitul Kotecha, the head of foreign-exchange strategy for Asia Pacific at Barclays Plc in Singapore, said in an interview on July 29. "The baht may have further to run if we see investors piling in."

Foreign fund managers have put $7.7 billion into Thai stocks and bonds since the beginning of June, after pulling $1.2 billion in the six days after the coup, data compiled by Bloomberg show. A total of $427 million went into Thai stocks in July, though outflows for 2014 still stand at $820 million.

The increased appetite for Thai assets helped push the baht up by 2% since May 30 to 32.28 per dollar as of 1:14 p.m. Bangkok time today. The currency reached an eight-month high of 31.74 on July 23 after the military government announced an interim constitution that formalized its power and paved the way for elections.

While Thailand's coup could have resulted in an "escalation of violence," this concern "has now dissipated," Wee-Ming Ting, the head of Asian fixed income in Singapore at Pictet Asset Management, which oversees $23.7 billion of emerging-market debt, said by phone July 29. "Some form of political stability, at least for the short term, has returned" and sentiment for the baht is "better."

Suwanit Sombatpiboon, an official for Thai authorities in the U.S., declined to comment on the coup's effect on the baht when contacted yesterday by Bloomberg News.

The baht has been a rare emerging-market success story in recent weeks as increasing global tensions sent investors into safer assets.

Just six of 24 emerging-market currencies rose in July, with Russia's ruble and Poland's zloty suffering amid the fallout from Ukraine. The conflict between Israel and Gaza is intensifying, with more than 1,300 Palestinians and 50 Israeli soldiers killed. Argentina missed a deadline to pay interest on its offshore debt on July 30 as Standard & Poor's declared the nation in default.

"The perception that political events are automatically bad for markets is wrong, people respond to each political and geopolitical event in its own right," John-Paul Smith, a London-based emerging-market strategist at Deutsche Bank AG, said yesterday by phone. "Thailand's been a good performer."

The baht's gains may be limited because the government could use the political stability to intervene in currency markets, Royal Bank of Scotland Group Plc said July 23. A weaker currency helps growth by making exports more competitive.

Thailand's currency fell after the finance ministry lowered its 2014 economic growth forecast on July 30 to 2% from 2.6%.

Stone Harbor Investment Partners LP, which manages $65.3 billion, remains "underweight" Thai assets because the outlook for the political situation is unclear, according to Steffen Reichold, an economist in New York.

"They have a lot of political and economic problems to work through," Reichold said in a July 25 phone interview. "That's going to put a cap on the baht's rally."

The central bank monitors the baht to ensure it moves in line with its fundamentals, spokeswoman Roong Mallikamas told reporters in Bangkok on July 24. She said sentiment toward Thai assets has improved since the coup.

Australia & New Zealand Banking Group Ltd. raised its year-end forecast for the baht to 33.5 per dollar on July 28, from 34, while Goldman Sachs lifted its six-month estimate to 31.7 on July 15, from 34. Credit Suisse said July 23 it sees the baht at 31.2 in three months, from 33.5 previously.

The baht has exceeded Morgan Stanley's expectations, and "there's definitely going to be more inflows," Geoffrey Kendrick, the head of Asian currency and interest-rate strategy at the bank in Hong Kong, said July 29 by phone. "Particularly as markets are relatively lightly positioned given the bad news from early this year."

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