This memorandum is in response to your request to analyze the changes that are occurring in Thailand’s economy, as they relate to Blades' ongoing business operations. After a thorough exploration of the Thailand’s current economic landscape, I have summarized my findings to your specific questions below. Before implementing anything set forth below, you must recognize the dynamism and complexity of the Thai marketplace. Accordingly, before moving forward with any speculative market investments, you must consider the risks involved if anticipated market movement is not realized.
Impact of Currency Value & Exchange
Recent economic developments have increased the value of the Thai Baht 18.18%, from $.022 to $.026, indicating that inflation is rising and that the USD buying power is decreasing. This would imply the cost of Thai goods will increase, which in turn will increase expenses and reduce profits. Demand for Blades may decrease due to the higher cost of goods in the Thai market negatively impacting overall revenue.
As you know, if the demand for the Baht remains higher than the supply, the value of the Baht will appreciate. Conversely, if the supply of the baht is higher than demand (which is one your concerns due to the outflow of foreign investment) than the value of the baht will depreciate. In purely economic terms there would be an exchange equilibrium balancing the supply and demand of Thai currency however fluctuations in multiple factors like interest rates, inflation rates, income levels, and government led controls could impact the equilibrium in a multitude of ways.
Impact of Inflation and Interest Rates
If the Thai inflation is high it may increase the demand of goods from the United States or other countries. Conversely the high inflation will reduce the desire of Thai goods from foreign buyers. Thai inflation could negatively impact Blades sales within Thailand due to higher prices Entertainment Products (i.e the primary Thai retail customer) may pass on to consumers. Decreases in sales of the Speedos products at Entertainment Products may force the retail customer to re-evaluate terms of the buying contract if the demand decreases significantly. In addition, inflation will impact the costs of some component parts sourced from a local Thai manufacturer increasing the cost of goods and minimizing potential gross profit from sales to Thai retail customers.
If interest rates remain high or increase, investment levels in Thailand should increase due to the more attractive rates of return. The demand for Thai baht will increase which should increase the value of the baht. The company may benefit today prior to any further market interest movement upward to invest in the currency and gain from the expected appreciation in value due to higher interest rates. Please note the inherent risk (positive and negative) in interest rate speculation since today there are no definitive plans of movement from the Central Bank. Potential impact of potential policy changes of the Central Bank is noted in the following section.
Global Confidence in the Thai Economy & Government Intervention
The waning confidence and withdrawal of foreign investment will negatively impact the value of the baht. As demand decreases for the baht, the value of the baht could continue to decrease. The unfavorable expectations of foreign investors could continually put downward pressure on the Thai currency. Blades could be negatively impacted by the currency depreciation because it could trigger more inflation. As noted in section II above, inflation would could have topline and bottom line implications. Simply put, Blades could be more impacted by the change in value because sales are determined in baht. Therefore, the depreciation in the baht will cause a conversion of the revenue of baht into fewer dollars. Intervention by the Central Bank of Thailand could have some positive impact. If its goal is to secure the value of baht from deprecation then they could maintain or minimally increase the level of interest rates in the country. This would help in increasing the demand of the Thai baht from foreign investors which could in turn begin a currency appreciation. Decreasing interest rates may further destabilize the economy and hasten the outflow of investments from the country because investments in baht may no longer be attractive.
Impact of Institutional Speculation (Appreciation & Depreciation)
Pursuant to your interest in formalized speculation of the firm’s investment in the baht, the critical component is the direction in which the value of the baht moves (whether up or down). Both scenarios have been analyzed in detail in the appendix. In general results are more positive when the baht appreciates in value versus depreciates. Assuming an initial $10MM investment in speculation, an appreciation of from $.022 to $.025 would result in higher profit gains for Blades versus a depreciation.
Historic data indicates that Thailand's Central Bank does not have the resources to engage in a successful currency swap. Therefore, my recommendation is to divest in Thailand.
Several factors including inflation, interest rates, and overall global confidence will impact the valuation of the Thai baht. Inflation's impact to customers and suppliers within Thailand could adversely impact Blades' gross profit and sales.
However, speculative investment in the currency may net positive gains if the Central Bank issues and sustains high interest rates which could drive the valuation of the baht back up.
The financial rewards of speculating correctly could net incremental gains for the firm and deliver on the business plan. But, again, given that Thailand's Central Bank has been historically unable to execute this strategy, the recommendation is to divest.
The value of currency changing year by year, the percentage change in value of currency is calculated as follows:
S = Spot Rate
St-1 = Spot Rate (for earlier date)
If there is percentage change shows the positive reflection then there will be appreciation of the foreign currency, but change in negative percentage shows the depreciation.
Change of percentage in Thai baht = 0.026 - 0.022/0.0222
Change of percentage in Thai baht = 0.1818 or 18.18%
According to above calculation the price of Thai baht will be appreciated.
The below mentioned basic factor determines the value related to currency:
Supply of the related currency for sale
Demand of the related currency
If the supply of currency is higher than the demand, than value of currency will lower. If the demand of currency is higher than the supply, then the value of the currency will increase. In equilibrium, the supply and demand of the currency must be equal.