Like many Southeast Asian economies, Thailand has evolved from an agriculture-based to
a manufacturing-based economy. Through the years, its domestic market demand has
consistently expanded from 5,000 bn baht in 2000 to 7,800 bn baht in 2006. Thailand's economic
prosperity relies heavily on its external trade, as its export-GDP ratio was 63.3% in 2006 and its total
trade was 125.7% of its GDP in 2006 (Table 1). Therefore, being an open economy, exchange
rate fluctuations will have a significant effect on its terms of trade and trade flows.
The exchange rate volatility is often said to have a negative impact on trade (Ethier,
1973; and Grier and Smallwood, 2007), largely due to uncertainty in terms of trade, affecting both
the volume and variability of trade flows (Barkoulas et al., 2002). Although this uncertainty could
be mitigated through hedging in the forward markets, risk-averse exporters who hedge against
this risk will find themselves incurring more cost, siphoning their profits and discouraging
trade (Dominguez and Tesar, 2001). It is also not easy for traders to determine when and how
much foreign exchange they should hedge. |
