 Dec. 14 (Bloomberg) -- Kings don't tend to say much about currencies, at least not in the 21st century. That is, unless you're talking about Thailand's monarch, who's seen the baht surge 18 percent in the last year alone. ``Now that the baht is exceedingly strong and the government has plenty of cash, it should spend more,'' King Bhumibol Adulyadej said on Dec. 4, the eve of his 80th birthday. He added that ``those who have money should spend. There is no need to be stingy.'' What kind of spending the king was referring to is unclear. Does he favor Thailand reducing poverty? Upgrading infrastructure? Upping military expenditures? All of the above? A better question may be whether the baht is becoming overvalued and crimping the competitiveness of Asia's ninth- biggest economy. That occurred to me last week when I was stranded along with a few dozen other travelers on a bus on the tarmac of Bangkok's Suvarnabhumi airport. Another bus was blocking the staircase to our aircraft. Our 40-minute wait turned into an animated grousing session -- not about the delay or the heat, but the baht. ``It's as if someone gave the baht a bit of Viagra since I was last here,'' says Peter McGilvery, 46, who visits Thailand annually from his home in Christchurch, New Zealand. ``It's a bit painful.'' Crimping Growth Thailand is a tourism mecca on account of its breathtaking beauty, welcoming culture and affordability. It's still a reasonably priced place, though the baht's gains might imperil Thailand's appeal and economic growth. Such concerns explain why central bank Governor Tarisa Watanagase refuses to lift controls on foreign capital entering the country. Currency speculators are betting on even bigger gains in the baht following a Dec. 23 election. Investors widely expect that the central bank will soon lift the controls imposed in late 2006. Bank of America Corp. says the baht may appreciate 8.5 percent by the end of 2008. Letting the baht rise is a nod to the reality that, like it or not, Asian currencies are in demand. For all Thailand's efforts to cap the baht, the most likely direction for Asian exchange rates and equities is up. ``Because the Bank of Thailand has limited market power relative to other central banks, its currency is a canary in the coal mine for what other currencies should do,'' says Mark Matthews, Hong Kong-based head of Asia-Pacific equity strategy at Merrill Lynch & Co. Living With Baht Thailand is indeed on the front lines of a phenomenon new to Asia: living with stronger currencies. While Matthews doubts the baht is overvalued, others are puzzled by the currency's rally. ``The Thai baht is a very strange beast and defies logic and fundamentals,'' says Benjamin Pedley, an investment strategist at LGT Group in Singapore. Economist Mikka Pineda of Roubini Global Economics LLC in New York, calls it the ``baht conundrum.'' Why it is that even with so-so growth (estimated to be 4.5 percent this year), lower interest rates and political uncertainties, the baht is Asia's best performer versus the dollar this year? In a recent report, Pineda concluded the baht's strength reflects the unique combination of an improving trade balance, foreign demand for Thai stocks and restrictions on capital outflows. The election alone would seem to inject doubt into the market. Since Prime Minister Thaksin Shinawatra was ousted in a September 2006 coup, investors have been at a loss to understand the plans of the generals overseeing the economy. They grabbed power pledging to create a ``self-sufficiency economy,'' without ever explaining what that is. Viagra Effect The election campaign has even found another use for Viagra -- one beyond tourist McGilvery's observations about the baht. One candidate has been accused of trying to buy votes by handing out the erectile-dysfunction drug. Headlines containing ``Viagra'' are omnipresent in this nation of 65 million. Whatever forces are boosting the baht, though, they're not about to go away. The phenomenon is more of a blessing than a curse for Thailand for three reasons. One, it's helping to offset the inflationary effects of rising oil prices. Two, it's a sign of confidence both in Thailand's outlook and asset markets. Rising stocks and falling bond yields are nothing to complain about in a nation still struggling to raise per capita income above $8,600 as measured in purchasing-power parity terms. Keeping Pace Three, it will force Thailand to keep pace with rival emerging economies. It ranked 28th in the World Economic Forum's 2007-2008 Global Competitiveness Index, behind Estonia, Chile and Malaysia. For all its promise, Thailand still needs to figure out how to compete with China and India on a cost basis and Japan, Singapore and South Korea technologically. Manufacturing has long been the fuel driving Thai growth, though services increasingly account for rising employment and prosperity. The baht's rise also serves as a reminder that Thailand needs to nurture entrepreneurship to create more good- paying jobs. Asia really has no choice here; it will just have to live with stronger currencies. When even kings are talking about them, you know something is up in global markets.
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