Thailand’s currency, the baht, was trading at 36.08 against the greenback on Monday, August 1, up 1.4% on the previous week.
The Bangkok Post newspaper looked at the causes of this recovery and the impact on the economy.
What forces are driving this change?
Since the beginning of this year, the baht is down 10.3% against the US dollar.
See the situation live: Thai Baht THB rate
It’s worth noting where this trend started before we delve into the recovery.
In recent months, currencies have been mainly influenced by the general development of the US dollar, triggered by the invasion of Ukraine, which led to a supply shock through blockades, the destruction of farms and factories and a series of sanctions and counter-sanctions.
Kobsidthi Silpachai, Head of Capital Markets Research at Kasikorn Bank (KBank), explained that the supply shock amplified inflationary pressures, ultimately prompting the Federal Reserve to tighten monetary policy and reduce the supply of US dollars.
As a result, the US dollar appreciated against other currencies, including the baht.
The US Federal Reserve (Fed) has hiked interest rates three times so far this year.
The reference interest rate is now between 2.25% and 2.50%.
“Since World War II, 11 of the Fed’s 14 tightening cycles have ended in recession, which is a 78% probability.
This caused the markets to change their minds,” Kobsidthi said, adding that the futures market’s forecast for the Fed Funds path subsequently declined.
“This was confirmed by the release of US GDP data for the second quarter of this year, which contracted 0.9% for the second straight quarter.
This is a technical recession.”
The head of capital markets research at KBank added that changes in Fed Funds expectations led to changes in expectations for the US Dollar Index (DXY), resulting in a mean trend reversal.
Wei-Liang Chang, currency and credit strategist at DBS Bank in Singapore, commented on the impact of the Fed’s rate hike on the baht.
“The baht rallied against the weakening US dollar as the market expects lower rate hikes from the Fed on slowing US growth.
Another factor is stronger economic momentum stemming from the reopening of international travel, which could help support the baht,” Chang said.
See: Thailand upbeat on its economy as tourism recovers faster than expected
What has the central bank done so far?
Bank of Thailand Governor Sethaput Suthiwartnarueput recently said there was no need to hold a special meeting to reintroduce the currency, as other countries in the region such as Singapore and the Philippines have done.
The central bank will let the baht move according to market forces.
The move will be closely monitored and if volatility is excessive, the central bank will take action, Sethaput said.
Is the weak baht part of central bank’s strategy to support tourism and exports?
Tourism and export have long been the two main drivers of the economy.
The Information Center of the Tourism Authority of Thailand reports that 3,334,326 foreign tourists arrived as of July 31.
The main markets are Malaysia, India, Singapore, UK and USA.
In total, the government expects around 10 million international visitors in 2022.
Meanwhile, exports grew by 12.7% year-on-year in the first half of 2022.
One of the best-performing categories is food and agricultural products, which grew 20.4% year-on-year in the second quarter of this year.
The main products shipped are potatoes, rice, brown sugar and pet food.
KrungThai Compass attributes this meteoric growth to the weak baht and high global food demand due to the Russia-Ukraine war.
Kobsidthi said the weak baht is not part of the central bank’s plan to revitalize key sectors.
“The Bank of Thailand’s stance on currencies generally focuses on stability rather than direction.
To do this, it buys and sells US dollars/baht with its foreign exchange reserves.
We can track this by calculating changes in the weekly FX reserve position.
As FX reserve changes increase, the central bank should buy US dollars and sell baht to weaken the latter.
When foreign exchange reserves fall, the bank has to sell to strengthen the baht, making it possible to control import inflation.
If the central bank tries to weaken the baht, instead of changing (as is currently the case), changes in FX reserves should be consistently positive,” he said.
Mr. Kobsidthi added that he found no empirical evidence that a weaker currency improves long-term export competitiveness and increases the market share of global exports.
“Thai exports have benefited from the global recovery since Covid-19.
However, with the ongoing war in Ukraine, world trade and globalization will increasingly face headwinds.
We forecast export growth of 7.8% in 2022, compared to 18.8% growth last year,” he said.
On Thai tourism, Kobsidthi said the sector is expected to welcome 7.2 million foreign arrivals in 2022, up from 430,000 in 2021.
Is Thailand’s Massive Currency Reserve Encouraging Volatility?
Thailand has an enormous foreign exchange reserve which amounted to US$201.4 billion as of June 2022.
Amonthep Chawla, head of research at CIMB Thai Bank, said the baht’s recent short-term volatility may not be relevant to the currency reserve.
This will only be the case if the Bank of Thailand intervenes to allow the baht to move at the same pace as its counterparts.
He warned that Thailand should consider ways to use its foreign exchange reserves more efficiently.
“Foreign exchange reserves can be viewed as insurance.
You’ll never know if we can be met anywhere.
Suppose there is now an emerging market crisis due to high external debt, a huge current account deficit and a weakening currency.
Thailand could one day experience high volatility with various symptoms such as high inflation, high household debt and financial instability.
It’s good to have a currency reserve to dampen volatility and build confidence.
But too large a currency reserve could be a dilemma.
We are too afraid to take risks, which leads to low growth,” he warned.
Meanwhile, Anusorn Tamajai, a former Bank of Thailand board member, said many studies show a long-term equilibrium relationship between foreign exchange reserves and exchange rates.
“In addition, any change in foreign exchange reserves would lead to fluctuations in the exchange rate, but not vice versa.
The reform from the fixed exchange rate regime to the floating exchange rate regime has not only increased the flexibility of the baht exchange rate, but also the accumulation of Thailand’s foreign exchange reserves,” Anusorn said.
What is the outlook for the baht against other emerging market currencies?
Mr Chang of DBS in Singapore said the baht is still overvalued based on its long-term fair value metric.
“The baht is the worst-performing ASEAN currency this year based on total returns.
The baht is likely to weaken further against regional currencies as Thailand is still running trade deficits and Thai interest rates are also lower than other countries in the region.
Poon Panichpibool, market strategist at Krungthai Bank (KTB), made a similar comment on the near-term outlook for the baht.
He said the baht may not appreciate significantly against emerging markets, except for markets with a weak economic outlook like China.
However, he believes the baht could gain strength in the fourth quarter of this year as Thailand enters the peak tourist season.
Source: Bangkok Post