Connect with us

Banking

Thailand’s soaring baht reaches six-year high

In early 2019, the BOT did not seem concerned about the Thai baht’s appreciation, as a strong currency can actually benefit Thai importers and those who have foreign currency debts

East Asia Forum

Published

on

The Thai baht has been the best performing currency in emerging Asia since 2018. On a year-on-year basis, it has roared more than 8 per cent against the US dollar and this year reached a six-year high.

But according to news headlines and commentary, the strong currency has lowered the country’s competitiveness and worsened both goods exports and tourism, two major drivers of Thailand’s economy.

Currency appreciation is not unique to Thailand

Bank of Thailand (BOT) officials and currency analysts explain the strength of the baht by domestic factors. Thailand’s solid economic fundamentals — a current account surplus and substantial foreign reserves together with a hawkish central bank — lure capital inflows.

Many consider the baht a safe haven currency among other emerging market currencies due to its stability.

As a result, the baht is likely to retain or increase in value, attracting speculative capital inflows and placing upward pressure on the currency.

In early 2019, the BOT did not seem concerned about the Thai baht’s appreciation, as a strong currency can actually benefit Thai importers and those who have foreign currency debts. It can also help improve the country’s terms of trade.

But the baht’s persistent strength and its potential negative impacts on the export-driven Thai economy have since prompted concern.

Exports contracted for a fourth straight month in June and the BOT revised its GDP growth forecast for 2019 downward, from 3.8 per cent to 3.3 per cent.

Measures have been taken to reduce baht appreciation

In July 2019, the BOT lowered the cap on the outstanding balance of non-resident accounts by a third and cut its supply of three- and six-month bonds at auctions in July and August. In addition, the BOT has signaled plans to further relax restrictions on outward portfolio investment by Thai investors, which can also help stem currency appreciation.

In August 2019, the BOT cut the policy rate by 25 basis points from 1.75 per cent to 1.5, a shift in the BOT policy stance since a raise by 25 basis points in December 2018. Still, many believe that these measures are inadequate.

There are three main further measures being discussed: foreign exchange intervention aimed directly at the baht’s value, a policy rate cut and imposing capital controls to curb speculative inflows. The BOT regularly intervenes in the foreign exchange market, but with strong market expectations this can be costly and counter-effective.

By purchasing foreign reserves in exchange for Thai baht, the central bank in practice helps keep the baht cheap and less volatile. Increasing foreign reserves and the stability of the baht could further reinforce its character as a safe haven currency.

BOT intervention makes the baht an ideal speculative asset

This can create a spiral of bullish speculation — followed by more foreign exchange intervention — leaving the economy with high liquidity or high interest rates if the central bank mops up excess liquidity through open market sales.

The central bank also incurs costs when there are increases in the interest rate differentials between domestic and foreign assets and when the BOT fails to prevent baht appreciation. The large amount of foreign exchange reserves (39.9 per cent of GDP and over 200 per cent of the IMF’s standard reserve adequacy metric in 2018) may put Thailand on the US watch list for currency manipulators.

Overall, bold intervention by the BOT is unlikely

To tame offshore fund inflows causing a rapid appreciation of the baht, capital controls are effective at least in the short to medium term. But capital controls have long-lasting adverse consequences, affecting the country’s credibility and financial markets.

In 2006, the BOT imposed controls on capital inflows to stem a previous bout of strong baht appreciation. The stock market plummeted and bond yields spiked, causing the central bank to lift some of the controls within a day.

Thus capital controls are also unlikely given their long-term impact. The most requested measure by the private sector is for the central bank to cut the policy rate.

A common belief is that further rate cuts would make the Thai baht less attractive for foreign investors, reducing pressure on the baht. Yet, if the funds flow into Thailand because of the safe haven currency perception, rather than for a high yield, it is unclear whether rate cuts will be effective.

More importantly, easing policy may worsen already elevated household debt, which is 78.6 per cent of GDP (among the highest in Asia), jeopardising Thailand’s financial stability.

But it may be Thailand’s only option given that a fragile political situation may thwart more fiscal stimulus. The strong baht may just be a product of global trends that are contracting exports, particularly sluggish global growth and trade tensions.

Further, to weaken the baht is not easy when other countries are pursuing even more aggressive easing policies. Still, many hope for at least another rate cut this year, even if it may increase household debt. Amid this debate, let’s not forget that ultimately the central bank is there for stability.

The central bank should not be expected to subsidise a cheap export sales strategy if it interferes with the BOT’s main priority of economic stability. Exchange rate fluctuations are simply a fact of life under non-pegged regimes. Policy efforts are better aimed at helping exporters to sell products with higher added value, rather than competing on low prices.

Phornchanok Cumperayot is Associate Professor with the Faculty of Economics at Chulalongkorn University, Bangkok.

Managing Thailand’s soaring baht | East Asia Forum

East Asia Forum provides a platform for the best in East Asian analysis, research and policy comment on the Asia Pacific region and world affairs.

Continue Reading
Advertisement Load WordPress Sites in as fast as 37ms!
Comments

Banking

BOT relaxes rules to Curb Strong Baht

the Bank of Thailand (BOT) decided to relax regulations to facilitate capital outflows to help promote capital flow balance and lessen pressure on the baht.

Boris Sullivan

Published

on

The Thai baht has been under pressure due to imbalanced capital flows in the current environment of highly uncertain and volatile external conditions, the Ministry of Finance (MOF) and the Bank of Thailand (BOT) decided to relax regulations to facilitate capital outflows to help promote capital flow balance and lessen pressure on the baht.

(more…)

Continue Reading

Banking

Bank of Thailand cuts rate by 0.25% to 1.25 per cent

The latest cut brings the Bot’s policy rate to an historical low, which the bank maintained from April 2009 to July 2010 during the subprime global financial crisis.

Bahar Karaman

Published

on

​On 6 November 2019, the MPC voted 5 to 2 to reduce the policy rate by 0.25 percentage point from 1.50 to 1.25 percent, effective immediately. Two members voted to maintain the policy rate at 1.50 percent.

(more…)

Continue Reading

Banking

Thailand’s loss of trade privileges with US is credit negative

The development is credit negative because Thailand’s export-oriented economy is in a difficult external environment given that a broad-based export slowdown and strong Thai baht are weakening the competitiveness of goods exporters and the country’s tourism industry.

Bahar Karaman

Published

on

Thailand’s loss of trade privileges with US is credit negative amid challenging external environment, according to an article from Moody’s Credit Outlook, 4 November 2019 issue.

(more…)

Continue Reading

Most Read

Upcoming Events

Wed 27

The Future Energy Show Thailand

November 27 @ 10:00 am - November 28 @ 5:30 pm BMT
Dec 02

Top Food science conference 2019

December 2 @ 9:00 am - December 3 @ 5:00 pm BMT
Dec 05
Dec 05

The Healthcare+ Expo Taiwan

December 5 @ 9:00 am - December 8 @ 5:30 pm BMT

Press Release

Subscribe via Email

Enter your email address to subscribe and receive notifications of new posts by email.

Join 11,797 other subscribers

Trending