Thailand’s Baht has hit a seven-year low of 36.35 baht against the US dollar last week. Analysts, however, are optimistic about the baht’s future in the second half of this year.
According to CIMB Thai Bank, the baht is under pressure because Thailand’s interest rate is low, resulting in capital outflows to higher-yield countries, including the US.
As a result of persistently high inflation, many analysts believe the Bank of Thailand’s Monetary Policy Committee will raise the policy rate by 25 basis points in August.
During a recent interview, Poon Panichpibool, a Krungthai Bank senior markets strategist, discussed the factors driving the baht’s volatility.
He said the rising volatility of the baht was in line with concerns about the Fed’s aggressive rate hikes, the Covid-19 situation in China, and economic recessions in major economies like the US and Europe.
In addition to uncertainty over the country’s central bank’s policy outlook, mounting worries over an inflation rate nearly 14-year high, and a new wave of Covid-19, Mr. Poon noted that domestic factors could also play a role in the baht’s movement.
“The baht has been weakening due to fundamental factors such as current account deficits caused by high energy and commodity prices, high shipping costs, and the gradual return of foreign tourists,” he said.
Many investors have also fled developing markets due to fears about the global recession and rising US interest rates.
Despite the persistently strong dollar against major currencies, the baht has recently weakened beyond the 36 levels [almost hitting its strong resistance of 36.50]. Thai assets, particularly equities, were also weakened by foreign fund outflows due to recession fears on the global market.”
How do industry leaders view the situation?
As a result of higher oil prices, the Federation of Thai Industries (FTI) has recently warned against further depreciation of the currency to 37 baht against the US dollar.
As the baht value fell to 36.35 to the dollar last week, the lowest value in almost seven years, tourism operators and exporters may benefit. However, manufacturers and consumers will not benefit as much, said the federation.
According to Kriengkrai Thiennukul, chairman of the FTI, a weaker baht will lead to higher oil prices in Thailand, where 80-90% of oil is imported.
People ultimately pay more for goods and services as a result of higher energy prices.
Nevertheless, exporters and tourists can benefit from the depreciation of the baht since Thailand’s goods and services will be cheaper abroad.
Thailand’s tourism sector will recover faster in 2022 with 7-10 million foreign arrivals, he estimates.
An appropriate value for the baht is 34 to the dollar, according to the Employers’ Confederation of Thai Trade and Industry. Tanit Sorat, the vice-chairman of the Thai Economic Development Board, said that this rate would benefit the Thai economy the most.
How will Thailand’s central bank deal with the weak baht?
On Monday, Bank of Thailand Governor Sethaput Suthiwartnarueput said the central bank would allow the baht to move according to market forces. He said the central bank would monitor the movement closely and take action if excessive volatility occurred.
Despite the strong dollar, the baht’s weakness is still in line with other regional currencies. In light of the possible depreciation of the dollar, he suggested businesses hedge against risks.
As Thailand’s economy continues to recover and foreign tourists return, the baht’s value will rebound in the second half of this year, according to a Finance Ministry source.
The Bank of Thailand is also expected to raise its policy rate in August, according to several analysts.
As a result of all these factors, the average baht value is unlikely to fall significantly during the remainder of the year, the source said.
In comparison to other EM currencies, how do the Thai baht perform?
As a benchmark for emerging-market currency holdings, the MSCI Emerging Markets Currency Index has fallen 4.4% this year, the steepest annual decline since 2015.
“The baht has fared well so far this year, along with other EM FXs, especially net energy/commodities importers like Thailand. However, high beta and high yield EM FXs that face extremely high inflation environments, like TRY [the Turkish lira] and ARS [the Argentine peso], have also done poorly.” Mr. Poon of Krungthai Bank said.
In the past year, the baht has fallen by almost 8% against the dollar. It has been 17 years since the Philippine peso dropped against the greenback, and 13 years since the South Korean won fell.
On Monday, the Russian rouble bounced back to 61 against the dollar after falling to an almost four-month low recently.
According to Bangkok Bank economist Nisara Vadee, all 23 major emerging market currencies tracked by Bloomberg have declined over the past month after the US central bank raised its benchmark interest rate twice. Consequently, rising interest rates lead to higher borrowing costs for emerging market countries.
In the second half of 2022, how do the Thai baht look?
According to Krungthai Bank, the Thai baht is expected to strengthen in the second half of 2022 and in the future.
Foreign tourists are expected to increase by 6.4 million. Supply disruptions will ease, foreign investors will be more inclined to invest in Thai assets as they bet on the reopening theme, and the US dollar will weaken, Mr. Poon said.
During the first half of this year, 1.98 million foreigners arrived. There are expected to be 9 million visitors this year, according to the Ministry of Tourism and Sports.
Krungthai Bank expects Thai foreign arrivals to surge in the fourth quarter, so it is crucial to stay tuned to this month’s US Federal Open Market Committee for its hawkishness.
A reversal in the US dollar could be quite crucial. For the US dollar to reverse its upward trend, it must be stable or falling 5-year inflation expectations and more signs of weakness in other economic indicators such as the labour market.
Including food and energy, the US consumer price report, due today, will reveal current headline inflation. It is expected that the headline inflation rate will rise above the 8.6% level recorded in May, according to Reuters and CNBC.