The Thai baht’s is poised to tumble further after the central bank cut interest rates to counter the impact of the coronavirus. The decisions came in a blitz of announcements starting with the emergency rate cut on Friday evening.
The new measures are a further negative for the baht, which has already slipped more than 9% this year. Above all due to slowing economic growth, the worst drought in decades. Furthermore a delay in the government’s budget due to political wrangling.
Friday’s move to cut rates by 25 basis points to a new record-low 0.75% was the second reduction in as many months. It came ahead of the scheduled policy meeting on Wednesday. The policy committee said the virus outbreak was likely to be “more severe” than it previously thought. Even more it would take time for the situation to normalize.
Policy makers appeared before the press on Sunday, saying they would set up a mechanism to allow banks to use money-market and bond funds for collateral to enhance liquidity. They would also make funds available for companies to refinance corporate bonds. All these steps have the effect of driving down local bond yields. Which will consequently do little to support the Thai baht.
The coronavirus has already taken its toll on Thailand’s struggling currency. The pandemic has also decimated the nation’s tourism industry. Especially by reducing visitors from China, who alone account for some 3% of the country’s gross domestic product. Data Monday showed tourism receipts slumped 43% in February from a year earlier. Furthermore exports tumbled 4.5% the same month, Bloomberg reports.
A lot has changed for the Thai baht
The central bank’s benchmark rate is now a fraction above the level of inflation. Putting Thailand on the precipice of joining the list of nations with negative real policy rates. Policy makers plan to go ahead with their scheduled meeting Wednesday. They are also likely to draw attention to the nation’s worsening economic outlook.
A lot has changed for the Thai baht in a short period of time. Just a few months ago, the currency was outpacing all its Asian peers, with investors attracted by the nation’s current-account surplus, healthy level of foreign reserves and buoyant economy. The central bank even introduced a range of measures to limit the baht’s strength, including making it easier for locals to send money abroad.
There’s no need for anything like that now. The odds of a recession over the next 12 months have jumped to 30% from just 10% a year ago. Across the rest of of Asia, only Japan has a higher probability, according to Bloomberg surveys of economists.
While the number of virus cases in Thailand remains well below those in the world’s worst-affected countries, the recent spike suggests there’s potential for the situation to get a great deal worse. That will mean more bad news for the Thai baht.