Understanding the Recent Rise in the Thai Baht

Thailand’s currency, the baht, traded against the greenback at 36.08 on Monday August 1, an appreciation of 1.4% from last week.

The Bangkok Post newspaper examines the reasons for this development and the economic implications.


What are the forces driving this change?

Since the beginning of this year, the baht has weakened by 10.3% against the US dollar.

View the situation live: Exchange rate of Thai Baht THB

It is worth noting where this trend started before the rebound was addressed.

In the past few months, the currencies were mostly influenced by the general trend of the US dollar, which was caused by the invasion of Ukraine which led to a shock of supply 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 increased inflationary pressure and ultimately prompted the US central bank to tighten monetary policy and reduce the supply of US dollars. .

As a result, the US dollar rose against other currencies, including the baht.

The US Federal Reserve (Fed) has raised interest rates three times this year.

The reference rate is currently between 2.25% and 2.50%.

“Since World War II, 11 out of 14 Fed tightening cycles have ended in a recession, which is a 78% chance.

This caused the markets to change their minds, “said Kobsidthi, adding that the market’s future forecast on the path of the Fed Funds later decreased.

“This is confirmed by the release of US GDP data for the second quarter of this year, which contracted by 0.9%, the second quarter in a row.

This is a technical recession. “

Rebound

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), which led to a mean reversion of trends.

Wei-Liang Chang, currency and credit strategist at DBS Bank in Singapore, commented on the effects of the Fed rate hike on the baht.

“The baht bounced back against the weaker US dollar as the market expects a slight Fed rate hike due to slower US growth.

Another factor is stronger economic momentum resulting from the reopening of international travel, which will help support the baht,” Chang said.

Watch: Thailand is booming for its economy as tourism bounces back faster than expected


What has the central bank done so far?

Bank of Thailand Governor Sethaput Suthiwartnarueput recently said that there is no need to hold a special meeting to return the currency as done in other countries in the region such as Singapore and the Philippines.

The central bank will allow the baht to move according to market forces.

The move will be closely monitored and if there is too much volatility the central bank will act, Sethaput said.

Is the weak baht part of the central bank’s strategy to support tourism and exports?

Tourism and exports have long been the two main drivers of the economy.

The Tourism Authority of Thailand’s Information Center reported that as of July 31, foreign tourist arrivals totaled 3,334,326.

The main markets are Malaysia, India, Singapore, UK and USA.

In total, the government expects nearly 10 million international visitors by 2022.

Meanwhile, exports increased by 12.7% in the first half of 2022 compared to last year.

One of the best-performing categories is food and agricultural products, which grew 20.4% in the second quarter of this year compared to last year.

The main products shipped are potatoes, rice, brown sugar and pet food.

KrungThai Compass attributed this meteoric growth to the weak baht and high global food demand due to the Russia-Ukraine war.

Kobsidthi said the weak baht was not part of the central bank’s plan to revive key sectors.

“The Bank of Thailand’s stance on currencies is generally focused on stability, rather than direction.

To do this, it buys and sells US dollars/bahts with its foreign exchange reserves.

We can track this by calculating the changes in the weekly FX reserve position.

If changes in foreign exchange reserves increase, the central bank should buy US dollars and sell baht, to weaken the latter.

If the foreign exchange reserves decrease, the bank must sell to strengthen the baht, which makes it possible to control the inflation of imports.

If the central bank tries to weaken the baht, changes in foreign exchange reserves should always be positive, instead of alternating (as in the current case),” he said.

Mr. Kobsidthi added that he found no empirical evidence that a weaker currency would improve export competitiveness in the long term, increasing the market share of global exports.

“Thailand’s exports have benefited from the global recovery since Covid-19.

However, with the ongoing war in Ukraine, global trade and globalization will face increasing headwinds.

We estimate export growth of 7.8% in 2022, compared to 18.8% growth last year,” he said.

On Thailand’s tourism, Kobsidthi said the sector is expected to welcome 7.2 million foreign arrivals in 2022 from 430,000 in 2021.

Are Thailand’s Large Currency Reserves Promoting Innovation?

Thailand has a large foreign exchange reserve that stands at $201.4 billion as of June 2022.

Amonthep Chawla, head of research at CIMB Thai Bank, said that recent near-term fluctuations in the baht may not be appropriate for the reserve currency.

This can only be done if the Bank of Thailand intervenes to allow the baht to develop at the same rate as its counterparts.

He warned that Thailand should think about ways to use foreign exchange reserves more efficiently.

“Cash reserves can be seen as insurance.

You never know if we might hit a spot.

Suppose that an emerging market crisis occurs today due to high external debt, a large current account deficit and a weakening currency.

Thailand may one day experience high volatility with various symptoms such as high inflation, high household debt and financial instability.

It is good to have a cash reserve to reduce volatility and build confidence.

But too much cash reserves can be a problem.

We are too afraid to take risks, which will lead to low growth,” he warned.

On the other hand, Anusorn Tamajai, a former board member of the Bank of Thailand, said that many studies have shown a long-term equilibrium relationship between foreign exchange reserves and exchange rates.

“Furthermore, any change in currency reserves will cause the exchange rate to fluctuate, but not the other way around.

The reform from the fixed exchange rate regime to the flexible exchange rate regime not only increased the flexibility of the baht exchange rate, but also the accumulation of foreign exchange reserves in Thailand,” said Anusorn.

What is the outlook for the baht against other emerging market currencies?

Mr. Singapore’s DBS Chang said the baht still looks overvalued based on his long-term fair value metric.

“The baht is the worst performing ASEAN currency on a total return basis this year.

The baht is likely to continue to weaken against regional currencies, as Thailand continues to run trade deficits and Thai rates are also lower than other countries in the region.

Poon Panichpibool, market strategist at Krungthai Bank (KTB), expressed a similar view of the baht in the near-term perspective.

He said the baht may not appreciate much against emerging markets, except for those facing a weak economic outlook, such as China.

However, he thinks the baht may gain strength in the fourth quarter of this year as Thailand enters its peak tourist season.


Source: Bangkok Post

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