The crazy rise of the baht threatens the Thai economy

The Thai baht is rising , a development that worries analysts because it does not reflect economic reality and threatens exports.

The Thai currency has continued its upward trend since the beginning of the month amid volatility in global financial markets and rising global gold prices.

This Friday, May 23, at 10:00 a.m. (Thailand time), 1 euro is worth 37.09 Thai baht and 1 US dollar is worth 32.73 baht.

See: Thai Baht THB exchange rate

This sudden strengthening raises concerns for Thailand's fragile economy, as it does not reflect a robust recovery in domestic activity.

On the contrary, analysts warn that the appreciation of the baht could put additional pressure on the economy, particularly on the export sector, which remains a key driver of growth.

Kanchana Chokpaisansilp, head of research at Kasikorn Bank, pointed out that the current level of the baht represents a significant appreciation compared to the beginning of the month, mainly due to two key factors.

The first is the continued rise in global gold prices, which is prompting investors to turn to gold as a safe haven amid ongoing geopolitical tensions, particularly the unresolved conflict between Russia and Ukraine.

The second factor is the weakening of the US dollar, under pressure from domestic economic uncertainty, concerns about fiscal stability and the recent downgrade of the US credit outlook by Moody's.

She explained that despite the lack of a breakthrough in the negotiations between Russia and Ukraine, global markets remain nervous, which contributes to capital movements favorable to the Thai baht.

At the same time, the lack of clarity in the US Federal Reserve's monetary policy has further eroded investors' confidence in the dollar.

Baht rise deemed 'unusual'

Sanguan Jungsakul, Senior Director of Investment Markets Research at Krungthai Bank's Financial Markets Division, said:

"The current appreciation of the Thai baht is unusually rapid and mainly due to short-term speculative flows into gold and the weak US dollar, rather than an improvement in Thailand's economic fundamentals."

According to him, the main factor behind this appreciation is the surge in the global price of gold, which has risen by more than 27% since the beginning of the year.

This triggered an increase in demand for baht in global markets as investors converted their currencies to buy gold, leading to a rise in the value of the baht globally.

"The main factor behind the baht's strength is clearly gold," Mr. Sanguan said.

"Given the strong correlation (about 0.5) between gold and the baht, every 10 baht rise in gold tends to strengthen the baht by about 0.5 baht.

This effectively turns the baht into a commodity currency."

He added:

"Against a backdrop of heightened global tensions, particularly in the Middle East and the Gaza Strip, as well as other geopolitical uncertainties, investors continued to seek safe havens, which supported the rise in gold and, by extension, the baht."

The baht appreciates alongside the won and the yen

Mr. Sanguan, however, expressed concern that the baht's appreciation follows the trend seen for the South Korean won, the Japanese yen and the Taiwanese dollar, which have all strengthened significantly amid a weak dollar.

But unlike these economies, Thailand does not hold significant dollar-denominated assets, which would typically trigger capital repatriation when the dollar falls.

"Thailand does not have as many dollar assets as these countries, so our currency is not expected to appreciate as quickly or as strongly," he said.

"Since the end of last year, the best-performing currencies have been the Japanese yen (+9.14%), the Taiwanese dollar (+8.79%) and the South Korean won (+6.18%).

The Thai baht, meanwhile, ranks sixth with +4.20%.

This is unusually high for Thailand and suggests that something is wrong, even though the baht's performance may seem regionally average.

Foreign exchange reserves expected to reach new record

Despite these concerns, the rapid strengthening of the Thai baht and the currency's high volatility are reflected in the increase in foreign exchange reserves, which are approaching their previous all-time high of US$259 billion.

The latest figure stands at US$257 billion, and Mr. Sanguan believes reserves could soon reach a new record.

This indicates that the Bank of Thailand (BOT) may have already intervened in the foreign exchange market to manage volatility, he said.

Going forward, Mr. Sanguan expects the baht to trade in a range of 32.50 to 33.00 baht per US dollar, provided there is no further surge in gold prices or further weakening of the US dollar.

If these external pressures ease, the baht could depreciate slightly in the short term.

Baht's strength follows regional currencies

Wachirawat Banchuen, senior financial strategist at Siam Commercial Bank, said:

"The recent appreciation of the Thai baht, which reached its highest level in weeks, follows the trend of major Asian currencies, influenced mainly by external factors."

These include rising crude oil and gold prices, fueled by tensions in the Middle East, and speculation that the Japanese government may enter into talks with the United States about weakening the US dollar.

Despite this, remittance flows to Thailand have not shown a clear upward trend, suggesting that the baht's strength is not based on domestic economic fundamentals.

It does not reflect a strong recovery or an export boom, he added.

Looking ahead, he expects the baht to trade in a range of 32.50 to 33.00 baht per US dollar, but it could appreciate to 32.30 baht if a significant breakthrough is achieved in the US-Japan negotiations.

"Unless there are further positive developments, we believe the baht will not appreciate much further.

"The likelihood of it falling below 32 baht remains limited unless progress at the government level boosts foreign investor confidence," Wachirawat said.

Funds flow into Thai bonds

Piriyapon Kongvanich, head of fundamental analysis at Bualuang Securities, noted that foreign investors have continued to invest in Thai bonds since the beginning of the year, totaling around 59 billion baht.

This trend is expected to continue due to concerns about US fiscal policy, which could lead to higher inflation and limit the US Federal Reserve's ability to cut interest rates.

He also highlighted a new US tax proposal aimed at extending previous tax cuts.

The market is concerned about the fiscal risks this poses, particularly after Moody's downgraded the US credit outlook.

The U.S. Congressional Joint Committee on Taxation estimates that this proposal would cost $3.72 trillion over 10 years.

Mr. Piriyapon noted that some sectors in Thailand benefit from a strong baht, particularly those with high foreign currency debt and overseas-based operating costs, such as energy and petrochemical companies.

Private sector warns of rapid baht volatility

Kriengkrai Thiennukul, president of the Federation of Thai Industries (FTI), told Krungthep Turakij newspaper that the rapid fluctuations of the baht are having a tangible impact on exporters.

This high volatility, similar to that observed during Donald Trump's presidency, has made exporters increasingly cautious, especially as the strengthening baht reduces revenues from foreign sales.

To mitigate risks, exporters hedge against exchange rate risk in advance.

However, this affects their ability to offer competitive prices for future shipments.

If they raise prices to cover exchange rate losses, they risk losing orders to lower-cost competitors, forcing many Thai exporters to absorb the losses, an unsustainable situation in the long run.

The strength of the baht does not correspond to the economic situation

Wisit Limluecha, vice president of the Thai Chamber of Commerce, stressed that the appreciation of the baht was not in line with the real economic situation.

Normally, a strong baht would be a sign of a robust economy and growing tourism.

However, this appreciation is the result of global currency volatility, mainly due to constantly changing US policy, and not the strength of the domestic economy.

To address these challenges, Wisit proposed three measures:

1. Use of the baht in cross-border trade, especially with neighboring countries, which has already been implemented to some extent and can help mitigate exposure to exchange rate risk for both buyers and sellers.
2. Adoption of several foreign currencies, such as the yen and yuan, for trade, facilitated by existing bilateral agreements between the Bank of Thailand (BOT) and regional central banks.
3. Hedging currency risk, even if this results in additional costs for companies. Profit margins, already low, must then be shared with banks to benefit from this protection, which reduces competitiveness.

See also:

Economic uncertainty: Thailand scraps 10,000 baht aid package

Thailand: Baht strengthens, but could fall again

Struggling economy: Thailand prepares emergency stimulus plan

Looming crisis in Thailand: Real estate market teeters

Tourism in crisis: Thailand responds to criticism from foreign travelers

US tariffs: Thailand forced to negotiate to avoid crisis

Source: The Nation Thailand