Understanding the recent rise of the Thai baht

Thailand's currency, the baht, traded against the US dollar at 36.08 on Monday, August 1, an appreciation of 1.4% compared to the previous week.

The Bangkok Post newspaper has delved into the causes of this rebound and the implications for the economy.

What forces are behind this change?

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

View the live situation: Thai Baht (THB) exchange rate

It is important to note where this trend began before discussing the rebound.

Over the past few months, currencies have been primarily under the influence of the general trend of the US dollar, triggered by the invasion of Ukraine which led to a supply shock 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 added to inflationary pressure and ultimately prompted the US central bank to tighten its monetary policy and reduce the supply of US dollars.

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

So far, the US Federal Reserve (Fed) has raised interest rates three times this year.

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

"Since World War II, 11 of the 14 Fed tightening cycles have ended in a recession, which represents a 78% probability.

"This prompted markets to change their minds," said Mr. Kobsidthi, adding that forecasts of the Fed Funds trajectory by the futures market subsequently declined.

"This was confirmed by the release of US GDP data for the second quarter of this year, which contracted by 0.9%, marking the second consecutive quarter of decline.

This is a technical recession.

Twist

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), resulting in an average trend reversal.

Wei-Liang Chang, foreign exchange and credit strategist at DBS bank in Singapore, commented on the effects of the Fed's rate hike on the baht.

"The baht has rebounded against the weakening US dollar as the market anticipates smaller Fed rate hikes due to slowing US growth.

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

See: Thailand optimistic about its economy as tourism rebounds faster than expected

What has the central bank done so far?

The Governor of the Bank of Thailand, Sethaput Suthiwartnarueput, recently stated that there was no need to hold a special meeting to reinstate the currency as other countries in the region, such as Singapore and the Philippines, have done.

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

The movement will be closely monitored and if there is excessive volatility, the central bank will take action, Mr. Sethaput said.

Is the weakness of the 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 Information Center reports that as of July 31, foreign tourist arrivals totaled 3,334,326.

The main markets are Malaysia, India, Singapore, the United Kingdom and the United States.

Overall, the government expects around 10 million international visitors in 2022.

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

One of the best performing categories is food and agricultural products, which increased by 20.4% in the second quarter of this year compared to the previous year.

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

KrungThai Compass attributes this rapid growth to the weakness of the baht and strong global food demand due to the Russia-Ukraine war.

Mr. Kobsidthi stated that the weakness of the baht is not part of the central bank's plan to revitalize key sectors.

"The Bank of Thailand's position on foreign exchange is generally focused on stability, rather than direction.

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

We can track this by calculating the changes in the weekly position of foreign exchange reserves.

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

If foreign exchange reserves decrease, the bank must sell in order to strengthen the baht, which helps to control import inflation.

“If the central bank is trying to weaken the baht, changes in foreign exchange reserves should be consistently positive, rather than fluctuating (as they are currently),” he said.

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

"Thai exports have benefited from the global recovery since Covid-19.

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

"We are forecasting export growth of 7.8% in 2022, compared to growth of 18.8% last year," he said.

Regarding Thai tourism, Mr. Kobsidthi stated that the sector is expected to welcome 7.2 million foreign arrivals in 2022 compared to 430,000 in 2021.

Does Thailand's massive foreign exchange reserves contribute to volatility?

Thailand has a massive foreign exchange reserve that amounted to $201.4 billion in June 2022.

Amonthep Chawla, head of research at CIMB Thai Bank, said that the recent short-term volatility of the baht may not be relevant to the foreign exchange reserve.

This will only happen if the Bank of Thailand intervenes to allow the baht to evolve at the same pace as its counterparts.

He warned that Thailand should consider ways to use its foreign exchange reserves more effectively.

“Foreign exchange reserves can be considered as insurance.

You'll never know if we might be affected somewhere.

Suppose that an emerging markets crisis occurs now due to high external debt, a huge current account deficit, and a weakening currency.

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

It is good to have a reserve of foreign currency to cushion volatility and boost confidence.

But holding too large a foreign exchange reserve could be a dilemma.

"We are too afraid to take risks, which leads to weak growth," he warned.

Meanwhile, Anusorn Tamajai, a former board member of the Bank of Thailand, stated that numerous studies show a long-term equilibrium relationship between foreign exchange reserves and exchange rates.

"Furthermore, any change in foreign exchange reserves would cause a fluctuation in the exchange rate, but not the other way around.

"The reform from a fixed exchange rate regime to a flexible exchange rate regime has not only increased the flexibility of the baht's exchange rate, but also the accumulation of Thailand's foreign exchange reserves," said Mr. Anusorn.

What are the prospects for the baht compared to other emerging market currencies?

Mr. Chang of DBS in Singapore said the baht still appears overvalued based on its long-term fair value metric.

"The baht is the worst performing currency in ASEAN based on total return for this year.

The baht is likely to continue to weaken against regional currencies, given that Thailand still runs trade deficits and Thai interest rates are also lower than those of other countries in the region.

Poon Panichpibool, market strategist at Krungthai Bank (KTB), expressed a similar view on the short-term outlook for the baht.

He stated that the baht might not appreciate significantly against emerging markets, with the exception of those facing weak economic prospects, such as China.

However, he believes the baht could gain strength in the fourth quarter of this year, given that Thailand will be entering the peak tourist season.

Source: Bangkok Post