The plunging value of the baht appears ominous and raises worrying questions about its impact on the Thai economy.
On Friday (July 15), the baht fell to 36.73 to the US dollar, its lowest in 15 years and eight months, according to Kasikorn Research Center.
Between July 11-15, foreign investors sold Thai shares worth 1.1 billion baht. Net buys have totalled 122 billion baht since early this year. They also sold Thai bonds resulting in net capital outflows of 2.1 billion baht from the Thai bond market since early this year.
Combined with the fast-rising inflation in Thailand and in many countries, a large number of consumers may feel the squeeze.
The weakening value of the baht has inflicted losses on some people while some have gained, said a senior director at the Bank of Thailand (BOT).
The manufacturing sector is complaining about rising production costs, as raw material and energy prices soar.
“We don’t hear complaints from other groups,” Daranee Saeju, senior director at BOT’s financial markets department, said without mentioning export groups.
Net positive impact
Allaying fears about the Thai currency’s slide, Daranee explained that people should look at the exchange rate of the baht in comparison with other currencies, adding that other regional currencies had also weakened against the dollar. For example, as of July 5, the baht had dropped 7.6 percent against the dollar, but taking into account other currencies — known as nominal effective exchange rate — the baht had depreciated only 1.5 percent.
Pisit Puapan, executive director at the macroeconomic policy bureau, Fiscal Policy Office, believes that the net impact would be positive for Thailand’s economy as the country depends on the export of goods and services, and they account for 67 percent of gross domestic product (GDP).
A weak baht makes Thai products more competitive in export markets.
Thailand’s trade deficit for June amounts to 40 billion baht as currency weakens
A plus for tourism
The weaker baht also will make Thailand more attractive to foreign tourists who consider a variety of choices among tourist destinations.
The Fiscal Policy Office had forecast that the number of arrivals this year would rise to 6.1 million, but the office may revise upward its forecast by the end of this month, said Pisit.
Before the COVID-19 crisis, revenue from foreign tourists represented 12 percent of GDP and local tourism accounted for 6 percent of GDP, according to Pisit.
The influx of foreign tourists also will boost domestic consumption and income for related industries, such as hotels, restaurants, and tourist guide services.
Inflows of foreign currency revenue from tourists would help stabilize the baht and even reverse its course.
Income boost for exporters
Exporters will get more baht when they exchange their dollar income.
Anusorn Tamajai from the executive committee of Thammasat University’s Pridi Banomyong International College, argued that the weakening baht would boost the incomes of exporters, especially those who sold their products in April and May when the baht was 33 to the dollar. Now, with the baht depreciating to 36-37 baht per dollar, exporters get a 9-12 percent revenue boost when they exchange dollars to the baht, he said.
To steady the fluctuating baht, the central bank is believed to have intervened in the exchange rate market by buying baht and selling dollars from its reserves. The intervention has led to a $3-billion drop in its international reserves as on July 8 compared to the previous week.
It is also the first time in three years that international reserves have fallen from $220 billion to $218 billion, Anusorn pointed out. However, if the US economy enters a recession, it would slow down the strengthening of the dollar.
Rising cost for borrowers
Borrowers will face higher costs if the Monetary Policy Committee raises the policy rate next month by 25 basis points, as commercial banks will follow suit and hike their lending rate.
The repayment burden for borrowers will rise by 5-5.5 percent, Anusorn said, explaining that currently, the average retail borrowers’ debt repayment installment accounts for 34-35 percent of their monthly income. If the policy rate goes up by 25 to 75 basis points, then debt payment will rise to 40 percent of income.
This will limit consumer spending and as a consequence, private companies could hold back or delay their planned investment, he argued.
Private consumption accounted for 54 percent of GDP last year and private investment for 18 percent.
Global factors
Is Thailand immune to the Sri Lanka contagion and capital flight from other developing countries?
As the world witnesses a deepening crisis in Sri Lanka, it will prompt investors to evaluate the fiscal situation of countries while those having high foreign debt would be seen as most at risk.
US Treasury Secretary Janet Yellen said recently at the G20 finance ministers’ meeting in Bali that the stronger dollar is having a spillover effect, as it has made other currencies depreciate. On the one hand, though depreciating currencies would make their products attractive, those who have high dollar-denominated foreign debt would find it more difficult to service their debt.
According to the BOT, Thailand has short-term foreign debt of $27 billion, due in less than a year, but the country’s international reserves are three times in excess of the short-term debt. This strong position would prevent massive capital outflows or an economic crisis.
However, household debt was high at 90 percent of GDP at the end of last year. This may prove a challenge for policymakers to tackle.
The limitation of monetary policy — interest rate and exchange rate management — is that it cannot please everyone. Fiscal policies would be much more effective in targeting a group in need of help.
So far, the Thai government has subsidized diesel and cooking gas and the Commerce Ministry has imposed price control on some goods. But the World Bank has criticized the Thai government’s policy, and suggested that the subsidies should be more targeted, and help only vulnerable groups.
“The policies of the Thai government as well as in other countries to deal with high inflation appear to be more broad-based rather than targeted at a narrow group,” said Kiatipong Ariyapruchya, senior country economist at the World Bank office in Thailand.
Outlook for Thai economy
Many research houses have predicted that Thailand’s economy would grow at around 3 to 3.5 percent this year, if there are no new major shocks.
However, there are developments around the world that are a dampener: China’s economy grew only 0.4 percent year on year in the second quarter, while there are increasing concerns about a global recession. This situation could affect to some extent exports that would benefit from the weakening baht.
By Thai PBS World’s Business Desk
