6 June 2024

The Bank of Thailand (BOT) has been facing the delicate task of navigating the baht and the economy through turbulent waters. 

As the government has apparently almost run out of tricks to jump-start the economy due to the high debt it is saddled with, the responsibility has fallen on the central bank as well.

The recent move by the central bank to hike the key policy rate by 0.25 percentage points to 1 percent has, however, made some analysts wonder if the BOT’s actions were too little to stem the rapid depreciation of the baht.

This has been caused by the widening gap between the benchmark rates of Thailand and the US, as the US Federal Reserve has aggressively raised its federal funds rate to a range of 3-3.25 percent.

The Thai stock market has been subjected to high volatility like the global equity market.

The sliding baht fell to below 37 to the US dollar, a key psychological barrier, raising speculation that it could further weaken to 40 per dollar.

Charl Kengchon, executive chairman at Kasikorn Research Center, had earlier warned that the BOT should give priority for the time being to addressing the rapid weakening of the baht rather than solely focusing on inflation.

Moving too slowly to address the baht’s exchange rate could lead to higher costs to defend it later, he had said.

Bank of Thailand Governor Sethaput Suthiwartnarueput feels the pressure from the market. He said he was almost exhausted trying to explain why the central bank had adopted a gradual and measured approach to deal with the interest rate hike, which was aimed at containing inflation without disrupting economic recovery.

“It is the issue of the dollar strengthening that is affecting the value of the baht and other currencies around the world,” he said. “It is the price of the dollar,” he added and noted that when the dollar strengthens, it would cost more in terms of baht.

The dollar has appreciated about 18 percent since early this year, while the baht has weakened by 12 percent, he said.

The baht’s depreciation was in the middle of the group of currencies that had weakened, compared with the Japanese yen, which has dropped by 20 percent, and the Korean won, also down close to 20 percent.

Weak baht and inflation 

Observers are worried that the baht’s fast depreciation would push up inflation, as Thailand is heavily dependent on energy imports. But Sethaput has argued that the far weaker baht had not resulted in any significant impact on inflation.

He said headline inflation had peaked in the third quarter of the year and it would start to decline, while core inflation (excluding fresh food and energy) would peak somewhere in the fourth quarter of this year. Core inflation is being closely watched by the central bank, as it would take more time for it to subside compared to headline inflation.

Latest inflation figures may vindicate the central bank’s claims. Headline inflation in September rose 6.41 percent year on year, compared with a 7.86 percent rise in August, partly due to a drop in oil prices, while core inflation was 3.12 percent compared with 3.15 percent in August.

Despite the slowdown in the pace of increase in headline inflation, it was still well beyond the 1-3 percent inflation target set by both the Finance Ministry and the BOT.

The prices of goods and services in September continued to remain high, while severe floods in many provinces also contributed to the rising inflation, according to the Commerce Ministry.

Sethaput was optimistic that headline inflation would slow down to within the target range next year.

However, oil and gas prices are still key factors that would determine when inflation will subside. Energy prices are highly volatile with crude oil price recently falling below $80 a barrel, but then rebounding back to around $90 dollar a barrel.

Poll shows most Thais unable to earn enough to make ends meet

Worried consumers

The Consumer Confidence Index in September continued to climb upward for the third consecutive month to 46.4 from 46.3 in August, according to the Commerce Ministry.

Recently, lower oil prices, the recovery of the tourism industry and government support measures contributed to a slight rise in consumer confidence. But expectations for the next three months look less optimistic.

The consistently weakening baht, the Russia-Ukraine war and the global economic slowdown have made consumers concerned, a Commerce Ministry report said. The Consumer Confidence Index below the 50-point mark suggests persisting weakness, as high inflation has eroded people’s purchasing power.

Exports shore up economy 

Export growth remains a lifeline for the economy, but it is susceptible to global pressures.

The value of merchandise exports in dollar terms in August rose to $23.6 billion, up 8.2 percent year on year (YoY), compared to a 3.4 percent YoY expansion in July. Excluding gold, export value grew 8.1 percent YoY compared with 3.8 percent YoY in July.

However, exports dropped by 3.9 percent month on month due to slowdown in demand of trading partners, especially China, which saw the export of agro-manufacturing products and metals fall steeply, according to the central bank’s economic report.

Thailand’s current account deficit has improved to $3.5 billion in August from $4.2 billion in July. The deficit in the first eight months reached $18 billion.

Some analysts have said the lower deficit in August was a good sign, as the recovery of the tourism sector would bring in more hard foreign currency and it would prevent the baht from sliding further. Although, the weak baht has boosted exports. Some observers expect the number of tourists to reach 10 million this year and close to 30 million next year, which could help turn the current account deficit into surplus next year.

Sethaput also assured that the current account deficit, estimated to be $14 billion this year, would not impact external stability, as Thailand has large international reserves of $240 billion. The deficit is about 2.8 percent of gross domestic product compared with 8 percent of GDP in the year running up to the 1997 financial crisis.

Private sector sees ray of hope 

Sanan Angubolkul, chairman of the Joint Standing Committee on Commerce, Industry and Banking (JSCCIB), said on October 5 that the private sector was optimistic about the economy this year and next year.

The JSCCIB raised its economic growth forecast slightly to 3-3.5 percent, up from the previous estimate of 2.75-3.5 percent this year, due to better-than-expected recovery of tourism while export value is expected to grow 7-8 percent, up slightly from the previous estimate of 6-8 percent. GDP could grow 4 percent next year as the number of foreign tourists is expected to reach 20 million.

The business community is still worried about the slowdown of the global economy, and the Russia-Ukraine war exacerbating high energy prices.

Inflation would remain high as the weakening baht has raised the cost of import, said Sanan, who is also chairman of the Thai Chamber of Commerce.

The combination of higher oil prices and weak baht has long been seen as a force driving high inflation.

After the JSCCIB press conference, OPEC+ countries announced a cut in oil production by 2 million barrels per day from November to shore up prices. Some analysts have predicted the cut could see oil prices rally back to $100 per barrel, which would be bad news for Thailand.

By Thai PBS World’s Business Desk