Weaker baht may not help economy if COVID not contained
The baht has seen a steady slide for weeks amid a surge in COVID-19 infections and deaths recently. The baht fell to 33.39 to the US dollar at one point last week, its weakest in almost three years, according to Kasikorn Research Centre.
“The baht’s slide reflects the dichotomy of the Thai economic recovery and the US economic recovery. The outbreak of the delta variant without sufficient vaccination equates to lockdowns which make economic activity very difficult,” said Kobsidthi Silpachai, head of capital markets research at Kasikorn bank.
Thailand is among emerging market economies which have failed to rebound quickly from the COVID-19 fallout.
Business leaders recently were worried that Thailand’s economy may again contract this year after a sharp contraction of 6.1 per cent last year. They called for the government to accelerate the vaccine rollout, as fully inoculated people (two jabs) were less than 10 per cent of the population, while new cases have been rising by around 20,000 every day in the past few days.
Some analysts believe that if the government is able to contain the pandemic in the next few months, the economy and baht could rebound.
Current account deficit
Thailand usually had large current account surpluses in the past, stemming from slower investment and influx of foreign tourists at close to 40 million a year before the pandemic erupted. Economists had then voiced concern that the baht’s value did not reflect the weakness of the economy, while exporters complained the strong baht was hurting their competitiveness as their products became more expensive.
In a year and a half of the pandemic, fortunes have gone into a tailspin. With foreign tourists gone due to travel restrictions and the global economic situation, foreign currency earnings have plummeted, putting pressure on the current account. It is estimated that Thailand’s current account deficit could reach US$7 billion this year, Kobsidthi said. The current account deficit is also weighing down on the baht, weakening the Thai currency.
Stronger US dollar
The quick recovery of the US economy has contributed to the dollar strengthening against other currencies, including the baht. This points to different directions in monetary policy focus. The Bank of Thailand (BOT) will have to increase monetary policy accommodation while the US Federal Reserve can afford to rein back, said Kobsidthi
The Fed is expected to raise its policy rate sooner than expected earlier, which would further strengthen the US dollar.
Thailand’s economic think-tank, the Thailand Development Research Institute (TDRI), predicts that the number of unemployed in the kingdom will reach one million by the end of this year, if the COVID-19 pandemic remains uncontrollable.
Low interest rates
The BOT has implemented an accommodating monetary policy by keeping the policy rate low at the current 0.5 per cent, aimed at boosting the subdued economy and lowering the debt burden of small businesses and people. The downside of a lower interest rate is it does not attract capital into the country as investors can get higher returns from countries having higher rates.
A rise in the key policy rate is unlikely anytime soon, as the virus continues to pose a challenge while also slowing economic growth.
Thailand does not face the threat of rising inflation due to weakening consumption as households are bogged down with high debt. The ageing society phenomenon has contributed to weaker consumption as the needs of the elderly are limited, compared with societies having a large, young population, such as Vietnam.
The weaker baht has led to foreign investors dumping Thai stocks.
The sliding Thai currency has cast a shadow on the Stock Exchange of Thailand whose index is down by 2.83 per cent in the past three months. Foreign investors were net sellers, worth Bt103.8 billion, from January to August 10.
The weaker baht should normally have lured more foreign tourists to visit Thailand because of the increased buying power of their currencies. But the spread of the virus has deterred them from coming in large numbers.
Last week, the United States warned its citizens against travelling to Thailand due to rising coronavirus cases. This is a setback for Thailand’s plan to reopen the country in the fourth quarter.
The Phuket Sandbox programme, which allows tourists to stay in the resort island without quarantine — if they are vaccinated and test negative — has also come under pressure, as the virus is spreading to all parts of the country.
Boost for Thai exports
The weaker baht will increase Thailand’s price competitiveness as exporters can sell their products at lower prices than competitors whose exchange rates are stronger. Combined with faster recovery in developed countries and China, the weaker baht will further boost exports and shore up the economy.
In the first half of the year, exports in dollar terms grew 15.5 per cent. Many research houses have recently revised upward their export projections for this year. However, if infections in the manufacturing sector escalate, it will potentially disrupt the export sector, nullifying the advantages of a weaker baht.
Thailand’s “modern trade” confidence index in the second quarter of this year hit the lowest point in the past three years, at 45.3, as retail businesses are being hit hard by the pandemic and government measures, according to a joint press conference by The University of the Thai Chamber of Commerce (UTCC) and the Board of Trade of Thailand yesterday (Monday).
Cushion of large forex reserves
In 1997, when the BOT followed the fixed exchange rate system, which tied the baht to the dollar, the central bank depleted its foreign exchange reserves defending a run on the baht, triggering the “Tom Yum Kung” crisis.
Wiser after that fiasco, the central bank has built up strong international reserves, which as of July amounted to US$248 billion. Thailand is among a few emerging economies with large international reserves, which offer a buffer against the risk of currency attack by speculators.
“Though the Thai economy is weakening, the baht is unlikely to be attacked again by speculators, because the central bank has a war chest of reserves,” said Kavee Chukitkasem, deputy managing director at Kasikorn Securities.
Manageable public debt
Thailand’s public debt is currently at 56 percent of gross domestic product (GDP). The debt is expected to increase as the country will need to borrow more to battle the pandemic and compensate businesses and people affected by its lockdown orders. The debt is expected to pass the current ceiling of 60 per cent of GDP in the next few years.
The private sector has proposed increasing the debt ceiling, arguing that the government needs to borrow more to stimulate the economy. However, Finance Minister Arkhom Termpittayapaisith said recently that the government did not see the need to lift the debt ceiling at the moment.
Many economists believe that public debt at slightly above 60 per cent of GDP would still be manageable. So a rise in public debt, but close to the current ceiling, would not worsen confidence in the baht.
Threat of political uncertainty
Political instability, such as any abrupt change of government, could derail economic recovery if political events disrupt or delay annual public spending. Political violence could also dampen consumer and investor confidence. Thailand has experienced renewed street protests since last year.
Kobsidthi, however, said so far political uncertainty had not yet translated into rising risk premium for Thai debt, such as credit default swaps.
By Thai PBS World’s Business Desk