Causes and Consequences of the Rising Baht

Anyone who has been living or even visiting Thailand in the last couple of years will be aware that the Thai Baht is appreciating at an incredible rate. In fact, since 2018, it has been the best performing in emerging Asian currency with year-on-year growth of 8% against the US dollar culminating in a six-year high.

What are the reasons behind the Thai Baht’s strength?

There are several reasons behind the currency’s strength, so highlighting one particular reason is complicated. Fears of a global recession have been looming for the last couple of years so investors, particularly those in Thailand, are looking for safe havens with gold being a natural choice. Political uncertainty in the US and UK has made these countries less attractive to Thai investors, especially with the perception that Thailand is politically stable.

Thailand also has a current account surplus and holds substantial reserves of foreign currencies which help to encourage foreign investment into Thailand. Success naturally breeds success, and the baht has performed admirably and is viewed very much as a safe haven compared to other emerging market currencies. This stability is likely to see the currency appreciate further as we move towards 2020 with speculative overseas investment, also pushing the value of the currency up.

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Thailand’s Competitiveness on the World Stage

At the turn of 2019, the Bank of Thailand (BOT) showed no apparent concern regarding the strength of the Thai baht as Thai importers were experiencing the benefits. However, as the year has progressed, Thailand has become less competitive with exports becoming adversely affected, and tourism also being impacted. Both of these factors place a strain on the overall Thai economy. As a result, the BOT revised its GDP growth forecast for the year from 3.8% to 3.3%.

In Q3 of 2019, the BOT took measures to try and control the ever-increasing baht by placing a cap on non-resident accounts as well as cutting the supply of three and six-month bonds in both July and August. Previously strict controls on investments outside of Thailand were relaxed in a further attempt to curb the Thai baht’s appreciation. In August 2019, the BOT also reversed a decision made in December 2018 to reduce the policy rate by 25 basis points to 1.5%.

Although the measures have been broadly welcomed, many financial analysts believe that the moves don’t go far enough and will have little impact either in the short or long-term. Other measures that have been proposed include foreign exchange rate intervention designed to reduce the baht’s value against other major currencies, a further interest rate reduction with 25 basis points again being muted and introducing capital controls to restrict speculative foreign investment previously cited as a problem.

Foreign Exchange Rate Intervention

Like with many central banks, the BOT frequently intervenes in the foreign exchange market. However, with the current buoyant market conditions, this could prove to be expensive and potentially counterproductive. Increasing Thailand’s foreign reserves helps to reduce the value of the Thai baht and control volatility. However, reducing the value of the currency as well as ensuring its stability may make it more attractive to investors looking for wealth preservation.

To stabilise the currency, BOT intervention may make to baht a perfect speculative asset creating a spiral of speculation met with further intervention. This snowball effect could leave the country’s economy with high levels of cash or alternatively, high-interest rates if the BOT chooses to try and reduce money supplies via the open market. Costs will inevitably be incurred if there are vast differentials between domestic and foreign interest rates.

Thailand’s vast foreign currency reserves, which equate to 39.9% of the country’s GDP and more than 200% of the IMF’s standard may see Thailand viewed as a currency manipulator and placed on the US’s watch list. All of these factors combined mean that any severe currency intervention is highly unlikely.

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Controlling Offshore Inflows

Controlling offshore fund inflows, which can rapidly exacerbate the problem with an appreciating currency, are likely to be far more useful, especially in both the short and medium-term. However, this does come at a price with Thailand’s credibility in the financial markets coming into question.

There has been evidence of the problems that this has caused in the past as similar moves in 2006 caused Thailand’s stock market (SET) to plummet. As a result, bond yield’s spiked and the central bank was forced to complete a U-turn within 24 hours and remove some of the restrictions. Whether currency controls will be implemented is open for debate, but the long-term consequences may be preventative.

Further Reduction to Interest Rates

The most popular move by the private sector would be for a further reduction in interest rates. Reducing interest rates would make the Thai Baht less attractive to foreign investors, particularly speculators, thus relieving some of the pressure on the currency. However, the counterargument is that the Thai Baht is attractive to foreign investors as it is viewed as a haven rather than a place to return significant yields. It instead brings into question whether such moves would be sufficient.

Another reason why the BOT may not favour this move is due to rising household debts which, at the start of Q3, were 78.6% of GDP, making it one of the highest in Asia. Spiralling debt could have a destabilising effect on the Kingdom’s financial stability.

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Is it Merely a Global Trend?

Many economists, both in Thailand and abroad, fear that the strong baht is symptomatic of global trends with low-levels of economic growth globally and worldwide exports contracting. Weakening the baht may have little effect with other countries having similar objectives and adopting more aggressive quantitative easing policies.

All central banks have a primary role in creating a sense of stability so therefore, should not subsidise cheap exports if it is contrary to overall economic policy. Currencies that are non-pegged do experience exchange rate fluctuations and, in reality, there is little that can be done long-term to impact this.

Conclusion

It appears that the Thai Baht will remain strong for the foreseeable future, certainly well into 2020. Exports and tourism will suffer, but financial stability is seen as more urgent by the powers that be. While efforts may be made to stem appreciation, it may be akin to King Canute attempting to hold back the tide.