BANGKOK – When new Bank of Thailand (BoT) Governor Sethaput Suthiwart-Narueput assumes his post on October 1, one of his first crucial challenges will be how to deal with the kingdom’s strong currency, the baht.
In 2019, the baht appreciated 9% against the dollar, one of the best currency performances in Asia.
Kasikorn Research Center, a Bangkok-based think tank, has predicted that the baht is likely to remain strong vis-à-vis the dollar throughout 2020, despite the ravages of the Covid-19 crisis and record low-interest rates of 0.5%.
Thai gross domestic product (GDP) is projected to contract 8-10% this year. GDP contracted a whopping 12.2% in the second quarter (2Q20).
The baht’s strength is thus more a reflection of market perceptions of still-strong underlying financial fundamentals rather than projected weak economic performance.
As of July, the BoT recorded net international reserves of 274.5 billion. Fitch Ratings notes foreign reserves are up some 8.5% year on year, defying its early expectation of a full year 11% drop.
At the same time, Thailand’s banks’ balance sheets are still perceived by ratings agencies and investment banks as generally healthy. So too is the government’s fiscal position, with public debt to GDP standing at 35% at the end of 2019.
The government has earmarked various Covid-19 rescue measures, but, as always in Thailand, distribution of the earmarked funds has proven a challenge.
The baht was trading at about 31.5/$1 in August, up 5% from this year’s nadir of 33/$1 in early April, when Thailand’s Covid lockdown was still in place. The kingdom’s borders are still closed to foreign travelers, crushing the tourism industry which normally accounts for around 18% of GDP.
Despite a massive decline in tourism receipts, with arrivals down 60% January-May year on year, Thailand still notched a current account surplus of 123.6 billion baht ($3.9 billion), comprising a 257.1 billion trade surplus with a deficit of 133.5 billion baht in the services, according to the government’s National Economic and Social Development Council (NESDC).
The current account measures the balance in both trade and services, with the latter including earnings from tourism. Exports of goods in 2Q20 fell 15.9% while imports fell 19.3%, according to NESDC data.
“The current account surplus is not due to our good export performance, because exports are doing very poorly,” said Charl Kengchon, executive chairman of the Kasikorn Research Center. “The reason we have such a huge import contraction is because we are not investing enough.”
Private sector investment fell 15% year-on-year in2Q20, following a 5.4% drop in 1Q20.
Thailand has generally underperformed its main regional rivals in terms of attracting FDI in the last five years, due to a host of competitiveness issues including an aging population, relatively high labor costs, shortages of skilled labor, persistent political uncertainties, and, last but not least, a relatively strong currency vis-à-vis the dollar.
Between 2015-2018 Thailand – the second largest economy in the Association of Southeast Asian Nations (ASEAN) – attracted $32.9 billion in FDI, compared with Indonesia’s $63 billion, Vietnam’s $54 billion and Malaysia’s $38.9 billion, according to the ASEAN FDI database.
The strong baht is not solely to blame. Thailand Development Research Institute (TDRI) Research Director, Kirida Bhaopichitr, notes that during the first half of 2020, the currencies of Malaysia, the Philippines and Singapore have actually appreciated more against the US dollar than the Thai baht.
But the currencies of Indonesia and Vietnam, Thailand’s two main competitors for FDI, have depreciated more than the baht in the same period.
“I think what people look at is the current account surplus and Thailand’s surplus is actually larger than that of the other ASEAN countries, and compared to Indonesia, definitely,” Kirida said.
Indonesia, Thailand and Vietnam are generally viewed as the most likely destinations for FDI fleeing the US-China trade war and moving operations from China to Southeast Asia. But Thailand’s competitiveness constraints, including a strong currency, have diminished its comparative allure.
“The baht is part of the bigger picture of the declining competitiveness of the country,” Charl said. “But among the factors contributing to the declining competitiveness, I think the baht issue is still reversible.”
The strong baht is not only hampering FDI inflows, but it also undermines the competitiveness of Thailand’s exports, the traditional engine of growth for the country accounting for as much as 65% of GDP.
Take, for example, rice exports, which previously topped 10 million tons a year and earned the country more than $5 billion in foreign exchange annually. This year, Thailand will be lucky to export 6.5 million tons, and earn about $4 billion, industry sources said.
Thailand’s declining rice export competitiveness is attributable to several factors, including higher production costs than its main rice exporter competitors (India and Vietnam), a failure to develop new rice varieties for the market (as Vietnam has done) and the strong baht.
“The Thai baht has been getting stronger and stronger compared with our competitors like Vietnam or India, which have very steady currency levels, while the baht has appreciated almost 10%,” said Chookiat Ophaswongse, honorary president of the Thai Rice Exporters Association.
“If the baht rate was around 33 baht/$1, we could reduce our price on jasmine rice by $50-$60,” Chookiat speculated. “At the moment, our price on plain white rice (the main export variety) price is like $30 higher than Vietnam’s but with a weaker baht I think we could lower the price by $20-30 a ton.
“With a weaker baht we could reclaim our market share by quite a bit,” Chookiat said.
The BoT’s challenge is how to weaken the baht without sparking a backlash. Analysts suggest new BoT governor Sethaput, known for his conservatism, will have limited scope to shift policy.
The BoT is extremely cautious about currency intervention, and rightfully so. Its failed defense of the baht when it was pegged to the US dollar and attacked by currency traders marked the beginning of the 1997-98 Asian financial crisis.
Furthermore, any obvious effort to deliberately weaken the baht against the dollar would likely prompt swift penalties from the trade deficit-sensitive administration of US President Donald Trump. Thailand is at risk of being put on a US Treasury Department “currency manipulator” watch list.
Still, Thailand earned a $20.1 billion trade surplus with the US last year, and notched up a $11.7 billion surplus in the first half of 2020.
One explanation for the baht’s strength vis-à-vis the dollar goes back to inflation and purchasing power parity, economists say.
Thailand’s inflation rate has been consistently lower than that of the US, which affects the purchasing power parity of the two currencies, argued Supavud Saicheua, managing director of research at the Kiatnakin Phatra Financial Group, a Bangkok-based financial outfit.
“The fact that we have persistently let Thailand have a lower inflation rate than the US means that the baht has appreciated against the dollar, and it has,” Supavud said.
“If I were to conduct monetary policy I would have said, ‘make sure the inflation rate in Thailand is the same as that of the US, so in the long term the baht-dollar relationship would be stable, on a power purchasing parity basis,’” said Supavud, co-founder of the CARE political movement that is offering free advice to the government on economic management.
TDRI’s Kirida has some other recommendations for the government. “What the central bank could do would be to promote more outflows of Thai baht,” she said. “If there is too much money coming in the country, then promote outflows.”
The BoT has actually relaxed past restrictions on currency outflows, but it maintains ceilings of the amounts that could be lowered.
“Another option would be to import more,” Kirida said. “If the government is really going to undertake these investments that have been planned, then they should consider importing more.”
While the prescriptions for depreciating the baht are plenty, economists agree that the government and BoT cannot sit on their hands.
“Suppose we just keep going with the baht getting stronger?” Charl said. “If we don’t do anything and keep seeing this type of performance – exports deteriorating, FDI deteriorating – eventually we are going to have pretty low growth in GDP.”
“If that happens, I think the market mechanism is going to force businesses that are not competitive to get consolidated. They are going to be replaced by bigger companies,” he said.
And that could aggravate Thailand’s other, bigger financial problem: growing inequality and rising poverty.