BANGKOK – A US Treasury Department report issued on Thursday tagged Thailand along with nine other mostly Asian countries as a possible currency manipulator, notably at a time when the Bank of Thailand (BOT) is struggling and largely failing to keep the baht competitive against rival currencies.
On Thursday, the baht fell below 30 to the US dollar for the first time this year, an appreciation that worries Thai exporters who are already suffering from the global economic slowdown in demand caused by the pandemic and an already strong currency compared to regional rivals such as China and Vietnam.
The baht has appreciated more than 6% against the dollar since July 20, 2020, when it hovered at 31.8 to the dollar. The baht strengthened to 29.8 on December 17.
Vietnam was designated as a currency manipulator by the US Treasury Department, a shot across the bow of a nation that has arguably profited more than any other from the trade war. China was kept on a Treasury Department watch list of possible currency manipulators, along with Thailand, South Korea, Japan, India, Singapore and Malaysia.
US lame-duck President Donald Trump, in his latest parting policy shots, is threatening to morph his administration’s trade war into a wider currency war at a time the US dollar is declining against most Asian currencies.
Whether or not the incoming administration of President-elect Joe Biden will ease or reverse that pressure isn’t immediately clear from his early policy signals, say analysts.
Yet observers doubt that the Biden administration will brand Thailand as a currency manipulator, or that the US Treasury Department’s latest report will alter the baht’s upward trajectory.
“I actually don’t think it will affect the currency fundamentally, or create some policy change but it makes our policymakers hesitate more about direct intervention,” said Jitipol Puksamatanan, senior vice president at Chief Investment Office, SCBS, a think tank.
The US Treasury Department sets three criteria for currency manipulation comprising – 1) notching up a trade surplus of more than $20 billion with the US, 2) a current account surplus exceeding 2% of GDP and 3) foreign exchange intervention exceeding 2% of GDP.
Thailand meets the trade criteria, having notched up a $21.7 billion trade surplus with the US in the first ten months of 2020, and its current account surplus this year, while on the decline, should well exceed 2% of GDP. It was 7% of GDP in 2019.
The US Treasury report acknowledged that the BOT’s net purchase of foreign exchange during the 12-month period ending June 2020 amounted to $10 billion, or 1.8% of GDP, below the 2% threshold.
Thailand’s foreign exchange reserves at the end of October were $236.6 billion, while public debt was a low 42% of GDP, favorable financial fundamentals that are contributing to the baht’s appreciation. So, too, presumably is Thailand’s relative success in containing the pandemic with under 4,300 overall cases and just 60 deaths.
The US Treasury Department had already launched a Section #301 currency manipulation investigation into Vietnam in October, but it’s formal designation as a manipulator, along with Switzerland, caught many by surprise.
Vietnam meets all three of the department’s criteria, with a trade surplus with the US exceeding $56 billion in the first ten months of 2020, a current account surplus of about 4% of GDP and accumulated foreign exchange reserves equal to 3% of GDP, according to unofficial estimates.
Vietnamese authorities, analysts say, could argue that their hefty accumulation of foreign exchange reserves has helped to stabilize the dong against the dollar, in hopes that a more sympathetic Biden administration would lift the designation.
“Vietnam can make an argument that what they are trying to do is to support the value of the dong, that they want people to have confidence in the dong because they have a lot of foreign exchange reserves,” said Michael Kokalari, chief economist for Vina Capital, a private equity fund. “But probably the whole issue will go away, anyway, with the change of US administration.”
Thailand can also argue that its hefty store of foreign exchange reserves has helped to strengthen the baht, which has in fact appreciated strongly against the dollar, suggesting that if the BOT is trying to depress the exchange rate it isn’t doing a very good job.
“We are good boys, we play by the book,” said Charl Kengchon, executive chairman of Kasikorn Research Center, a think tank.
This year, the BOT has sought measures other than outright currency market interventions to weaken the baht against the dollar.
Last month, the BOT introduced three new measures to slow the baht’s appreciation, comprising 1) allowing Thai retail investors to invest up to $5 million per year in foreign securities, up from a previous limit of $200,000, 2) allowing local residents and companies to open foreign currency deposits in Thailand and, 3) requesting that foreign investors in Thai equities or bonds to complete a registration process to limit short-term speculation on the baht.
Still, observers and analysts doubt that the measures will forestall the baht’s sustained rise. “Thai investors are generally not risk-takers,” said Charl. “So inducing them to invest abroad is pretty challenging.”
With the Stock Exchange of Thailand (SET) rebounding in recent weeks and likely to perform better in 2021, there is little incentive to invest in more volatile US or European markets, he says.
“On top of that, we have the expectations that the US dollar will decline in coming months because the economic outlook for the US economy is not good and people expect the Federal Reserve to cut rates one more time,” said Charl.
Thailand’s GDP is expected to contract at least 7.7% this year, with foreign tourism income that usually contributes 12% of GDP basically disappearing because of Covid-19. Private investment is down 8.9% year-on-year and exports have fallen 7.5% in 2020, though analysts expect the situation to pick up in 2021.
The National Economic and Social Development Council (NESDC), the state planning agency, anticipates 4.5% GDP year-on-year growth in 2021, fueled by a predicted 4.2.% jump in exports and private investments.
Those figures, along with a hoped-for return in tourism revenue once a vaccine is widely distributed, should boost Thailand’s current account surplus and the baht in 2021. Kasikorn Bank predicts the baht will reach at least 29.25 to the dollar by year-end 2021.
“The baht is getting stronger because of the current account surplus – and that is a structural issue that can’t be solved by short-term measures from the BOT,” said Charl. “It’s a pretty tough situation for them.”