BANGKOK – Thailand’s once-mighty baht had depreciated against the US dollar by 8% as of August 30, the steepest fall of any currency in Asia in 2021. The fall is notable as the Thai unit outperformed all Southeast Asian and most Asian currencies in 2019 and 2020.
Despite a contraction of 6.1% in gross domestic product (GDP) in 2020, the Thai baht remained one of the strongest currencies in Southeast Asia, appreciating about 6% against the dollar in the second half of the year thanks to the economy’s sound fiscal fundamentals, namely a current account surplus, vast foreign exchange reserves and relatively low public debt at 42% of GDP.
In 2019, when GDP advanced a tepid 2.9% year-on-year, the baht was even stronger, advancing 9% against the dollar thanks to those same fiscal fundamentals and pubic debt of only 35% of GDP in the pre-Covid period.
But gravity started to weigh against the baht since the middle of this year due to a number of factors.
“The baht’s depreciation was due to firstly, the strength of the US dollar, secondly, the drop in Thailand’s current account following a sharp jump in imports as well as continuing income loss in tourism,” said Charl Kengchon, executive chairman of the Kasikorn Research Center, a Bangkok-based think tank.
Thailand’s foreign tourism receipts which accounted for 12% of GDP in 2019 and about 2 trillion baht (US$62 billion) in revenue, all but disappeared in 2021 due to the aggravated Covid-19 pandemic.
After attracting nearly 40 million foreign tourists in 2019, Thailand only drew 6.8 million in 2020 – all during the first three months of the year before travel bans were enforced after the first Covid wave hit in March 2020.
This year’s performance promises to be even more dismal, thanks to an ongoing travel ban and despite valiant efforts to promote the “Phuket Sandbox” as a beach getaway haven for vaccinated world travelers.
The Bank of Thailand expects a mere 150,000 foreign tourists to arrive in 2021, hitting the economy’s bottom line hard.
Thailand’s current account went from a surplus in 2020 to a deficit in the first half of 2021, which sent the baht tumbling against the dollar since July, hitting a nadir of 33.4 baht per greenback before recovering in early September to 32.47 on September 3.
The kingdom recorded a current account deficit of 16.5 billion baht ($51 million) in the second quarter of 2021, due to a services (including tourism) deficit of 321.1 billion baht ($9.94 billion), compared with a trade surplus of 304.6 billion baht ($9.43 billion), according to the National Economic and Social Development Council (NESDC), a state planning agency.
Thailand’s exports for the first seven months of 2021 rose 16.2% to $155 billion, while imports rose 28.7% to $152.4 billion, resulting in a slim trade surplus of $2.6 billion.
The trade figures need to be viewed in comparison with a very poor performance in 2020, when both exports and imports shrank double-digit year-on-year and private investment fell 8.6%, amid Covid-lockdowns and resulting economic doldrums.
The private investment contraction led to imports falling more than exports in 2020, leaving the country with a current account surplus. Private investment rose 4.6% in the first half of 2021, and with it imports have jumped.
“There has been an uptick in private investment since January this year,” said Kirida Bhaopichitr, research director at the Thailand Development Research Institute (TDRI), an independent think tank. “When exports recovered firms realized that their capacity was rising so they needed to invest more.”
Mid-year data from the Board of Investment (BOI) likewise suggests increasing foreign direct investment (FDI) in the near future, albeit from companies that have already shifted their production to Thailand, some decades ago.
In the first six months of 2021, the value of new investment applications at BOI rose 158% year-on-year to 386.2 billion baht ($12 billion), reflecting a poor performance in the first half of 2020, but also an uptick in confidence in Thailand’s growth prospects.
“During the first half of 2021, 60% of the total applications came from existing investors, accounting for 74% of the total investment pledges,” said BOI secretary-general Duangjai Asawachintachit.
Thailand’s private investment has been limp for almost a decade, as Thai firms have expanded abroad where growth prospects are better and foreign direct investment (FDI) inflows have underperformed the region, where Vietnam has recently received the lion’s share of new inflows.
But Thailand boasts a huge inventory of residual investments in sectors such as autos (chiefly from Japan) and electronics (Thailand is still the world’s leading exporter of hard disk drives, for instance, thanks to massive investments in the early 1990s by US-based Seagate Technology and Western Digital).
These existing players have been expanding their capacity. Western Digital, for example, recently closed down its factory in Malaysia (set up after Thailand’s devastating floods of 2011) to consolidate its operations back in Thailand.
Hard disk drives, no longer deemed a sunset industry thanks to the takeoff in cloud data storage, account for nearly 90% of Thailand’s electronics exports.
“It has been very good for them since Covid because hard disk drives are getting a second life from the fact that everyone is working from home and with home computing you need more storage so they are selling very well,” Kirida said.
Other export sectors that have performed well in the first half of 2021 include automotive parts and components, motorcycles, petrochemicals, fruits (up 42% with 83% going to China) and other processed foods.
While the weakened baht may have helped, analysts say it is not necessarily the main driver.
“I think it’s the demand factor,” Kirida said. “As developed markets recover there is more demand from the US, Australia, from the EU, and from China,” she said.
According to TDRI research, the dollar value of 80% Thai exports during the May-July period was higher than exports during the same period in 2019, pre-Covid.
While the Covid third wave has forced many factories to shut down and will disrupt some supply chains in the second half of 2021, most economists are predicting 13-16% export growth for the entire year. The baht is expected to stay in the 32/$1 to 33/$1 range, economists predict.
Thailand’s strong fiscal position in the pre-Covid period has been somewhat weakened by the pandemic but it has not been shattered.
A 1.5 trillion baht ($46.4 billion) relief program is likely to boost the public debt ratio up to 58% of GDP by year-end, from around 42% in 2020.
And while the shift from current account surplus to deficit will eat into foreign exchange reserves, particularly with the absence of foreign tourism revenues, there is still plenty of fiscal room to maneuver, analysts say.
“I think that Thailand’s $240 billion foreign reserves should be more than enough to absorb the current account deficit during the pandemic,” Charl said. “This year’s current account deficit is in the range of $16-18 billion, which should not cause any problem,” he predicted.
While Thailand’s macroeconomic picture remains stable, the bigger challenges facing the kingdom come from elsewhere.
“On the macro front I am not worried at all, but it’s on these other structural things,” said Kirida. “In the future what worries me is that given the slow recovery path of Thailand, we are leaving SMEs behind.
“There will be fewer SMEs and more unemployment, more large companies and inequality will rise. These are the things that are more worrisome,” she said.