Features Thailand Economy

Analysts don't expect baht to weaken, but Thai bank thinks differently

18, Dec. 2019

Bank of Thailand Gov. Veerathai Santiprabhob speaks during the Ayeyawady - Chao Phraya - Mekong Economic Cooperation Strategy summit in Bangkok last year. The baht is Asia's best performing currency in 2019. (Photo Courtesy of The Nation)
Bank of Thailand Gov. Veerathai Santiprabhob speaks during the Ayeyawady - Chao Phraya - Mekong Economic Cooperation Strategy summit in Bangkok last year. The baht is Asia's best performing currency in 2019. (Photo Courtesy of The Nation)
By Pornbaworn Jirapatwong

BANGKOK, NNA - In 1997, Thailand saw its currency crash after accumulating hefty foreign debts, triggering a domino effect throughout Asia, in what was subsequently known as the Asian financial crisis.

Fast forward to today, the second largest economy in Southeast Asia is grappling with another currency headache. But ironically enough, the Thai baht has performed too well that it has hindered the growth of the economy which is normally bolstered by exports contributing to more than half of the gross domestic product.

Speaking to NNA on the baht's strong performance, Jitipol Puksamatanan, chief market strategist of Krungthai Bank Public Co., pointed out that since the beginning of this year, the currency has surged 7.7 percent against the U.S. dollar, 10 percent against euro, and 9.6 percent against Chinese yuan, making it the best-performing Asian currency in 2019.

With the country amassing a huge current account surplus amounting to about 6 percent of its GDP and a robust foreign reserve, investors have seen the baht as a 'safety net' amid the worsening U.S.-China trade dispute, said the bank strategist.

The baht appreciated to 30.23 against the U.S. dollar by the end of November, according to Bank of Thailand (BoT) statistics, after hitting a six-year high in mid-October at 30.16. It was traded at 32.42 at the end of December 2018.

From January to October, Thailand’s current account surplus rose 26 percent from $23.27 billion in 2018 to $29.31 billion, according to BoT. Last year's annual current account balance posted a surplus of $28.46 billion, a sharp 35.3 percent decline from $43.95 billion in 2017.

The kingdom’s strong foreign reserve stood at $221.04 billion in November, way above $205.64 billion at the end of last year, according to the central bank.

Although the Bank of Thailand has made continuous efforts to curb the currency’s growing strength, analysts see no sign of the baht decelerating next year. Instead, they anticipate it breaching above 30 baht per U.S. dollar, at a level not seen since 2013.


Jitipol expects the baht to trade at 28.70 against the U.S. dollar by the end of 2020, citing further interest rate cuts by the Federal Reserve, which will weaken the greenback.

“To prop up a slow economy and sustain anticipated financial turbulence during the period before the presidential election, the U.S. Federal Reserve will cut its interest rate by 0.50 point in the second half of the year,” he reckoned.

As investors turn away from the greenback, the U.S. currency will lose it value by 5 to 10 percent against other major currencies, while capital will flow back to Asia, Jitipol estimated, adding that around 20 to 30 billion baht might enter Thailand’s capital market, thereby contributing to the baht's further appreciation.

Kobsit Silpachai, head of Kasikorn Bank’s capital market research, told NNA in a phone interview that he believes the baht will continue its upward trend in 2020, rising to 29.75 against the greenback by the end of June and 29.25 by yearend.

He said the main driving factors are the country’s tamed inflation and massive current account surplus that is expected to hit $31.50 billion next year. Thailand’s large surplus is due to “an imbalance between Thailand’s and international economies" as it has attracted huge foreign investments into the country, added the analyst.

Pressured by a rate cutting cycle from central banks around the globe and White House demands, the Fed is expected to trim interest rates twice next year, which would drive investors into buying more Thai baht, said Kobsit.

Amornthep Chawla, head of research at CIMB Thai Bank, also expects the baht to notch up to 29.70 against the greenback by the first quarter of 2020, helped by Thailand’s burgeoning current account surplus.

“After the first quarter, the baht should begin to lose strength, as the trade tension between U.S. and China would gradually de-escalate by then, which would help reinvigorate investments,” Amornthep opined in a phone interview with NNA.

He expects the baht to trade around 30.20 by the end of 2019.

Baht "exceeded' economic fundamentals, says BoT

Amid skepticism among analysts, the BoT, however, forecasts that the baht is likely to weaken.

The strength of baht has “exceeded the country’s economic fundamentals,” and has lost its attraction, Mathee Supapongse, deputy governor of the bank’s Monetary Stability, told the media earlier this month.

He claimed that the bank’s two previous rate cuts this year have made the country’s yield curve to be the lowest in Southeast Asia, decreasing investors’ appetite and baht pressure as a result.

Last month, the central bank cut its interest rate to 1.25 percent that matched a lowest record to bolster the sluggish economy. It also rolled out some measures to ease rules on money outflows to rein in the surging baht.

Exporters who gain proceeds of more than $200,000 are now allowed to take the money abroad without a time limit. The previous threshold was $50,000.

Investors can now invest up to $200,000 per year in securities abroad, without having to do so via Thai intermediary institutions.

The bank also loosened restrictions on outward transfers and given the green light to Thai investors to trade gold in foreign currencies apart from the baht.

However, economists at Siam Commercial Bank's Economic Intelligence Center said in response that such schemes would only weaken the baht in the short term, but not ease the currency’s strength in the long-run.

Strong currency causes export woes for many

On the negative impact of the strong currency, Jitipol said it has shaved off 1 to 2 billion baht or 0.5 percent of Thai export revenues

Exports dropped 2.4 percent during the first ten months of the year. The estimated fall of 1.5 or 2 percent for the whole of 2019 would be the first annual contraction since the 1.2 percent decline in 2015.

For months, the baht appreciation has eroded the competitiveness of Thai export-oriented firms as production has become more costly, said the economists from Asia Plus Securities Corp.

They pointed out that many companies have struggled to gain profits this year, with the petrochemical, food, electronic and energy segments being the worst performers as they relied too heavily on export revenues.

“Industries like electronic manufacturers, which rely almost 100 percent of revenue on exports, are prone to currency volatility. During the past nine months, the (U.S.-China) trade spat and baht appreciation have dragged down their business profits,” Anakepong Putthapibal, one of Asia Plus’s analysts told NNA in a phone interview.

From January to September, the overall net profit of petrochemical manufacturers plunged 65 percent, from 63.97 billion baht last year to 22.10 billion baht, making them among the worst-hit, as shown by a study of data of firms listed on the Stock Exchange of Thailand.

In the third quarter alone, their profit sank 78 percent to 5.39 billion baht, down from 24.56 billion baht in the same period last year.

For electronic manufacturers, their first nine months saw profit sliding 33 percent from 8.21 billion baht last year to 5.49 billion baht. Between July and September, profit tumbled 53 percent from 3.67 billion baht in the same period last year to 1.71 billion baht.

Energy firms also saw their profit contract - by 27 percent to 176.02 billion baht in the first nine months of the year from the previous year’s 239.88 billion baht. In the third quarter, it fell 39 percent year-on-year to 45.53 billion baht.

While many segments have struggled painfully, the net profit for food manufacturers managed to rally 17 percent, from 34.46 billion baht in the first nine months last year to 40.36 billion baht in the first three quarters of this year.

Food producers saw their revenue surge 45 percent year-on-year to 17.73 billion baht between July and September this year.

As there is still no sign of the baht decelerating, analysts at Asia Plus said earnings of affected firms will slide further in the last three months of the year.

However, BoT has assured the country throughout this year that it would always keep its eyes on the baht and may come up with new measures to tame the surging currency again.

The central bank will look into ways to relax foreign-exchange and foreign-reserve regulations, bank governor Veerathai Santiprabhob told reporters during a visit to Laos last month, while indicating that lowering the policy rate is not the best solution.

"In the past, cutting the policy interest rate from 3 percent to 1.25 percent was seen to be a strong dose. But this is no longer the case,” according to a Bangkok Post report on Veerathai’s speech made during his visit.