BOT concerned with the strengthening of the Thai baht

The Bank of Thailand (BOT) said on Monday that the central bank is worried about the rapid strengthening of the Thai baht as it does not reflect the country’s current economic condition.

Experts agreed that the latest appreciation is caused by the inflow into both equity and bond markets. However, their opinions are split when it comes to how much the baht would cost in the second half of 2020.

BOT’s deputy governor of monetary stability said the baht has been strengthening at a rate faster than its regional peers over the past two weeks.

He said the appreciation was partly because of Thailand’s comparative success in containing the virus.

Many economic figures in the first quarter were also better than the market expected.

However, the rapid appreciation is not reflecting the current “fragile” economic condition as many sectors have been “severely” hit by the outbreak.

“The impact from the outbreak will be clearer when the economic numbers for the second quarter are released,” he added.  

The economy in April 

BOT said last Friday that Thailand’s economy contracted in April. The central bank then added in May that the economy will go into a recession by at least 5.3 per cent in 2020.  

The arrival of foreign tourists declined by 100 per cent from the same period in 2019 due to Thailand’s inbound travel restriction. 

The value of merchandise exports contracted by 3.3 per cent year-on-year. Excluding gold, exports value contracted by 15.9 per cent. Additionally, imports value dropped by 17 per cent because of the decrease in economic activities.

Due to the drop in global demand, there have been high contraction rates in exports of automotive parts, petroleum-related products, and electrical appliances and machinery.

Private consumption, manufacturing production and private investment have all declined, while jobless claims increased by five times, from 92,000 people in March to 465,000 people in April.

Only public expending has expanded. 

The National Economic and Social Development Council (NESDC) said last week that 8.4 million people are at risk of losing their jobs in 2020 because of COVID-19’s impact on the economy.

Experts’ views on baht 

The baht was the best performer in Asia against the greenback in 2019 and it started at 30.17 baht per US dollar in 2020. The pandemic’s effect sent the baht down to its lowest figure so far at 33.09 baht per greenback on April 1. 

The State of Emergency (SOE) came into effect on March 26. Since then, the country has been averaging about 100 new confirmed cases per day. It is now down to single-digit figures for the past three weeks.

Thailand is currently in Phase 3 of its lockdown easing period. Most businesses have reopened with social distancing measures. Domestic tourism has also resumed but the curfew and entry ban are still intact.

Phase 1 of the easing period started on May 17 but the currency has been appreciating since April 1, rising from 33 baht up to 31.74 baht per US dollar as of Monday morning

Head of Economic Unit at Tisco Economic Strategy Unit Thammarat Kittisiripat told Thai Enquirer that the reason for the appreciation of the currency was due to capital inflow into both the equity and the bond market.  

Foreign investors sold 193.93 billion baht worth of Thai shares from year to date.

However, on Monday morning, foreign investors were net buyers of 5.5 billion baht while everyone else was net sellers. Local investors instead sold 4.3 billion baht worth of Thai shares.      

Thailand’s ten-year government bond yield was at 1.158 per cent on Monday morning, up 12.5 basis points from last week and 2 basis points from last month. A much better outlook when compared to the historic low of 0.86 per cent on March 3.   

“The COVID situation is improving in terms of new cases, the death toll and the gradual easing of the lockdown which is going according to plan,” Thammamat said. 

“The market is now looking forward to the return of businesses so the current baht movement is based on an expectation of what will happen in the next period,” he added.

He said the market is also looking at economic activities and forward earnings in the next 30-60 days while the economic data that came out are the result of the first four months.

This is why the baht is now reflecting what the market is expecting to see, not what has happened.

ESU said the slowdown of the Thai economy bottomed out in the second quarter and things should continue to improve in the third and fourth quarter. 

However, the ESU still expects the baht to average around 32.5 baht in the second half of 2020 because of internal and external factors. 

This includes the US general election in November, the escalation of both geopolitics and trade conflict between the US and China, and political uncertainty in Thailand.

“We believe that after the outbreak situation is resolved, the political risk could return,” he said.

“There were already demonstrations against the dissolution of a political party before COVID. That situation did not go away and it is something that is still stuck in the pipeline,” he added. 

On the other hand, Thailand economist at Standard Chartered Bank Tim Leelahaphan told Thai Enquirer that the baht would appreciate towards 31 baht per US dollar by the end of 2020. 

He said the outbreak is stabilizing. The current account is still strong and will be stronger once international tourism returns. These are factors that are contributing to the strengthening of the Thai baht.

“This a correction,” he said. “The currency was at 30 baht before going up to 33 baht at the peak of the outbreak, and it is now rising to 31.8 baht which is looking like it is travelling back to where it was before,” he added.

However, the strengthening of the baht is still being influenced by the pandemic so there will be fluctuations as economic activities return.

Standard Chartered sees the baht at 31.25 in the third quarter and 31 baht per greenback by the fourth quarter. 

At the same time, there is also an escalation of tensions between the US and China, and if that leads to the end of the Phase 1 trade deal, the baht could depreciate as well.

“Since April, there was also bond inflow, following net selling, during the first three months of [2020]…but the US-China situation is still a risk to the baht strengthening,” he added. 

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