Thai Baht keeps strengthening…where does Thai manufacturing go from here?

If you thought that the Thai Baht was already strong, brace yourself for what could be yet another round of strengthening of the currency in the weeks and months ahead. The Thai Baht has been rising relentlessly since last year. Presently, it is hovering around 30 Baht to the US Dollar, a staggering increase of 32.1 per cent compared to the level seen in 1997 when Thailand adopted a managed floating exchange rate.

The strengthening of the Baht is set to continue through 2021 at least. This strengthening comes against this backdrop of weakening economy and the export sector, which accounts for a big chunk of the gross domestic product (GDP) is likely to continue to suffer from this strengthening.

Exports will be the main casualty of the stronger Thai Baht due to Thailand’s waning competitiveness in relation to ASEAN rivals including Malaysia, the Philippines, Indonesia and Vietnam in particular.

Country such as Vietnam has a similar manufacturing and export structure to Thailand, and its currency has steadily weakened, Vietnamese products have gained the upper hand in the global arena. As evidenced, Vietnam’s exports outclassed their Thai counterparts in terms of value in 2019 – for the first time on record – garnering a global market share of 1.4 percent. In comparison, Thai exports accounted for 1.3 percent of the global market, a figure almost unchanged for the past two decades.

Moreover, the strengthening Baht has indirectly impacted Thailand’s foreign direct investment (FDI). Given rising wages and production costs, FDI inflows into Thailand have been on the ebb, standing at only 1.3 percent of GDP in 2019. In contrast, Vietnam’s FDI inflows surged to 6.0 percent of GDP during the same period.

It is noteworthy that the country’s medium- and high-technology products – similar to Thai exports – have emerged as products with greater potential in the global market.

Meanwhile, Thai export structure has remained unchanged during the past 20 years, as demonstrated by the country’s top 30 export items in 2001.

Of total exports, 41 percent were technology products in the automotive category, hard disk drives (HDDs), petrochemicals, air conditioners and vehicle tires.

In 2019, the list of top Thai exports remained the same, even though their market share edged up to 51 percent.

At the same time, Vietnam also manufactured and exported these product categories, which accounted for 36 percent of its total exports in 2019 versus only 11 percent in 2001. Under these circumstances, Thai exports will be under even more pressure in the foreseeable future.

Regarding the impact of the Baht’s appreciation on businesses, KResearch holds the view that the rising Baht will have a greater effect on the profitability of export-related businesses than those focused on the domestic market. However, the degree of such an impact may be somewhat lessened if exporters adopt a “natural hedge” strategy to maintain a balance between exports of goods and imports of inputs. To wit

The most affected manufacturers will be those that are largely reliant on export markets. Exporters of medium- to low-technology products will compete head-on with rivals within ASEAN and stand to lose a huge amount of income.

Even worse, those who are highly reliant upon local raw materials may enjoy little benefit from the stronger Baht through imports of raw materials, and their profitability may be hit harder than that of other businesses.

Rubber products are a good example, as local raw materials represent as much as 74 percent of their total. Meanwhile, Thai medical products which are not categorized as high-technology products may be at a disadvantage compared to rivals that stand to benefit from lower costs and a weakening currency.

Less-affected manufacturers are those reliant chiefly upon the domestic market. As their revenue stream comes mainly from the domestic market, it may help offset declining foreign income as a result of the strengthening Baht.

Moreover, manufacturers who are within a global supply chain like the automotive industry may be more resilient to the Baht’s appreciation than other industries even if they rely mainly on domestic inputs (high natural hedge).

Meanwhile, industries highly reliant upon local raw materials, especially processed food and garments (low natural hedge), are more vulnerable to the rising Baht. Finally, SMEs that sell their products domestically bear no forex risk, given that they have no foreign exchange exposure.

The primary beneficiaries are manufacturers reliant upon the domestic market but with imported inputs. Large operators who depend on imported inputs will obviously receive a windfall from the strengthening Baht. They include large-scale medicine producers who are reliant upon imported raw materials for as much as 30 percent of their content, with 90 percent of their production earmarked for the Thai market. Likewise, beverages and paper products will also benefit from the Baht’s appreciation.

To cope with this situation, the export sector should prioritize production upgrades, focusing on high-value products, as the stronger Baht is expected to linger for a while. What’s more, effective foreign exchange risk management is vital. SMEs that are reliant mostly on foreign markets are at risk of losing their profits, compared to larger exporters.

Increasing their domestic market share could help such businesses to cushion the impact of reduced foreign income. Finally, they should adjust themselves via linkage to the global supply chain while also adopting the “natural hedge” strategy by maintaining the equilibrium between exports of goods and imports of inputs to mitigate the impact of the Baht’s appreciation.


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