Many economists, however, say the downturn in exports and economic problems besetting Thailand is more likely to be due to the global downturn and the trade war. The relationship between Thailand and China has also left the Thai business sector vulnerable to the trade war and punitive US tariffs. This week it emerged that Thailand’s large business concerns are now feeling the heat from the economic conflict in terms of revenues and many have prudently put off investment.
The Thai baht hit a six-year high against the dollar this week and there seems to be no end in sight as a race to the bottom by central banks in the developed world economies is fueling the rise of Thailand’s currency which has taken on the characteristics of gold.
The Thai baht hit a record six-year high against the US dollar at the end of last week when the trading rate reached ฿30.36 against 1 US dollar. Many Thai banks including the Kaskorn Bank expect it to trade in a similar range in the course of the next week.
Business leaders last week urged the government to prioritise curbing or reducing the value of the baht
It comes as Thai business leaders and industry heads have begun to urge the government in conjunction with the Bank of Thailand to address the rising baht as an economic priority. However, some respected economists feel that the rising baht is simply reflecting uncertainty about the global economy which is leading central banks into a spiral of loosening monetary policy.
This trend may lead to tighter margins and reduced profitability for banks worldwide which paradoxically may lead to less lending and have the opposite effect that the policymakers intended.
This may also be one of the reasons why the Thai Central Bank has been very cautious to lower interest rates although another 25 points drop is still expected by many forecasters by the end of the year. Thai banks and investment instruments still offer a higher return than those in most developed countries.
Thai baht is the new gold
In this way, the Thai baht has taken on the same characteristic of gold as Thailand because of its old fashioned and prudent approach to borrowing and its success in the past as an exporting economy with strong trade surpluses and a strong tourism sector has become a haven for funds worldwide.
This was abrogated to some extent by actions taken by the Bank of Thailand in July but the growing economic slowdown worldwide has brought us to Fridays six-year higher against the greenback.
European Central Bank is now charging more for banks to keep funds on deposit to push lending
Actions like that of the European Central Bank which has raised the negative interest rate on banks holding deposits from 0.4% to 0.5% indicate the extremities that some central banks worldwide have reached to keep the global economic engine moving forward. Eurozone economic growth fell by half in the second quarter of 2019 to a negligible 0.2% while Germany, long regarded the engine of the Eurozone economy, is showing signs of an imminent recession.
Devaluation of the Chinese yuan introduced a new problem for Thailand’s economy in August
It is this environment constantly exacerbated by the moves and counter moves of US President Donald Trump and the vagaries of the US-China trade war that is driving the rising baht.
The war itself is certainly having a direct effect on Thailand, one that can no longer be denied. Some economists argue that the downturn is perhaps more due to the weak global economy and significantly, problems Thai firms are experiencing doing business in and with China rather than the upward trajectory of the baht.
However, business and industry leaders are crying out for direct action to effectively devalue the baht. Ultimately, the terrible truth is that Thailand is experiencing the negative effects of both, a double economic whammy.
Rising baht makes Thailand less competitive
In tourism and exports, it is only common sense that a rising baht makes Thailand less competitive. The devaluation of the yuan in August has had significant implications for Thailand in making Thai exports less competitive and is also impacting many larger Thai firms that have grown or built their success on the emergence of China in the last few decades.
The more ‘flexible’ yuan is emerging as a key Chinese weapon in fighting the effects of US tariffs in this still escalating trade war. Unfortunately, while this makes Chinse goods and services cheaper, it has an array of negative effects on businesses feeding into and working off the Chinese economy.
Thailand’s links with the Chinese economy may have been underestimated at the outset of the trade war
One banker this week, Pornchai Padmindra who is the head of corporate banking at CIMB Bank in Thailand told The Nation newspaper that some firms had been impacted by the trade war and were considering moving production operations away from China because of the new and higher American tariffs.
This indicates the extent to which the Thai economy because of its location, is linked to China and may explain the devastating effects that the trade war has had on Thailand despite predictions from last year which suggested it would not.
Government pins hope on domestic economic stimulus and rebound in tourism since July
The downturn started to affect Thailand in July last year but more deeply impacted the Thai economy in the first half of this year, when it began to extend into the domestic sector with small business particularly impacted. The government is holding out hope that an economic stimulus initiative and a rebound in tourism will help pull the economy up to achieve a revised and more modest target of 3% growth this year.
Thailand’s larger firms now being impacted
Now the attention is shifting to Thailand’s larger corporates. This week, it was reported that senior bankers in Thailand have begun to review the activities of the kingdom’s larger firms as there is evidence that the negative world economy is now impacting them.
Revenue and performance in Thailand is off
Wasin Saiyawan is a senior executive vice president in charge of wholesale banking at Siam Commercial Bank. He accepts that the global downturn is now impacting the revenue and performance of Thailand’s larger players. However, he insisted that there is still no question of this playing into their ability to service debt. The senior banker highlighted the devaluation of the yuan as a significant factor for some larger Thai firms
He outlined that the bank had loans to this sector of ฿900 billion with a bad debt level of 1% which the bank targets to keep under 2%.
Large firms becoming more cautious
At TMB Bank, Senathip Sripaipan is the boss of wholesale banking. He has observed Thailand’s larger corporate players move into a defence mode because of the slowdown triggered by the escalating trade war. This has delayed moves to invest in new projects and firms being particularly wary for foreign adventures outside the kingdom’s borders.