Spike in the Thai baht has caused Bank of Thailand, Deputy Governor Mathee Supapongse to warn that the central bank will take action. He indicated that the bank was examining gold trading activities and associated regulation, closely. Robust and decisive action last year led to an easing of similar problems but not before the kingdom’s exports had suffered heavily from an overpriced currency. Some analysts are speculating that the baht should, in fact, decline in value to ฿33.50 against the dollar by the end of June.
Even before the Thai economy is fully reopened and gets back to work, its chances of recovery are already bedevilled by an old problem that obstructed and inhibited economic progress in 2019. The Thai baht has risen in value by over 2% since early May defying the country‘s economic fundamentals. There are now real fears that the kingdom and its currency is again being used as a short term financial home for excess funds particularly related to investment in gold as hot money seeks a safe home around the world at this time of acute economic uncertainty.
The Bank of Thailand is sounding the alarm about a short-term rise in the value of the Thai baht since the beginning of May and has warned that it is ready to take action to deal with the situation.
There are fears that the strengthening of the Thai currency which has seen it gain over 2.3% from May 3rd to June 1st is again being fueled by short term financial trading.
Authorities focusing their concern on gold trading as financial investors seek a hedge in uncertain times
Authorities are beginning to focus their concern on the trade in gold which has shown a rising profile in economic data in recent months and may be seen as a hedge by financial investors against uncertain conditions not only in Asia but throughout the world, as huge uncertainty over the financial impact of the coronavirus emergency prevails.
Spike in the currency out of line with economic fundamentals say central bank officials
Senior officials at the Thai central bank see the current course of the currency as completely out of line with the country’s economic fundamentals at this time.
The current forecast is for Thailand to see a GDP contraction in the order of 6 to 7% this year.
Economic data for the first 4 months in Thailand showed a mild deterioration in the economy
Recent economic data for the first four months, while it showed the devastating impact of economic fallout from the virus, however, has not yet shown a cratering of the economy that some feared.
The economy has been supported by increased government expenditure which, while it was up 29%, was not unreasonably high in the context of this unprecedented emergency.
However, Thailand was already in recession by the beginning of April after a 2.25% contraction for the first quarter, the second quarterly contraction after adjusted figures for the last quarter of 2019 showed a 1.5% contraction.
This is expected to change dramatically when data is published for the second quarter which will see even deeper losses in exports and the elimination of the foreign tourism industry with zero arrivals since April 4th.
Bank of Thailand officials determined to act
A Thai central bank official has warned that the bank was taking a close look at gold trading and was determined to take action against this trend which could impede any recovery just as it stymied Thailand’s economy during the course of 2019.
‘The Thai central bank is ready to take necessary steps to ensure that the baht’s strength doesn’t aggravate the fragility of the economy,’ said Mathee Supapongse who is a deputy governor.
One financial institution predicts a decline in the Thai baht to ฿33.50 by the end of June this year
Financial analysts believe that the trend will be short-lived.
Irene Cheung of Australia and New Zealand Banking Group sees the baht weakening substantially between now and the end of June predicting a value of ฿33.50 to the dollar at that point.
Fears of a repeat of 2019 with baht hampering recovery and efforts to regenerate a crippled economy
However, officials at the bank are concerned that this rise in the baht may not be a market-driven process but the result of short term hedging or parking of funds which was proven last year to be the cause of a strengthening baht that severely hampered the Thai economy.
Effective and targeted action by the bank in the latter part of 2019 did help alleviate the situation.
The relative success of Thailand in dealing with the Covid 19 outbreak and ironically a surge in liquidity in some areas, where investors are seeking safe havens for their money with fears of an impending financial crisis, may be behind the new wave.
Current deterioration in the Thai economy could be aggravated by short term investors
Deputy Governor Mathee Supapongse warns that the economic impact on Thailand of the virus will show clearly in the second quarter and that it has been devastating.
The bank official suspects that the high price of gold is linked to the current problem and said that the bank would be investigating gold trading activity and regulations surrounding it.
‘The Bank of Thailand does not want investors to use the baht as a tool for parking their short-term funds and we are ready to introduce extra measures to guard the fragile economy, which will suffer more by a baht appreciation,’ he warned.
Former Bank of Thailand boss critical of its current leadership for failing to rein in the baht
A strengthening of the baht would represent the worst of both worlds for the Thai economy and the public with fears that 14 million may be left unemployed.
Earlier this year, in March, at an opposition party seminar, a former Minister and Deputy Prime Minister who was also Chairman of the Bank of Thailand, Virabongsa Ramangkura, was scathing in his criticism of the current leadership of the institution for failing to rein in the Thai baht by using all the tools at its disposal.
Concerns over the US dollar feeding into the situation this week but the speed of recovery is critical
In the short term, this week, many currency analysts believe that the Thai baht may also be gaining because of uncertainty and instability in the United States undermining the US dollar.
The severe protests in the US over the weekend and reports of coronavirus spikes will be balanced out by news showing how fast the US economic engine is getting back to normal.
Jitipol Puksamatanan, who works with Krungthai Bank, saw this as a key factor in the state of play.
He also suggested that the current situation regarding Hong Kong might be another force driving the upward trend in the Thai currency.
This week sees key economic data emerging in the US culminating with non-farm payroll data which will be published on Friday.