The baht weakened slightly this week but the outlook for 2021 is for it to strengthen due to the weakness of western economies and continued strength in Thailand’s trade surpluses and current account balances as the year progresses. This may be particularly pronounced at the end of the year if foreign, mass-market tourism reopens.

Weak fiscal and monetary policies being pursued by western countries, where returns on bank deposits and even bond investments are now turning negative, will drive a strengthened Thai baht in the longer term during 2021 say top economists in Thailand. Thailand’s consistent trade and current account surpluses are also feeding into this. It comes as a top Bank of Thailand official now estimates that 85% of the movement on the baht is influenced by external forces and other currencies.

Associate Dean of the Economics Faculty at Chulalongkorn University, Nipit Wongpunya, has noted Thailand’s near consistent current account surpluses since 1997 and, of late, a lack of investment in plant and machinery in the industrial sector. He linked this pattern with the strengthening baht.

Even as the US dollar gained slightly against the Thai baht this week, experts continue to predict that the Thai currency will strengthen in the long term over the US dollar as the year plays out.

It is understood that, at one point, over the previous few months, the Bank of Thailand attempted to keep the US dollar above the psychological important ฿30 to the greenback barrier.

This will continue to be a decisive point during 2021 as the baht is already too highly valued to benefit farmers and industry with one exporter’s group last year calling for a ฿32 to the dollar exchange rate as the optimum one for Thai exporters.

Longer-term macroeconomics must prevail

While the government and the central bank have some tools, most analysts feel that, over the longer term, macroeconomic forces must prevail.  

This week, an academic with the Economics Faculty of Chulalongkorn University pointed out that the kingdom’s consistent trade surplus and positive current account balances continued to drive the gains seen in the baht since the financial crash of 1997. 

There were some brief interludes of current account deficits, three years out the past twenty-three, from 2012 to 2014 and in 2005.

Central banks in the West now charging depositors while bonds are also offering a negative return

This situation, of course, has been exacerbated by capital inflows from western countries seeking more opportunity. 

This follows an unprecedented situation where some central banks, right now, charge depositors to hold money while bond markets in certain western countries are only offering a negative return on investment which are often multiples times oversubscribed in respect of sovereign bonds with a good credit rating. 

This week, the Associate Dean of the Economics Faculty at Chulalongkorn University, Nipit Wongpunya, drew particular attention to the lack of investment we have seen in recent years in the Thai manufacturing sector.

He said that this was partly reflected in the trade surplus and appreciating current account gains for the kingdom which continued into 2019 and 2020 despite a decline in exports and the closure of the kingdom’s mass-market foreign tourism industry in April 2020.

Thailand’s current account to GDP dipped in 2020 but stayed positive and will rebound in 2021

Indeed Thailand’s current account surplus, as a share of GDP, rose from 5.6% in 2018 to 6.8% in 2019 although, for 2020, it is projected to have fallen somewhat to 4.6% because of the extent of the economic contraction particularly in domestic expenditure as well as a steep decline in exports from April to September 2020 and the elimination of the country’s lucrative foreign tourism industry which contributes directly to the current account’s bottom line.

Most economic experts are predicting that with a resumption of foreign tourism in the later stages of 2021 and a continued pickup in exports, the current account surplus will rise to at least 5.8% of GDP for this year.

Concern over the lack of private investment by Thai firms especially to bolster productivity

Mr Nipit drew particular attention, this week, to the lack of investment in Thailand’s manufacturing industry and the overall private sector during this time.

‘Imports of machinery and raw materials have plummeted significantly, declining more than Thai exports have slowed down,’ he pointed out.

This is despite calls from the Bank of Thailand for industry leaders to use the strong baht, at this time, to undertake increased private investment to boost productivity, a call regularly echoed by the World Bank and the International Monetary Fund in their bulletins on the Thai economy.

However, it is understood that part of the reason for the lack of investment not coming on stream is the sudden disruption caused to manufacturers in 2019 by the US-China Trade War and the uncertainty regarding global economic supply chains that the Covid-19 crisis has ushered in. 

Bank of Thailand has adopted a confident and flexible stance on capital outflows from the kingdom

The inflow of capital into the country has allowed the Bank of Thailand not only to comfortably institute a relaxation of capital exchange controls allowing greater freedoms and latitude to Thai business and enterprise to hold and do business in foreign currencies and instruments but also to facilitate the record low-interest rate set by the institution late last year at 0.5%.

Thailand also maintains a healthy inflation environment with the headline rate for December 2020 at only 0.27%.

Flight of capital to Asia will continue in 2021

A review of the minutes from the latest Bank of Thailand Monetary Policy Committee meeting shows an assessment that the current inward flight of capital, which began after the US election result from western and US sources to emerging economies, will continue for some time into 2021.

This will tend to lead, in itself, to a strengthening baht.

The decline of the baht in the second quarter of 2020 can also be ascribed to a reversal of this effect when funds flowed out of Asia to a safe haven in the United States and into the US dollar.

2021 potential for volatility and uncertainty

However, there is caution about possible volatility in the market place and the Bank of Thailand stands on guard to act if it is required to do so. 

The central bank has concluded that the baht’s value is now determined primarily by the movement of external currencies and not by domestic events or actions. 

The world’s more fractious political stage including tensions between China and western powers as well as financial challenges facing all economies are bound to increase uncertainty.

A senior bank official estimated that only 15% of factors determining the baht’s overall value in the marketplace now stem from domestic considerations.

Baht’s value is driven by weak western policies

Wasin Rojayaroon is the Assistant Director of the Economic and Policy unit at the central bank. This week, he explained that the strengthening baht has everything to do with weak fiscal and monetary policies being pursued by western economies who are going to struggle to emerge from a severe virus-induced recession, the greatest economic hit we have seen since the second world war and also policies that have been in place since the last financial crisis from 2007 and 2008 and its aftermath.

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