The slow return of the foreign tourism industry and rising living costs were among the reasons given by JP Morgan as it downgraded its investor rating for both Thai equities and the kingdom’s industrial sector last Monday. The kingdom’s more than adequate Foreign Exchange Reserves dropped by 5.7% in April with reports that the Bank of Thailand has been intervening to prop up the baht against the dollar even as it gained ground against both the euro and pound sterling. 

There are fears that Thailand’s economic recovery may be choked off by growing pressure to reverse course on its recently adopted pro-growth policy and raise interest rates. The country’s economy continues to do battle against rising costs with oil prices worldwide again ticking up and unions pursuing a new minimum daily wage claim of ฿492 per day. This comes as the 10-year yield on government bonds has risen sharply and amid reports that the Bank of Thailand may be intervening to stop the Thai baht from falling further against the US dollar.

Senior Director Sakkapop Panyanukul of the Bank of Thailand has expressed concern about the volatility of the Thai baht and suggested that the bank will take action to stabilise the currency where necessary. The baht has depreciated in the last months by 2.27% against the US dollar although it has gained ground against the euro and the pound sterling. There is concern that the baht may weaken further against a steady stream of interest rate hikes still expected from the US Federal Reserve, a situation which will exacerbate further higher oil prices and inflationary pressures.

There are also reports that the Bank of Thailand may have begun to intervene in markets to halt the sliding baht.

At the end of April, Sakkapop Panyanukul, the central bank’s senior director for Macroeconomics expressed concern about the volatility of the baht after it declined precipitously during the month.

Steadily rising interest rates in the United States the key to the baht’s decline against the US dollar

This is being driven by rising interest rates in the United States which has seen a massive capital outflow from Asia but more particularly from China.

During the last week, there was a brief rally after the Federal Reserve raised American interest rates by 50 basis points and following comments by Fed Chair Jerome Powell. 

However, within hours, it became clear to markets that interest rates in the United States are set to increase steadily to combat inflation while the medicine being applied has not yet tempered a still hot labour market.

On the other hand, most observers believe that this trend will inevitably lead to an economic downturn in the United States perhaps early next year. 

Both the United Kingdom and Europe are already experiencing a sharp slowdown in economic growth even as policymakers in that region have been constrained to adopting a more dovish monetary policy.

The Thai baht has gained ground against both the euro and the pound sterling over the last month or so as policymakers in the Eurozone and Britain run out of options while Thailand still has the possibility of rising numbers of incoming foreign tourists and continued, although more moderate, export growth to power an improvement in its economic fortunes.

The euro has depreciated by just under 1% against the baht since April 8th last while the pound sterling has lost 3.27%.

Thailand’s 0.5% interest rate, an all-time low and key cause of the 2.27% baht depreciation this month

However, analysts say that, in the long term, this is purely a matter of timing as the United Kingdom moved faster to tame inflation since December with four 25 point rises since then bringing the interest rate to 1%.

The move stateside on Wednesday was the sharpest rise in nearly twenty-years but still only left US rates at between 0.75% and 1%.

Thailand’s interest rate at 0.5% is the lowest in its history and has seen the baht slip by 2.27% against the greenback in the last month with fears that this slippage could have been a lot steeper were it not for the intervention by the Bank of Thailand.

Thailand’s Foreign Exchange Reserves are the 14th largest in the world and are far higher than needed by the kingdom.

To put it in context, they are at similar levels to both the United Kingdom and the United States. 

The figure for Foreign Exchange Reserves fell from $242.4 billion at the end of April to $228.6 billion at the start of the month.

Kingdom’s economy is a confident, open one to international capital with recently liberalised controls

At the same time, the country is an open one on international capital markets and has recently liberalised capital controls. It has adopted a confident posture in the face of a darkening world economic climate with a flight of capital currently moving out of Asia and to the United States.

There are already some signs that Thailand is escaping the worst of this capital flight.

Although the Stock Exchange of Thailand (SET) fell by 1.6% in April, it was nothing like the decline inflicted on other countries such as the Philippines at 5.5%, Japan at 6.8%, Vietnam at 8.8% and China at 16.3%.

In the month, foreign buyers on the exchange accounted for a ฿9.78 billion net inflow and have accounted for ฿118 billion net inflow since the start of the year.

Threat to Thailand’s financial liquidity comes from a potential sell-off of bonds or debentures in favour of offshore investment driven by a weak economy

However, the real threat to Thailand’s financial liquidity, already tested by high levels of household debt and government borrowing, comes from the sale of Thai bonds or debentures. ฿123 billion left the kingdom through bond sales by foreigners in March after the Ukraine War.

We do not have figures for April but we do know that the yield on 10-year Thai government bonds has risen from March 3rd when it was 1.73% to the latest price of 2.71%. 

At the very minimum, this shows rising uncertainty. It is the highest level since 2014 but nowhere near the 6.96% seen in October 2005.

In October 2005, US interest rates were at 3.22% while the US treasury 10-year bond yield is currently at 3.124%, the highest since November 2018 and a near 10 year high.

Thailand’s economy, so far in 2022, remains on track for 3.5% growth for the year although inflation is still rising albeit at a lower level than seen in western countries.

Bank of Thailand concerned about the baht’s volatility with faltering economic indicators since March showing a fall off in confidence and investment

At the end of April, Mr Sakkapop warned that the central bank was concerned about the volatility of the baht and said the bank would intervene if it saw a change to the currency’s value that was inconsistent with Thailand’s economic fundamentals. 

At the same time, he warned traders to hedge against the value of the currency and the dangers posed by a weakening baht to the country’s nascent economic recovery.

‘The Bank of Thailand will take care of the baht during this period of excessive volatility. Or if there is a change in the currency that is inconsistent with the fundamentals of the Thai economy. These developments affect the entrepreneur’s business and the overall economic recovery. Both energy prices and raw material prices have risen. This trend may continue to affect the price of goods and increased inflation in the country. And in the next period, the baht has a chance to fluctuate. Traders are advised to hedge against the increased exchange rate risk,’ he said.

The government and officials at the bank are extremely concerned about data since March which show that the war in Ukraine is severely impacting the domestic economy. 

For that month, private consumption was down by 0.9%, private investment by 0.4% and the manufacturing index fell by 0.9% despite an increase in exports up 18.9% compared with March 2021 and 1.5% compared to February 2022, the month previously.

Weaker baht now a key factor behind inflation despite April’s respite when the rate came in at a less than expected 4.65% due to an oil price lull

Thailand’s central bank is coming under pressure to address its policy of holding the line on interest rate rises as a depreciating baht threatens to become another key factor in rising inflationary pressures.

The country enjoyed a brief respite in April with inflation for the month coming in at only 4.65% compared to a rate of 5.73% in March but this was largely due to a short lull in oil prices at the end of April. 

Last week saw the price of West Texas crude oil climb to $110.61 a barrel from a low of $94.29 on the 11th of April or a rise of 17.31%. It is not clear if this trend will continue as there are signs worldwide that economic activity is slowing down.

On Wednesday, JP Morgan issued a note suggesting that global oil demand this year may be reduced by one million barrels per day because of faltering growth and rising geopolitical tensions.

Worry over weaker baht and rising oil prices

The combination of a depreciating baht and higher oil prices is worrisome for economic planners.

This was alluded to in recent days by Minister of Finance Arkhom Termpittayapaisith who last month advocated letting the baht swing to boost growth. 

Thai planners prepare to let the baht ‘swing’ in a move to boost growth via tourism and exports at this time

The minister underlined the competitive advantage of this by making Thai exports cheaper and the country more attractive to incoming tourists whose foreign currency gets to go further.

However, this week, Mr Arkhom expressed concern about the impact that a lower-priced baht was having on surging oil costs as the government has begun to let the price of oil and associated products float.

Good economic news, test now is how to emerge from stagflation with a large price shock looming as inflation rises

It is estimated that this move will see the consumer price of diesel in Thailand which has now breached the former government-imposed ฿30 per litre price cap at ฿32 per litre, go as high as ฿41 per litre in the coming weeks if the government does not act by extending tax breaks.

Price shock has begun as diesel price rises beyond the previous ฿30 per litre cap driving product prices

This is expected to lead to a price shock in the coming months with Ronnarong Phoolpipat at the Ministry of Commerce accepting in recent days that inflation over 5% will be the norm for the foreseeable future.

‘As oil prices rise, generally product prices will also increase. But it does not mean inflation will be much higher. We also have to look at many factors,’ he explained.

Currently, the Bank of Thailand and other planners are holding out hope that this can be mitigated in the last quarter of 2022.

Those who support that view in government point to the kingdom’s core CPI index which is still running at only 2% and suggests that the reason for the current pressure is inflamed oil and food prices

However, the government is presently under notice from the country’s trade unions that wages must now rise to deal with the current situation.

Unions pursue ฿492 per day minimum wage claim which, if conceded, will impact the entire economy

Since the start of the year, the labour movement, led by the Thai Labour Solidarity Committee (TLSC) and the State Enterprises Workers’ Relations Confederation has begun a campaign calling for a 45% hike in wages with a minimum daily payment of ฿492 per day.

The demands are coming in a kingdom where household debt is at a record high and conservatively estimated to be over 90% of GDP just based on figures for the formal banking sector with informal debt repayments probably meaning a far higher amount.

A survey this year by Silpakorn University showed that from a sample of 1,225 Thai workers, 75% of them worked as many as 14 hours a day with overtime to boost their monthly income between ฿3,000 to ฿6,000.

The survey showed that 88% of the group had a debt to pay from this income with 28% paying off ฿10,000 to ฿20,00 per month while 10% had to shoulder as much as ฿20,000 to ฿30,000 per month in debt repayments.

The union movement says it has taken advice from international labour organisations and calculated that the basic daily living cost for Thai workers is ฿712 per day.

Horrified employers implore the government to help them resist the claim, a lower pay hike is expected

Employers have been horrified by the latest demand with Thaniwan Kulmongkol, president of the Thai Restaurant Association urging the government to talk sense with the unions about the situation.

‘When the operators heard the figure, they felt like someone had hit them. I hope the government will talk to the unions and help them understand the economic situation,’ Ms Thaniwan said.

Most observers agree that a hike in the minimum daily wage rate to anything like ฿492 will also apply to contract workers and those working in Thailand’s informal or grey economy which will have a heavy impact on inflation and prices going forward.

A survey of prices and the economic situation for employees is being prepared by the Ministry of Labour from April to June to assist in the process of reviewing the union’s demands.

Tripartite panel to review claim in August/September, before a proposal is made to the cabinet for approval

The claim will be considered by a tripartite panel of unions, employers and governments representatives in August and September with an approved wage hike, which many now accept as inevitable, being proposed to the cabinet later in the year by Minister of Labour Suchart Chomklin before it is then formalised and announced in the Royal Gazette.

It is thought unlikely that the ฿492 per day demand will be agreed upon. The current rate is between ฿313 to ฿336 per day depending on the province.

JP Morgan downgrades Thai equities and industry over slow foreign tourism recovery and rising costs

Last week, JP Morgan downgraded Thailand’s economic prospects and in particular, its rating for Thai equities from overweight to neutral because of the slow rebound in the kingdom’s foreign tourism economy compared to other nations.

It cited rising living costs and currency volatility as key problems for the Thai economy coming at a time of rising inflation and damaged growth prospects worldwide which was weakening consumer sentiment in countries that have supported Thailand’s exports and foreign tourism industry, particularly in China.

‘China’s firm zero-Covid policy and recent capital outflows will likely delay the return of Chinese outbound tourists,’ the bank’s statement read.

Even if Thailand can achieve 10 million foreign tourists this year, this would still only be 25% of the level achieved in 2019.

This compares unfavourably to Singapore and the Philippines whose markets have recovered to 72% and 65% of levels seen before the pandemic.

The banking also downgraded the Thai industrial sector to neutral.

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