While the kingdom maintains a strong external financial situation and prudent fiscal management to support its economy, the growing impact of chronic problems such as household debt and a rapidly ageing population as well as inequality and political instability are undermining any prospect of decisive action to find a solution. The result is an economy that has now performed below its regional peers for years and one that, in the short term, faces a need to more rapidly raise bank interest rates to halt a decline in the baht. 

The Thai baht, this week, reached a 15-year low against the US dollar with local analysts predicting that it will breach the ฿36 barrier against the US currency. They project, at the same time, that it will rebound later this year with rising foreign tourist numbers. However, there is growing concern that a widening divergence between US interest rates may be the real cause of June’s 4% drop in the baht and a projected even further widening of the rate difference could see the Thai currency falling even further. It comes in a week when Fitch Ratings, the American credit rating agency, rated the kingdom’s borrowings at BBB+ and gave the country’s economy a stable outlook due to its robust external financial position. However, it warned that Thailand faces significant problems in the medium term with an ageing population, a record level of household debt and ongoing political instability. These issues are believed to be the underlying reason for the kingdom’s lacklustre economic performance since 2018 which, because of the pandemic crisis, has seen the country’s growth stalled since then as its peers in Asia and Southeast Asia move forward.

fears-for-the -baht-as-it-hits-a-15-year-low
Last week, the Minister of Finance, Arkhom Termpittayapaisith, asked the Bank of Thailand to soften its plans to raise borrowing rates so as not to impede the economic recovery. However, Thailand appears poised to only raise interest rates from 0.5% to 1% by the end of the year while there is evidence to show that the widening of the interest rate divergence between the US and Thailand in June at 1.25% was a decisive factor in the precipitous fall in the baht by 4%this month with fears that the divergence may widen further to at least 2.75% by the end of the year despite two probable rate hikes here.

Most economists in Bangkok expect the Thai baht to weaken over the coming two months even though the Bank of Thailand is set to raise interest rates by 25 points in August with a further, similar hike in November.

This week, the key Thai lender, K Bank, projected that the Thai currency will fall below ฿36 to the dollar in the coming two months.

Last week, the dollar rose to ฿35.73 against the baht before falling back slightly to close out at ฿35.43, its lowest point in over 15 years.

Rapid depreciation of the baht in June corresponded with a wider divergence between Thai and US interest rates despite better foreign tourism numbers

The rapid depreciation of the baht is being driven by the Federal Reserve’s increasingly hawkish position as it continues its campaign to tackle rampant US inflation with a further 75-point rise expected in July following June’s rise and a potential base interest rate of 3.75% stateside at the end of the year.

This is driving capital flight out of Thailand which is quickly becoming the key reason for an increasingly volatile baht which is now the fourth most volatile in the region behind the South Korean won, the Philippines peso and the Indonesian rupiah.

It is also important to note that the rapidly dropping baht is occurring in a month when the number of tourists to the kingdom could reach up to 1 million visitors.

K Bank predicts a recovery by the baht to ฿33.50 by the end of the year mainly based on higher tourist arrivals

For the first four months of 2022, Thailand had a current account deficit of $4,962 billion while attracting 791,043 foreign tourists.

It attracted a further 521,410 arrivals in May bringing the total for the first five months to 1,312,453.

According to the most recent projections of Bangkok economic and financial analysis agencies, the average spend per tourist visiting Thailand in 2022 is $1,714 meaning the number of arrivals in May should have generated $893,696 million in foreign tourism income for the month or an equivalent positive contribution to the kingdom’s current account.

K Bank is projecting that the baht will return to an exchange rate of ฿33.50 against the dollar by the end of the year as foreign tourist numbers are expected to swell.

This is based on the bank’s projection of only 4 million visitors in 2022 with many analysts now suggesting that anything up to 10 million visitors is achievable this year which should assist the kingdom’s current account in the latter half of the year with tourism bringing in now badly needed foreign exchange into the system.

Account not fully taken of what is probably the main driver of the falling baht which may be capital flight because of divergent interest rates from the US

However, this does not account for the current capital flight and fears that money will flow from Thailand as the year progresses with the gap between interest rates on deposits and other instruments in the United States compared to Thailand set to widen further having already widened significantly this month with the Fed’s 75 point rate hike at a time when the Bank of Thailand held its borrowing rate in check by a margin vote of 4 to 3 by the Monetary Policy Committee.

The baht dropped sharply against the dollar from the end of May when it was ฿34.10 against the greenback to Friday last when it ended at ฿35.43 or a 4% drop even as tourist numbers grew substantially and this can be largely attributed to capital flight.

Even with a trade surplus of $0.5 billion in April, Thailand still posted a current account deficit of $3.35 billion.

The volatile price of oil is another key factor influencing inflation and consumer confidence

The higher price of oil contributed to a massive 21.5% jump in merchandise imports in April which left a 12-month trailing deficit of $0.8 billion based on the rising cost of oil even though it fell back somewhat in April to a low of $85.89 from a peak of $119 in early March based on the price of West Texas crude (WTI) on international markets.

The impact of the Ukraine war and overall trend of the global economy are the big engines driving this

In June, the price of WTI crude spiked again to $120.26 before falling back to $107.62 on June 24th.

The underlying trend is upward but the price of the commodity is extremely volatile as economies in Europe and the United Kingdom are left facing headwinds with GDP beginning to retreat in the United Kingdom.

In the meantime, China’s economic growth continues even at a lower and more marginal pace of 4.3% while countries in Asia are growing strongly with a projected growth rate in 2022 of 4.5% to 7%.

At the same time, growth in the United States, Thailand’s leading export market., slowed significantly in the first quarter of 2022 to 1.5% compared to a 6.9% gain in the last quarter of 2021 with growth rates for the developed world projected to be lower this year at 2.6%.

Thailand’s economic growth prospects consistently weaker compared to its peers in Asia and faces further impacts from raised borrowing costs and inflation

Thailand, however, in contrast to most of its Asian peers, appears to be set for another year of under-par growth.

While projected to be 3.3% this year, it is threatened by a potential disruption in export markets, record-high inflation in May and household debt as the Bank of Thailand begins the process of raising interest rates which will further hurt growth prospects.

Even if a 3.3% growth rate is achieved, the Thai economy only grew 1.5% in 2021 and 2.1% in 2019 while in 2020 it contracted by a massive 6.1% meaning the kingdom’s economic growth over the five years from 2018 to 2023 has been effectively stalled with a 2.2% growth rate in the first quarter of this year being followed by a challenging second quarter for which we have yet no figures but can see already a loss of consumer confidence and reduce growth rates in exports.

In May, the National Economic and Social Development Council (NESDC) cut the kingdom’s projected growth rate for 2022 from a range of 3.5% to 4.5% to 2.5% to 3.5% and since then, analysts have also suggested that the kingdom’s economy may only expand by 2.5% this year due to potentially higher borrowing costs, inflation and lack of confidence in the market.

Even in the first quarter, figures from the national economic body revealed that construction industry activity in the opening months of 2022 was down by 5.5%.

Minister asks central bank to find a balance between raising direct rates and keeping growth on track

This may help explain efforts by the government and Minister of Finance Arkhom Termpittayapaisith to stay the hand somewhat of the Bank of Thailand in the last two weeks when Governor Sethaput Suthiwartnarueput indicated that raising interest rates right now was a far less dangerous prospect for Thailand’s economy than rising inflation.

The governor said it was also a matter of tackling inequality as inflation is more damaging to the prospects of the less well-off.

Inflation is a bigger threat to business and the less well off than higher interest rates says bank chief

Last week, the finance minister called on the central bank to take into consideration liquidity in the banking system and the maintenance of the stability of the baht while also making efforts to minimise the impact of interest rate hikes on growth.

Certainly, a contorted objective or mission for central bank officials.

Thailand’s retail banks are already preparing for higher rates from August but most only predict two 25-point rate hikes between now and the end of 2022. 

Divergence in interest rates between Thailand and United States set to widen alarmingly by year’s end

Taking into account the increased divergence in Thai interest rates and those of the Federal Reserve in the United States which currently stands, since mid-June, at a significant 1.25% with a now almost certain prospect that the divergence between the two will widen further and significantly.

World inflation crisis may lead the Bank of Thailand to act before August and raise interest rates more sharply

There is a certain expectation that this divergence will rise to a startling 2.75% which is bound to put pressure on capital markets with money flowing out of Thailand and therefore a weakening baht.

It is not clear if Thailand’s rising foreign tourism trade and resultant income can stem this tide.

Thailand’s Foreign Exchange reserves rose marginally in May from $228.6 billion to $230 billion after falling precipitously the month previously from $242.2 billion.

Kingdom’s external finances are robust says Fitch

The kingdom’s external finances are seen by international markets as extremely robust and sound with the Fitch Ratings Agency, this week, reaffirming the country’s BBB+ debt rating and signalling a stable outlook in the near term.

This week, the Finance Minister while expressing approval of the central bank’s plans to combat inflation, also emphasised the priority that Thailand’s fragile economic recovery should not be disrupted.

‘Tackling inflation will be inevitable as every country has also faced the same problem,’ he told reporters.

Fitch, which has a subsidiary firm in Thailand, issued the rating update from its Hong Kong office and gave particular insight into its decision-making and train of thought on Thailand’s status.

However, the agency also noted the kingdom’s economy has fundamental problems in the medium term with the increasingly evident weakness of Thailand’s economy compared to its regional peers becoming more pronounced.

It noted that, compared to other BBB+ rated economies, Thailand’s structural fundamentals were weak. It highlighted the lower per capita income and World Bank governance standards as issues of concern.

It projected that the Thai economy would grow by 3.2% in 2022 compared to an average for other countries in the same rating tier of 3.4%, noting that this would be driven by improved consumer consumption and what it described as a ‘mild recovery’ in foreign tourism.

Rating agency in its report on Thailand’s economy and outlook forecasts 22 million foreign tourists in 2023 or 55% of the record level seen in 2019

The rating agency projected a 4.5% GDP gain for the kingdom’s economy in 2023 driven by a more robust recovery of Thailand’s foreign tourism engine with a projected number of arrivals of 22 million, still only 55% of the numbers seen in 2019.

The report suggests that it would take some years before the tourism industry returned to normality and that this would be dependent on the reopening of China, which currently looks like it will take some time

The agency paid considerable attention to the prudent management of the kingdom’s finances by the government and noted that while exchequer borrowing was higher, it expected this to narrow to 5.3% of GDP by the country’s year-end at the end of September 2022.

It noted the fragile nature of Thailand’s economic recovery but at the same time, saw that the kingdom’s debt to GDP ratio was quite stable and projected to end the year a 55.4% of GDP, up from 53.8% in 2021 while it is expected to rise to 56.6% by the end of 2026.

Kingdom’s strong domestic capital markets and government’s overwhelming borrowing in baht a plus

Again, as in previous reports into the kingdom’s finances and prospects, it noted that the vast bulk of Thailand’s public borrowings were in baht and the strength and depth of the country’s domestic capital markets.

It noted that this, together with the government’s financial discipline, was a core strength of the kingdom and suggested that there is an emerging potential for an upswing in GDP growth.

Healthy state of Thailand’s external finances has been confirmed by Fitch Ratings with a return to a positive current account predicted in 2022 
Assurances from the Finance Minister after the downgrade of four Thai banks last week with two rated as investment-grade BBB, just above junk status

The agency projected that Thailand’s annual inflation rate for 2022 will come in at 6% for the year and projected an inflation rate of only 2.3% in 2023.

Record levels of household debt and ageing weighing down the economy well before the current crisis

On the negative side, the agency drew attention to the kingdom’s record level of household debt which, it revealed, was 90.1% at the end of last year.

This has risen alarmingly from 79.9% at the end of 2019 and the onset of the current crisis when it was, even at that level, considered a significant problem weighing down the country’s domestic economy.

It identified this as a key risk to the financial sector. 

However, while Fitch sees more problems with bad loans emerging in 2022 when relief measures fully expire, it highlights the more than adequate provisions made by Thai financial institutions.

Price to be paid now for population control measures of the 1970s and a changing society where many Thai women no longer aspire to be mothers

A significant challenge for the Thai economy and the one perhaps underlying its deteriorating growth performance and prospects is the increasing problem caused by demographics or the country’s rapidly ageing population.

This translates to a lack of skilled and semi-skilled workers in the economy as well as general factory operatives.

The rating agency, this week, starkly highlighted a significant lowering of productivity and income-earning capability among the Thai labour force.

It called for a boost in hard and soft infrastructural development as well as the effective creation of a more technology-based industrial base to offset this trend.

The rating agency also highlights political uncertainty as another key factor which is impeding the development of the country’s economy.

Ongoing political uncertainty and stasis undermine decisive action to fix critical structural problems

Ongoing protest activity and uncertainty over the next General Election due to be held before March 2023, were highlighted. 

Fitch also suggested that the current political situation in the kingdom was less than certain and likely to lead either to street unrest or increased political tensions or an unwieldy government made up of many parties such as the one we have seen since 2019, which poses a challenge to executing exciting and effective policies to drive the economy forward and overcome the country’s chronic problems of an ageing population and suffocating levels of private household debt.

The bank also noted Thailand’s score for Environmental, Social and Governance (ESG) criteria which includes political stability and human rights. 

The kingdom was given a score by the World Bank which left it in the 45th percentile.

On the plus side, the kingdom has always had strong albeit unique institutions of government and rule of law while, on the negative side, the country’s political instability was noted as a persistent factor detracting from this.

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Concern for the Thai baht and liquidity if Thailand does not move swiftly to raise interest rates

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