The significant and heavy impact of the war in Ukraine is hitting Thailand hard as it also challenges economies across the world as inflation bites the less well off with anaemic growth. All eyes over the coming months will be on Thailand’s current account after it posted a larger deficit of $3.7 billion for May ahead of a $3.1 billion shortfall in April. The problem for the kingdom is elevated import costs driven by oil prices in excess of $100 a barrel and a foreign tourism industry that, at best this year, will only see 25% of the numbers seen in 2019 crippling the country’s already limited prospects for significant growth.
The Thai Minister of Finance has assured the media that Thailand was not experiencing a flight of capital from debt markets as he said the government was monitoring the baht even as it continues to depreciate against the US dollar breaking past the ฿36 barrier for the first time in over 15 years on Wednesday. It comes as the kingdom’s current account deficit rose for May 2022 to $3.7 billion after a $3.1 billion shortfall in April while the kingdom’s economy, like others around the globe, is left facing the very real and perhaps inevitable prospect of an economy mired in stagflation with an anaemic growth rate and persistently high inflation in force at least until the end of 2022 which could feed into a spiral.
On Wednesday, the Thai Minister of Finance, Arkhom Termpittayapaisith, told Reuters that the depreciation of the Thai baht was not being driven by capital flows from the country’s debt market as the baht broke through the ฿36 to the dollar mark for the first time in over 15 years reaching a new low against the US dollar while the Thai currency since the beginning of this year, has gained ground against both the pound sterling and euro.
Since early January the baht has gained 4% against the UK currency which dropped from ฿44.87 to its recent close at ฿43.06.
Similarly with the euro, where the gain has been 2.46% with the euro falling from ฿37.74 to the current value of ฿36.80.
Lack of confidence in the UK and Eurozone economies and low rates has seen gains for the baht this year
The lack of confidence in both economies with rising inflation, negative growth prospects and comparatively low-interest rates has translated to both currencies with capital being attracted to the United States where interest rates are decisively on the rise.
Markets are already reacting to a strongly anticipated 0.75% rate hike by the Fed in July.
Chief among the reasons for this is the unique impact of the Russian Ukraine war on the region but it is also a result of pandemic era policies and the fact that both the Eurozone bloc and the United Kingdom are still pursuing weaker monetary policies with both the Bank of England and the European Bank reacting, up to now, indecisively to tackle inflation as both the British and European economies face steep challenges and strong headwinds with GDP in the United Kingdom falling by 0.1% in March 2022 and 0.3% in April 2022 even though the first quarter showed marginal growth.
Rampant inflation in the UK to hit 11%
In the 15-country eurozone bloc, the economy grew by 0.6% in the first quarter but the diverse economy experienced strong inflation at 8.6% in June following a rate of 8.1% in May 2022.
In the United Kingdom, inflation is even higher, hitting 9.1% in May, the highest rate in 40 years with confident predictions that it will hit 11% in the Autumn.
In the face of this, the European Central Bank still maintains an effective negative deposit rate for funds of 0.5% while the interest rate in the United Kingdom stands at 0.75%.
The Thai baht has not been valued so low against the US dollar since the latter half of 2006 when the dollar was in the process of dropping precipitously against the baht from ฿40.85 in December 2005 to a modern-day low of ฿29.10 in March 2008.
Baht is still well within a medium range of its historic values over thirty years against the US dollar
In the mid-1990s, the baht traded stably at a range of ฿25 to the US dollar before hitting an all-time low of ฿52.95 in mid-January 1998 after the Asian Financial crisis.
On Tuesday, the Ministry of Commerce confirmed a 7.66% inflation rate for June 2021 driven by a rise in both energy and food prices for the month.
These figures were despite intensive efforts by the ministry to slow down inflationary pressures which can be seen in data suggesting that the Consumer Price Index only grew by 0.9% in June slowing from a 1.4% rate in May.
Higher energy costs are driving inflation in Thailand accounting for 61.18% of the price hikes seen
The key driver of inflation in Thailand last month was energy costs which accounted for, according to the ministry’s data, 61.18% of the headline inflation rate for June while food and non-alcoholic beverages accounted for 34.2%.
These figures were confirmed by Ronnarong Phoolpipat, the Director-general of the Trade Policy and Strategy Office at the Ministry of Commerce on Tuesday.
The government may see a relief over the coming weeks as the WTI price for oil or West Texas Crude price has fallen back over the last week to approximately $100.50 per barrel based on fears of a worldwide recession being caused by the war in Ukraine, increased geopolitical tension between the United States and China and internal problems in the world’s second-largest economy where COVID-19 breakouts continue to cause disruption and with China also facing a property market crisis with new home prices falling again.
In Thailand, the government’s efforts to stabilise the price of energy are being challenged by the length of this crisis as its special oil fund for financial support of the domestic price at the pumps becomes exhausted and the price of oil, although moderated, remains well above the $70 to a barrel projected at the start of the year by the country’s oil industry.
Rising concern about embedded inflation with a prediction of an elevated rate also in the last quarter
Core inflation, which takes out energy and food, rose by 2.51% in June compared to 2.28% in May as short-term price hikes increasingly feed their way into the broader market.
Thailand’s problem currently is that its ultra-low interest rate, a historic one at 0.5%, which is now almost certain to rise at the next Monetary Policy Committee of the Bank of Thailand on August 10th, is not attracting transient capital flows.
There is also rising concern that the lower baht against the US dollar exchange rate may be contributing to the inflation challenge with Thanavath Phonvichai of the University of the Thai Chamber of Commerce now suggesting that heightened inflation will be a feature of the economy also in the fourth quarter of the year although it is expected to come in lower at 6% to 7% after it peaks at somewhere between 7% and 9% in the third quarter of the year.
Thailand’s Bank of Thailand under increased pressure to raise interest rates higher and faster
The problem is that other central banks worldwide have raised interest rates faster such as the United States which hiked its benchmark rate in June by 0.75% bringing it to 1.50% to 1.75% with even Thailand’s next-door neighbour Malaysia having an interest rate of 2.25%.
However, the worst is yet to come with another 0.75% jump expected in US interest rates in July and further increases strongly signalled with the market confident that interest rates in the United States will end the year at between 3.25% and 3.5% with some forecasters even suggested it could reach 3.5% to 4% as the Federal Reserve has committed itself to prioritise the fight against inflation even if it means the economy slowing down or a recession.
This policy has also been hinted at in the last 24 hours by the Bank of England which has vowed to bring inflation in the United Kingdom back to 2% as the overriding priority.
This may mean a strengthening of the pound sterling if the bank follows through on its policy despite its implications for UK economic growth prospects.
Thailand is currently expected to only raise rates by a further 0.5% to 1% by the end of the year meaning the ‘spread’ between the two interest rates in the US and Thailand will widen from a current 0.75% to 1% to between 2.25% and 2.75%.
This and the rising level of Thailand’s inflation challenge has led some commentators to suggest, this week, that the Bank of Thailand may have to go further and raise interest rates three times or bring the year-end rate to 1.25%.
All eyes on the kingdom’s current account in the months ahead to see how increased foreign tourist numbers benefit the struggling economy
In the meantime, all eyes will be on Thailand’s current account deficit which widened to $3.7 billion in May from another disappointing month in April when it came in at $3.1 billion in the red.
It remains to be seen if the renewed impetus generated by the kingdom’s foreign tourism industry can come to the rescue.
From June 1st to July 3rd, reportedly, 822,000 visitors arrived in Thailand and it is not known if this will be enough to plug the gap as the country’s heightened import bill is driven by oil prices and rising demand as the kingdom’s domestic economy has become more active with the country’s reopening and an end to emergency era curbs.
Despite the rise in foreign tourist numbers both seen and predicted, Thailand is still only on course to reach 25% of that seen in 2019 while higher oil costs have been aggravated by the weakening baht.
Threat of a stagflation spiral as worldwide economies struggle to cope with the shock of war in Europe
In the meantime, the Joint Standing Committee on Commerce, Industry and Banking (JSCCIB) on Tuesday projected the GDP growth rate for the Thai economy to come in at 2.7% for 2022, up from an earlier figure of 2.5% but warned that inflation posed a significant danger.
The widespread impact of the war in Ukraine, the first war in Europe since the end of World War Two, is rising and sparking fears of an altered economic world.
At the same time, Thailand still has millions of struggling and underemployed workers whose livelihoods have not fully recovered from the pandemic emergency and who face another year with limited economic growth which will only be half that of inflation.
A rise in the national minimum wage rate has already been conceded this year by the Minister of Labour Suchart Chomklin although it is expected to be well below the ฿492 per day per worker being pursued by unions.
This is how stagflation begins and the government, as with others across the world, it must be said, has only months to go before such pressures take hold and turn into a vicious circle.
The problem is the driving economic forces are mostly external but some factors are within its control such as promoting more inward foreign tourism, investment and export growth with open, smart and outwardly friendly policies.