Baht’s depreciation is now being driven by a wider difference between interest rates in the United States and Thailand which had gone beyond a critical point at 150 to 175 basis points even before Wednesday’s rise and which could see it grow wider by up to a further 175 basis points by the end of this year if the Federal Reserve maintains its hawkish stance and with projected Thai interest rate rises. The situation ultimately may lead to the Bank of Thailand being forced to raise interest rates higher and faster than it wants given the capital movement we are now witnessing thus supporting the acting PM’s call for action.
Acting Prime Minister Prawit Wongsuwan surprised the cabinet on Tuesday when he warned that the government could not again allow the baht to trade at ฿50 against the US dollar. He called on Minister of Finance Arkhom Termpittayapaisith to work with the Bank of Thailand and Governor Sethaput Suthiwartnarueput to bring about a rate of ฿35 to the US currency. On Wednesday, the baht fell below the ฿37 barrier for the first time since October 2006. The intervention of General Prawit is reported to have drawn a mirthful response from ministers around the cabinet table and was later qualified by a press briefing from temporary government spokesman Anucha Burapachaisri.
Despite growing pressure to raise interest rates faster in Thailand, Bank of Thailand Governor Mr Sethaput, whose role is an independent one concerned primarily with financial stability and inflation, has signalled consistently that the bank will pursue its more gradual approach to rising interest rates so as not to torpedo the country’s emerging growth which the Ministry of Finance itself sees as essential this year.
Most observers still feel that the central bank will only raise interest rates by a further 50 basis points over the coming months compared to a potential 225 points for the Federal Reserve on top of the gaps that already exist between Thailand and US interest rates of 150 to 175 points, a dangerous possible divergence which Thailand’s central bank may surely be forced to revisit if it occurs but, for now, the Thai central bank does not appear to be perturbed despite the acting prime minister’s intervention.
Central bank expected in the short term to maintain course and not to act aggressively despite the threat of a lower baht but things could grow acute
‘The baht may weaken further in the short term along with other emerging market currencies if the Fed makes a big hike,’ explained Amonthep Chawla of CIMB Thai Bank Plc on Wednesday. ‘This will put pressure on the Bank of Thailand to raise rates to prevent outflows. Still, we don’t expect the Bank of Thailand to adopt an aggressive rate hike path and they’ll likely raise the rate by 25 basis points next week.’
Thailand’s Acting Prime Minister Prawit Wongsuwan, at a cabinet meeting on Tuesday, called on the Minister of Finance Arkhom Termpittayapaisith to meet with the Bank of Thailand to see what can be done to ‘rebalance’ the baht as it broke through the ฿37 to the US dollar rate for the first time 24 hours later on Wednesday.
The dollar was quoted at ฿37.12 having threatened for the last week to breach the new barrier, representing its lowest point against the US currency since October 2006.
Mirth reported from ministers around the cabinet table as acting PM Prawit warned that what happened in 1997 with the baht cannot be allowed to reoccur
The Deputy Prime Minister who has taken over the role of suspended Prime Minister Prayut Chan ocha pending a Constitutional Court verdict on September 30th caused some mirth around the cabinet table on Tuesday, it is reported, when he warned that the baht cannot be allowed again to drop below ฿50 to the US dollar as it did under the premiership of General Chavalit Yongchaiyudh who was in office from November 1996 to November 1997 during the Asian Financial crisis in 1997 when Thailand’s economy was described by many economists at the time as an ‘economic bubble’ burst plunging the region into crisis as contagion spread and ‘hot money’ flew out of the kingdom.
The current pressure on the Thai baht which is supported by $213 billion in foreign currency reserves because of Thailand’s prudent management of its banking system and economy since then, is being caused by a growing divergence between interest rates in the United States which are expected to be raised by at least 0.75% later on Wednesday, the third such hike in a row, bringing the US rate to between 3% and 3.25%.
Thailand’s interest rate is well below its peers in Asia as well as the United States because of fears for the kingdom’s fragile economic recovery
This compares to a current rate of 0.75% in Thailand, well below its peers in the region, which is expected to rise later this month to 1% as the Bank of Thailand pursues a more gradual tightening of policy because of the weakness of Thailand’s economy which is in the midst of a very fragile recovery threatened by rising inflation which although expected to be reduced in the months ahead, will remain elevated into 2023 with underlying core inflation rising.
The sharp drop in the Thai baht which lost 1.5% of its value in recent days, is now beginning to impact the kingdom’s inflation rate even with West Texas Intermediate (WTI) crude oil off its peak of $122 seen in early June to $85 on Wednesday and with a recent high in consumer confidence.
Money flowing into Thai stocks but capital on deposit is finding a higher return stateside as interest rate divergence with the United States grows
Even with lower oil prices, Thailand is still facing a current account deficit which ballooned to $4.1 billion in July despite the country receiving over 1 million foreign tourists that month who this year are reported to be spending less.
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The pressure on the baht does indicate that there is capital outflow from the kingdom even though money may be pouring into the kingdom’s stock exchange as rising interest rates stateside puts pressure also on US stocks with investors getting a higher return on treasury bonds.
Thailand’s 10-year bond yield is also elevated at 2.85% and peaked in May at 3.37% but the corresponding US rate now is 3.57%.
Greater impetus as gap widens to move funds even while considering the danger of a reverse course and foreign exchange losses for domestic fund holders
The prospect of two further Federal Reserve meetings between now and the end of the year with a borrowing rate now projected to be well over 4% compared to a projected 1.25% rate in Thailand even with two further increases is increasing the likelihood of money leaving the kingdom for a higher return.
The greater the divergence, the more impetus for this to happen with domestic fund holders calculating the potential for a reversal of course and exchange rate losses being one of the reasons why the baht has not depreciated faster in recent months.
Another key factor has been the Bank of Thailand itself which has admitted to intervening to stabilise the volatility of the baht or checking its decline at key moments through the use of Foreign Exchange reserves.
Thailand’s ample foreign reserves have fallen this year with higher current account deficits run up but this is projected to improve at the end of 2022
Largest US interest rate hike since 1994 with American interest rates poised to end up anywhere from 3% to 4% by the end of 2022 or even higher still
Observers have noted that Thai foreign exchange reserves have fallen from $259 billion to $213 billion in the course of this year.
Government spokesman Anucha briefs reporters after the acting PM’s pronouncement to ministers denying control over the baht’s value in a free market
After this week’s cabinet meeting, a spokesman for the government briefed reporters on what was meant by the acting Prime Minister’s eye-raising instructions to the Minister of Finance in cabinet.
Anucha Burapachaisri, the Deputy Secretary-general to the Prime Minister for Political Affairs and spokesman for the acting prime minister, outlined the situation to reporters.
He appeared to be at pains to highlight that the government was not intent on controlling the currency’s value which Minister of Finance Arkhom Termpittayapaisith said some months ago would be allowed to ‘float’ in response to market forces while at the same time being monitored by the Bank of Thailand.
‘If the Fed has raised interest rates before, it made the dollar strengthen. The baht depreciated. But it’s not the weakest in the region. As for Thailand, it will have to raise interest rates accordingly or not. It mainly depends on the situation in the country. And the part that says that the baht should be at the level of 35 baht per dollar, it cannot be determined. We must follow the market mechanism. Because when the baht depreciates on one side, they like it. But the other side doesn’t like it. Or if the currency is strong on the other side, it’s good. On the other hand, it affects negatively. Therefore, we need to find a balance point,’ he told reporters at Government House.
Confidence in Thai assets and stock market stressed
He then, as the Minister of Finance also did on Wednesday, emphasised that money was still being invested in Thai assets and shares by foreign investors but, at the same time, with money on deposit heading to more advantageous waters as the rate divergence widens more significantly while raised geopolitical tensions are also pushing funds into the US dollar as Asian currencies including the Yen and the Chinese Yuan depreciate.
‘Thailand is also an attractive country for investors causing capital to continue to flow in, including the capital market despite some volatility. But net purchases are still foreign which reflects the confidence. As for the case that some money has started to flow out of Thailand, the Bank of Thailand has been closely monitoring the situation,’ Mr Anucha concluded.
Bank of Thailand may use Foreign Exchange reserve again to dampen volatility and slow the rate of depreciation of the Thai baht in a very tense market
Bank of Ayudhya’s Ms Rung Sanguanruang of the Global Markets Business Promotion Department at the bank, said on Wednesday that the markets were now awaiting not only the Federal Reserve’s latest interest rate rise but also its guidance moving forward which investors anticipate will remain hawkish.
She noted that the baht has been allowed to float and that intervention by the Bank of Thailand can only be a short-term response as it may have unintended and counterproductive consequences.
She also noted that the bank had recently used the Foreign Exchange Reserve Fund to slow the pace of depreciation of the baht at times.
Central bank issues a statement underlining the country’s strong financial system and impressive foreign exchange reserves, 12th highest in the world
On Wednesday, the Bank of Thailand in response to the publicity surrounding the cabinet meeting, pointed to the country’s strong foreign exchange reserves and noted that they were the 12th highest in the world and 6th when related to GDP representing 48% of the country’s annual output as well as being three times higher than Thailand’s short term foreign debt.
However, the bank quoted a figure of $240 billion and also emphasised that the reserves had been revalued in relation to the baht’s depreciation against the dollar.
It also pointed out that there were no abnormal capital movements in the market and that Thailand’s financial markets remain both strong and stable.
‘The volatile economic situation with high inflation, expensive oil and the price of products increasing, including volatile financial markets, affects the currency and international reserves. This has an impact on many countries in the world. However, Thailand still has sufficient international reserves to cope with the current situation. In addition, Thailand’s financial market remains strong and stable. Thailand continues to have the potential to draw inward capital and inspires confidence among foreign countries and investors.’