The business community, despite its leadership cooperating with the new government and Prime Minister Srettha Thavisin, increasingly fears its policies of accepting a higher public debt level and wages to spur growth as it may not work in a world economic downturn caused by the rising cost of money as financial markets, primarily based in the United States, have become risk averse leading to higher yields on US ten year bonds feeding into similar rises for Thai instruments.

On Tuesday, Srettha Thavisin pointed to the declining baht saying that the Bank of Thailand was monitoring the situation and that it would help boost Thai exports and tourism. The baht has fallen 7% this year but is still higher than the rates set in October 2022 with Bangkok analysts suggesting that although it may fall to ฿37.55 to the dollar in the weeks ahead, but then recover with the High Season for foreign tourism, to anywhere between ฿35 and ฿36 by the end of 2023. However, could this year be different? In the last week alone, Thailand’s 10-year bond yields have risen 4.57% amid a similar surge in the United States as markets have become wary of risk. This will make the government’s contentious expansionary stimulus plans for the economy more expensive in a darkening economic environment with an implosion of the Chinese economy and market scepticism about Pheu Thai’s expansionary policies at a time when world economic danger signals are flashing.

On Tuesday, Prime Minister Srettha Thavisin said the Bank of Thailand was monitoring changes in the bath after it hit an eleven-month low against the US dollar. It comes with significant changes to the world economy, with bond yields in the United States reaching a 16-year-high, a development that has led Thai 10-year bond rates to rise by 4.57% this week alone, something that will impact the Prime Minister’s plans to raise ฿270 billion in the coming months to fund the government’s expansionary fiscal stimulus plans.

The Thai Baht, on Wednesday, ended up at ฿37.05 to the dollar after a week in which the currency hit a ten-month low against the dollar, driven, in part, by signs of a rift between the government and the Bank of Thailand regarding the Kingdom’s economic policy and more significantly, rising bond yields in the United States which are driving up the value of the US dollar significantly.

Most market analysts who monitor Thailand still suggest that the baht will recover against the dollar between the end of October and the New Year in 2024 as the kingdom’s High Season for foreign tourism gets underway.

Krungsri analyst expects the Thai baht to recover to ฿35 to ฿36 by the end of 2023 boosted by a strong Current Account from foreign tourism earnings

Krungsri Bank’s Roong Sanguanruang, the Head of Global Markets and Research predicted the normal strengthening of the baht towards the end of 2023 to anywhere from ฿35 to ฿36 to the dollar.

‘Given a higher level of uncertainty, the baht is expected to depreciate further against the dollar over the next two weeks through to October. After that, the baht should be firmer compared with the greenback, supported by the high season for tourism,’ she disclosed.

This should boost the Current Account through foreign tourism earnings which go directly to the country’s bottom line.

However, in 2023, the country’s economy appears to be suffering from a lengthening array of economic challenges driven not least by the implosion of the Chinese economy, the scale and extent to which has not been openly acknowledged by financial analysts in Bangkok and Singapore who continue to rely on discredited Chinese economic data, suggesting the Chinese economy is growing.

China’s economy is a ticking time bomb

Rudimentary analysis would suggest that matters in China have taken a decisive turn for the worse with falling confidence in both the Chinese economy and the state generated by a growing list of troubling controversies and developments.

China could be an economic time bomb sitting on Thailand’s doorstep as Evergrande collapse nears

Reports on the ground from China suggest that the 45 years of economic development since 1978 came to an end with the pandemic crisis with record lows of inward investment, widely discredited economic data and reports from Chinese business owners on the ground that an economy, driven in the last decade of its power growth period by property and construction combined with state industry, is not only experiencing lower growth levels but is in the process of collapsing like the zombie creation it is.

US interest rate policy appears to be the decisive factor impacting the final value of the baht even more than the country’s Current Account movements

The key factor which is impacting the price of the baht, even ahead of factors influencing Thailand’s all-important Current Account, is the policy of the Federal Reserve in the United States and the value of the US dollar as Thailand remains part of the free world’s financial market.

The US dollar has spiked this week with 10-year yields on US 10-year Treasury notes reaching 4.771% on Tuesday, up significantly from 4.173% only at the start of September. 

According to data provided by Dow Jones, the significance of this development has even caused the price of gold to fall in recent weeks and suggests that the US economy is more resilient and robust than markets and financial analysts had predicted over the last year.

Fast-rising US bond yields a new twist with a dynamic at play in the world economy bringing a slowdown in economic activity now also impacting Asia

The situation has left US Treasury bonds heading for a rate of 5%, last seen in July 2007, which suggests that a fundamental correction is ongoing in the world’s financial system, culminating with a downturn in global economic growth.

This has been particularly emphasised in Southeast Asia with even Singapore suffering in 2023 as a new dynamic is being experienced.

Last week saw economic data emerging from the Ministry of Commerce suggesting that Thailand’s exports had bucked an 11-month downward trend by rising in August by 2.6%. 

The ministry spokesman, Keerati Rushchano, however, suggested that there was no sign of a continued improvement carrying into September although the government is forecasting an improvement in the last quarter.

However, even this gain was challenged out by a statement on Friday from the Bank of Thailand, which suggested that export earnings for the same month were down.

Figures released by the Bank of Thailand suggested that exports had dropped by 1.8% compared to August last year, directly contradicting a figure issued by the Ministry of Commerce. 

The bank also noted that the month saw a lower number of tourist arrivals although tourist spending was up while domestic consumption in the economy softened, after several months of robust growth.

Thailand’s capacity utilisation in August was only 58.1% as manufacturing activity continued to falter with no sign of an improvement on the horizon

A notable feature of the report on Friday was Thailand’s Manufacturing Production Index (MPI), which showed a drop from last year of 7.5% to 91.81 points. 

The bank pointed to the Office of Industrial Economics (OIE) which showed that the capacity utilisation in the manufacturing sector was only 58.1% in August, compared to an average for the first eight months of the year of 60%. 

‘The continuous decrease in MPI reflects the weak economy and unfavourable business sentiments,’ explained Mr Warawan Chitaroon, the Director General of the Office of Industrial Economics (OIE) during the presentation given by the Central Bank. 

Capital from Thailand and other Asian economies is moving away to an environment where higher returns are on offer this year driven by US interest rates

The fall in the value of the baht is also being driven by pronounced differential returns with Thailand’s key interest rate, currently standing at 2.5%.

This was predicted in 2022 but did not materialise at that time with speculation that investors saw the situation as short-term while the array of economic challenges since 2022 is mounting including the deterioration of the situation in China which impacts sentiment towards Asia overall.

Choppy waters for the economy as the central bank tries to cling to its benign interest rate policy
Warning to central bank to preserve Thai foreign exchange reserves for a brewing 2023 economic storm

This comes despite a rate hike by the Monetary Policy Committee of the Bank of Thailand last Wednesday, which came as a surprise to most analysts and the government. 

However, the 2.5% baseline interest rate compares to a 5.5% rate set by the Federal Reserve in the United States in September and indeed significantly higher rates on offer from banks in the Southeast Asian region.

Capital flight more pronounced in recent weeks as the Thai government gets ready to issue ฿272 billion in new bonds to fund expansionary stimulus

The capital flight from Thailand is said to be more pronounced in recent weeks after the Federal Reserve in the United States made it clear that the current high level of interest rates may be in place for a longer period while bond rate yields are also now rising. 

Analysts in the United States suggest that the rising rate of bond yields is also impacting Thailand by making government borrowing more expensive.

The government of Srettha Thavisin is preparing plans to raise ฿272 billion or $7.35 billion in the next few months from now until December to finance the government’s policy of financial stimulus and in particular, the controversial ฿10,000 digital wallet giveaway scheme which alone is projected to cost ฿560 billion or $15.1 billion.

The current yield on Thai-10-year bonds is running at 3.378%, a rate which has seen a rise of 4.57% this week alone and which in turn is up nearly 15% on the rate seen in early September.

This suggests that the funding cost of the government’s proposed expansionary budget policy may end up being higher as markets worldwide have become allergic to risk.

Fast-rising bond yields in the United States do not portent good news for the American economy as financial markets become wary of government debt

The rising bond yield rates in the United States are thought to be driven by hopes that the US economy may achieve a soft landing in 2024.

Again, this is against expectations and despite aggressive interest rate hikes by the Federal Reserve. 

The second reason for the rise in US bond yields is the slowdown in China which, it is understood, has restricted the ability of the Chinese to hold US Treasury bonds as Beijing grapples with a financial crisis.

Chinese authorities were known to have invested spare dollars in US Treasuries in the past. 

The fundamental change now brewing in the world economy and developments in China may have made this a thing of the past.

The third reason for the rise in US bond yields, and the most disturbing, is a growing resistance by investors to buying US debt following the downgrading of its status by the Fitch Ratings Agency on August 1st.

Thailand is also facing the prospect of higher inflation as oil prices worldwide started to rise in recent months with concern that Thailand’s current account will be impacted.

Baht’s movements entirely to be expected as the country posted a significant Current Account deficit for the first eight months of 2023 of $7.2 billion

Despite a current account surplus of $0.4 billion announced by the Bank of Thailand on Friday last, for August, the figures for the 8 months in total showed Thai exports were down 4.5% at $188 billion for the first eight months of the year while imports fell by 5.7% to $196 billion leaving the kingdom with a trade deficit of $7.2 billion.

Thailand’s consumption of oil increased by 2.3% for the year driven by a 70% increase in jet fuel to support the country’s aviation sector.

The country appears to be on target to welcome 28 million arrivals for 2023, in line with projections, but this cannot be taken for granted with August seeing fewer arrivals than July, although expenditure was up because of more visitors from Japan, Malaysia, Germany and Australia.

The Thai baht is also influenced by movements relating to the Chinese currency, the Yuan, which has fallen only 4.34% in 2023 from ¥6.91 to the dollar on the 1st of January 2023 to ¥7.21 on the 4th of October.

This week, Kasikorn Research Center, the think tank associated with the Kasikorn Bank, predicted that the Thai baht could fall as low as ฿37.55 against the dollar in the short term. 

‘Earlier we anticipated the baht would stay around ฿36.6 to the greenback, but our view changed after the currency slipped below the ฿37 mark,’ Ms Kanjana Chockpisansin told the Bangkok Post newspaper this week.

Thailand’s exports in trouble as key export markets such as Europe and China with global economic activity slowing down as oil prices recede

Most Thai market analysts have been expecting the baht to return to ฿35 to the dollar by the end of the year but there are concerns about the medium and long-term implications for the economy of this year’s developments.

The Thai National Shippers Council, on Tuesday, suggested that exports will be down this year by at least 1% and possibly 1.5% for 2023. 

This is a bleaker outlook than was even reported several weeks ago and corresponds with a 4.5% fall seen in the opening eight months with no reports yet of improved manufacturing output, in fact, the opposite.

There has been some good news for the government in that the price of WTI crude has fallen from $90.25 per barrel on the 24th of September to $87.67 on October 4th, a drop of 2.8%.

This would appear to be a response to the weakening of economic growth, particularly in Asia and Europe, where the effects of consistently high-interest rates and the shortage of liquidity are now impacting output, in addition to ongoing insecurity over the war in Ukraine. 

Severely challenged world economy with the US adopting a defensive posture and funds flowing to the US dollar as a haven. Thai reserves are vital

The current trend shows an increasingly challenged world economy with authorities in the United States now adopting a defensive posture which is seeing the US dollar again becoming a safe haven.

Because of this, analysts in Bangkok say it is unlikely that the current flow of capital out of Thailand, particularly in movements by foreign investors will reverse course, at least in the short term.

It should be noted that Thailand is among a basket of Asian currencies which has been suffering in recent weeks and is only the third worst-performing currency in Asia behind the South Korean Won and the Japanese Yen.

Thai foreign exchange reserves are a cushion

The kingdom has an extraordinarily strong level of foreign exchange reserves which on the 29th of September was valued at $213.6 billion having risen from $197.8 billion on the 21st of October 2022.

Thailand’s foreign exchange reserves, however, in January 2021 were valued at $258.5 billion, with the current figure showing a drop of 17.3%.

By comparison, the Indian level of foreign exchange reserves at the end of September was $590.7 billion for an economy with a GDP of $3.385 trillion compared to Thailand’s $536 billion in 2022, 6.31 times the size of the Thai economy, while the foreign exchange reserves are 2.76 times.

The Indian rupee has just hit a new low against the US dollar at ₹83.72, a 21.7% fall since July 2019.

This illustrates the level of cushion or financial stability that the Kingdom of Thailand has built up over the last two decades, primarily through running current account surpluses driven by highly lucrative foreign tourism earnings on top of exports.

Market confidence in new PM Srettha Thavisin’s handling of the economy is now on the line as his government pushes through its contentious policies

On Tuesday, Prime Minister Srettha Thavisin suggested that the Bank of Thailand was closely monitoring the volatile situation with the baht as it has declined.

He said the lower value of the Thai currency would inevitably be a benefit to the country’s tourism and export drive.

One analyst, Mr. Christopher Wong of OCBC Bank in Singapore, suggested that the current expansionary policies of the new government led by Mr Srettha are, at least, contributing to a lack of confidence in the baht. 

However, Mr Wong said the biggest factor was the prospect of higher US interest rates continuing for longer than expected with some analysts even factoring in the possibility of a further increase in the benchmark rate by the Federal Reserve due to the resilient nature of the US economy.

DBS Bank in Singapore, at the same time, identified the emerging differential in interest rate levels between Southeast Asian economies and the rate established by the Federal Reserve coming at a time when both growth and manufacturing output in the Asian region are declining as a significant reason for the fall-off in Asian currencies.

Top Bangkok analyst says chasm has opened between the United States economy and those in Europe and China with growth in America to continue apace

A top financial brokerage in Bangkok InnovestX Securities announced this week that the global economy would slow down even further in the fourth quarter of 2023 saying its research showed that purchasing managers’ indexes of the world’s largest economies point to this trend.

The Bangkok analysts also highlighted the US Federal Reserve’s recent statement that it would hold interest rates at 5.5% until the end of 2023 or possibly longer, as highly significant. 

‘We project a chasm between the US, where the economy is still growing, and other economies, especially Europe and China, where growth will slow significantly,’ the firm wrote.

Analysts in Bangkok accept that the new Pheu Thai-led government will push through its policy agenda, such as the controversial ฿10,000 digital wallet giveaway, subsidised lower electricity costs and a moratorium on interest repayments for farmers and selective businesses.

Srettha’s government to continue policies despite scepticism in the business community over wallet giveaway, the threat of inflation and higher wages

In addition, the Thai government will move ahead with its plan to increase the minimum wage in 2024 as part of a three-step process to raise the minimum daily wage to ฿600 per day by 2027. 

However, the government is facing problems with the threat of inflation, which will be exacerbated if the baht continues to fall in value and wage levels rise in 2024.

Thai consumers are also experiencing problems with purchasing power because of high levels of household debt.

The business sector is openly sceptical about the government’s plans to use stimulus to prime the economy because of the risk of a higher public debt burden and costs within the economy.

In a recent survey by the Federation of Thai Industries (FTI) whose leadership is broadly supportive of the new government, only 27.2% of respondents suggested that the digital wallet giveaway was something which would assist the economy in the year ahead.

By comparison, the government’s policy of reducing the cost of electricity and energy received an 85.9% response.

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