The Thai baht has been the best performing currency in emerging Asia since 2018. On a year-on-year basis, it has roared more than 8 percent against the U.S. dollar and this year reached a six-year high. But according to news headlines and commentary, the strong currency has lowered the country’s competitiveness and worsened both goods exports and tourism, two major drivers of Thailand’s economy.
Currency appreciation is not unique to Thailand. Bank of Thailand (BOT) officials and currency analysts explain the strength of the baht by domestic factors. Thailand’s solid economic fundamentals — a current account surplus and substantial foreign reserves together with a hawkish central bank — lure capital inflows. Many consider the baht a safe haven currency among other emerging market currencies due to its stability. As a result, the baht is likely to retain or increase in value, attracting speculative capital inflows and placing upward pressure on the currency.
In early 2019, the BOT did not seem concerned about the Thai baht’s appreciation, as a strong currency can actually benefit Thai importers and those who have foreign currency debts. It can also help improve the country’s terms of trade.
But the baht’s persistent strength and its potential negative impacts on the export-driven Thai economy have since prompted concern. Exports contracted for a fourth straight month in June and the BOT revised its GDP growth forecast for 2019 downward, from 3.8 percent to 3.3 percent.
Measures have since been taken to reduce baht appreciation. In July 2019, the BOT lowered the cap on the outstanding balance of non-resident accounts by a third and cut its supply of three- and six-month bonds at auctions in July and August. In addition, the BOT has signalled plans to further relax restrictions on outward portfolio investment by Thai investors, which can also help stem currency appreciation. In August 2019, the BOT cut the policy rate by 25 basis points from 1.75 percent to 1.5, a shift in the BOT policy stance since a raise by 25 basis points in December 2018.
Still, many believe that these measures are inadequate. There are three main further measures being discussed: foreign exchange intervention aimed directly at the baht’s value, a policy rate cut, and imposing capital controls to curb speculative inflows.
The BOT regularly intervenes in the foreign exchange market, but with strong market expectations this can be costly and countereffective. By purchasing foreign reserves in exchange for Thai baht, the central bank in practice helps keep the baht cheap and less volatile. Increasing foreign reserves and the stability of the baht could further reinforce its character as a safe haven currency.
BOT intervention makes the baht an ideal speculative asset. This can create a spiral of bullish speculation — followed by more foreign exchange intervention — leaving the economy with high liquidity or high interest rates if the central bank mops up excess liquidity through open market sales. The central bank also incurs costs when there are increases in the interest rate differentials between domestic and foreign assets and when the BOT fails to prevent baht appreciation.
The large amount of foreign exchange reserves (39.9 percent of GDP and over 200 percent of the IMF’s standard reserve adequacy metric in 2018) may put Thailand on the U.S. watch list for currency manipulators. Overall, bold intervention by the BOT is unlikely.
To tame offshore fund inflows causing a rapid appreciation of the baht, capital controls are effective at least in the short to medium term. But capital controls have long-lasting adverse consequences, affecting the country’s credibility and financial markets. In 2006, the BOT imposed controls on capital inflows to stem a previous bout of strong baht appreciation. The stock market plummeted and bond yields spiked, causing the central bank to lift some of the controls within a day. Thus capital controls are also unlikely given their long-term impact.
The most requested measure by the private sector is for the central bank to cut the policy rate. A common belief is that further rate cuts would make the Thai baht less attractive for foreign investors, reducing pressure on the baht. Yet, if the funds flow into Thailand because of the safe haven currency perception, rather than for a high yield, it is unclear whether rate cuts will be effective. More importantly, easing policy may worsen already elevated household debt, which is 78.6 percent of GDP (among the highest in Asia), jeopardizing Thailand’s financial stability. But it may be Thailand’s only option given that a fragile political situation may thwart more fiscal stimulus.
The strong baht may just be a product of global trends that are contracting exports, particularly sluggish global growth and trade tensions. Further, to weaken the baht is not easy when other countries are pursuing even more aggressive easing policies. Still, many hope for at least another rate cut this year, even if it may increase household debt.
Amid this debate, let’s not forget that ultimately the central bank is there for stability. The central bank should not be expected to subsidize a cheap export sales strategy if it interferes with the BOT’s main priority of economic stability. Exchange rate fluctuations are simply a fact of life under non-pegged regimes. Policy efforts are better aimed at helping exporters to sell products with higher added value, rather than competing on low prices.
Phornchanok Cumperayot is Associate Professor with the Faculty of Economics at Chulalongkorn University, Bangkok. This article was originally published over at the East Asia Forum here.