Baht strength holding back trade
Currency gains blunt competitiveness
The baht has surged against the US dollar to be the best-performing currency in Asia this year, prompting a growing outcry among exporters fearing that foreign exchange pressure will be a hurdle for them to sell products.
However, Thailand's exports totalled US$113.5 billion in the first half, advancing 7.8% from the same period a year earlier, its highest growth rate in seven years.
As a rule of thumb, a stronger currency increases the prices of exported goods and waters down the money of incoming tourists. A weak currency, in contrast, makes exports cheaper and travelling less expensive for inbound tourists.
At first glance, the baht's 7% rally against the greenback seemed no impediment to the country's exports, but currency and outbound trade are still highly correlated, and the rapid gain in the baht is blunting some of the competitiveness of Thailand's exports.
Thailand's export growth pace lagged behind many other trade-dependent Asian countries where outbound shipments were in the double digits.
During the first six months of the year, Malaysia's exports jumped 21% year-on-year, Vietnam's chalked up 18.8% and Indonesia's shot up 14%. These are commodity-exporting countries that saw their currencies appreciate at a slower clip than the baht.
For the Philippines, its exports climbed by 16.3% during the first five months to May, while the peso depreciated against the dollar.
South Korea and Taiwan, whose currencies are among the biggest gainers in Asia, saw their merchandise shipments grow more quickly than Thailand's -- at 15.8% and 12.5% respectively for the six months to June -- thanks largely to demand for high-technology products, which typically have low price elasticity.
Currency still matters to exports
The slower growth for Thailand's exports when compared with other export-oriented countries in the region shows the baht's appreciation is taking a bite out of the country's shipments, said Amonthep Chawla, CIMB Thai Bank's head of research.
Recovering demand in commodity and electronics products from China lent strong support to the bullish performance, he said, but the market consensus points toward softer export growth in the second half in line with lower commodity prices expected during the period.
"The country still lacks investment to upgrade its products to sharpen competitiveness. In fact, the baht's strength presents an opportunity. Local manufacturers should invest," said Mr Amonthep.
CIMBT's research house forecasts exports this year will grow 4%, below the Bank of Thailand's estimate at 5%.
Don Nakornthab, senior director in the macroeconomic and monetary policy department at the Bank of Thailand, said the baht's appreciation has affected merchandise exports somewhat.
With inflation at a low ebb, the baht's real effective exchange rate, which measures the development of the real value of a country's currency against a basket of the country's trading partners, has gained less than the nominal value, indicating Thai exporters' competitiveness in terms of price was only slightly affected by the change in the exchange rate, he said.
"The appreciation in the baht might somewhat affect Thai exports, but it is not large enough to cancel out the momentum of growing demand in most foreign markets this year," said Mr Don.
However, Thailand has entered a new period where export growth will be lower than 5% from now on, which has nothing to do with the stronger baht, he said.
Benjarong Suwankiri, head of TMB Analytics, TMB Bank's research unit, agreed the stronger baht has affected the competitiveness of the Thai exporters, mainly in the agricultural sector, where price competition has intensified. He believes shippers are seeing lower revenue that need to convert currencies back to baht.
The effect might not be seen clearly as growth in exports this year is supported by both a rise in prices and quantity, as a result of growing demand in foreign markets, said Mr Benjarong.
"However, as Thai exports still rely heavily on commodities, the sector remains fragile despite strong growth in the previous period," he said.
Safe haven Thailand
Even though Thailand's economy is gaining below its growth potential, capital flows still flood into the country and strengthen the baht.
The failure of US president Donald Trump to deliver on his policies, including tax cuts, and Federal Reserve chair Janet Yellen's dovish stance have weakened the baht and tempted fund flows to return to emerging markets.
Thailand is considered a safe haven, with an enormous current account surplus of $23.5 billion derived from robust growth in exports and tourism income for the six months to June, Mr Benjarong said.
Foreign investors bought a net gain of 120 billion baht in Thai bonds, which also pushes up the value of the baht, he said.
Mr Amonthep, however, forecast the baht will reverse course following the Fed's balance sheet downsizing plan in September to 34 to the dollar late this year.
5% export growth target unchanged
The business sector has kept its 5% export growth target for this year unchanged. Export growth in the second half of the year will be propped up by momentum from the first half, some analysts predict.
Government measures are still needed to stabilise the baht and set exports back on a growth trajectory for the second half of the year, when the effects of a strong baht will be reflected.
The sector discussed the effects of a strong baht on the Thai economy with the chairman of the Federation of Thai Industries (FTI), Chen Namchaisiri, who said shippers are likely to be the hardest hit by baht appreciation.
The FTI has not yet cut its 2017 annual export forecast.
"It's true that the baht keeps rising, but it's too early to revise the forecasts. We need to monitor other factors as well," said Mr Chen.
The FTI set up meetings with related agencies, including the Joint Standing Committee on Commerce, Industry and Banking, to monitor Thai exports closely, he said.
"The agricultural and food processing sectors could be the biggest losers in the third and the fourth quarter of this year," Mr Chen said. Nevertheless, falls in exports for these two sectors should be offset by hefty export gains in the first half, he said.
Mr Chen said public and private entities should take this opportunity to pay their foreign debts, especially those denominated in US dollars. Higher expected demand for the dollar could help the greenback strengthen against the baht, he said.
Chanintr Chailisarapong, president of the Thai Tuna Industry Association, voiced some of the same concerns. A stronger baht will have a major impact on the Thai agriculture and food processing sectors, particularly on small and medium-sized enterprises that have limited capacity to protect themselves or hedge against baht volatility.
"The business sector projects 5% export growth, but the association would prefer the baht at 35 to the dollar. We need the government's help immediately," said Mr Chanintr.
Ganyaphad Tantipipatpong, chairwoman of the Thai National Shippers' Council, said the strong performance of Thai exports in the first half should help exports in the second half reach the 5% growth target.
Shipments in the third and fourth quarters should remain steady, she said. Exports in the first quarter of 2018 can dip substantially if the baht continues its upward trajectory, said Ms Ganyaphad.
Moreover, some of these exporters import raw material from overseas, which should help them compensate for export losses, she said.
Commerce Minister Apiradi Tantraporn said she is confident exports will grow by 5% because shipments of major agricultural and food processing products are still rising despite a higher baht. That should lend support to a healthy Thai export outlook in the second half, rising to the 5% annual target, she said.
"Exports of rice, rubber, cooked chicken and frozen chicken are still rising. That is a good sign for Thai exports the rest of the year," said Ms Apiradi.
The Commerce Ministry has planned several marketing strategies to promote exports during the year-end celebration, when demand for goods normally increases.
The strategies include business matching and trade promotion along the borders to capitalise on strong demand for Thai goods in neighbouring countries.
Phusadee Arunmas and Oranan Paweewun