Exchange rates tipped for shaky 2021

Exchange rates tipped for shaky 2021

Volatility and malleability are key themes for this year's foreign exchange outlook, with the baht projected to appreciate further, fuelled by Thailand's surpluses in trade and current accounts, say economists.

The baht breached 30 per US dollar near the end of 2020 and hovered around 29.9 against the greenback early this month, before retreating to 30 as of press time on Thursday.

Net foreign inflows worth 725 million baht in the domestic stock market for the month to date are one of the main factors contributing to the baht's strengthening value.

The baht has an appreciation outlook because the country has recorded continuous current account surpluses since 1997, said Nipit Wongpunya, an associate dean at Chulalongkorn University's economics faculty.

Despite the pandemic slowing the economy, Thailand's trade balance is still in surplus because of low manufacturing output domestically, said Mr Nipit.

"Imports of machineries and raw materials have plummeted significantly, declining more than Thai exports have slowed down," he said.

The constant current account surpluses also reflect a low investment ratio in the country, whereby low investment is tantamount to lower imports, said Mr Nipit.

Foreign inflows moving into the domestic bond and stock markets have been fuelled by Thailand's current account surplus, high foreign reserves, manageable public debt and the 0.5% policy interest rate, he said. Negative inflation is another factor contributing to the baht appreciation.

Thailand's headline inflation contracted by 0.27% in December compared with a 1.2% expansion of the US consumer price index in the same month. This reflects Thai products are cheaper than US counterparts, subsequently enticing more demand for local products, said Mr Nipit.

The baht will encounter some challenges going forward, according to the latest edited minutes of the Bank of Thailand's Monetary Policy Committee (MPC).

The MPC has assessed that a risk-on sentiment will continue to prevail in the global financial markets in the short term and the US dollar is expected to depreciate subsequently.

These developments will subsequently lead to a rapid appreciation of the baht, which could affect the fragile economic recovery. The MPC believes a new foreign exchange system should be expedited to address structural problems in the foreign exchange market and encourage more balanced capital flows.

Wasin Rojayaroon, assistant director of the economic and policy department at the Bank of Thailand, said this year's foreign exchange outlook will be marred by high volatility on the back of the pandemic and excess liquidity coming from a dovish monetary policy adopted by global central banks.

Malleability is another key theme. Based on the central bank study, the baht's value is influenced by movement of foreign currencies at 85%, with the remaining 15% attributed to other factors, said Mr Wasin.

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