We maintain our forecast for the Thai baht to average 32.00 to the US dollar in 2021, in line with a year-to-date average of 31.69 and a spot price of 33.21 at the time of publication.
Since our last update in July, the baht has weakened, falling from a spot rate of 32.89 to 33.21, as a combination of factors weighed on the currency. A surge in Covid-19 cases through the third quarter of 2021 resulted in a delayed reopening for tourism, a weakening of the economic outlook and the extension of accommodative monetary and fiscal policies, all dragging on investor sentiment towards the baht.
That said, Covid cases have been declining since August, from a seven-day average peak of 21,744 (Aug 16) to 9,066 (Oct 27). This has been coupled with a ramping up of the vaccination programme, with 41.7% of the population fully vaccinated as of Oct 26. The government hopes to have fully vaccinated most of the population by the end of 2021 and has announced an easing of travel restrictions for vaccinated travellers from 46 countries, beginning Nov 1.
The combination of rising vaccination rates and a reopening of tourism will prove a boost to investor sentiment towards the beleaguered currency, which has fallen 10% on the year to date against the dollar.
However, in the near term we are neutral on the baht as we expect a combination of dovish monetary policy stance and slowing Chinese growth to offset the improving outlook for Thailand's current account, particularly given our expectation for a slow recovery in tourism.
DOVISH CENTRAL BANK
We forecast the Bank of Thailand (BoT) to maintain a dovish monetary policy stance through most of 2022 to support the economic recovery and provide accommodative credit conditions for small and medium-sized businesses. This contrasts with the hawkish approach to monetary policy by most emerging market (EM) central banks, more of which are expected to begin monetary tightening over the coming quarters.
Still-rising global inflation is weighing on the attractiveness of currencies in emerging markets with low policy rates, such as Thailand, and putting upward pressure on domestic inflation; Thailand's headline inflation rate bounced back sharply in September to 1.7% year-on-year, from zero in August. Compounding the headwinds for the baht is the potential for the US Federal Reserve to start raising interest rates earlier than expected in 2022.
Pressure is growing on the BoT to follow suit, with markets increasingly pricing in rate increases in 2022. As such, the baht could face selling pressure if inflation readings surprise to the upside and the central bank shows no sign of shifting its stance.
In addition, China's economic outlook continues to face headwinds, suggesting a weakening of external demand for goods exports from Thailand and a dampening of investor appetite for Asian assets.
We expect economic growth in China to slow in 2022, with the net change in China's credit impulse -- the flow of new credit as a share of GDP -- signalling risk-off action towards EM assets.
Growth slowdowns in China tend to weigh on the attractiveness of Asian assets as the region's economy slows and trade cools. Given the struggles of Thailand's tourism sector, headwinds to the country's goods exports could hamper the recovery in its current account over the coming quarters.
On the upside, we do not expect Thailand's inflation rate to surge because of subdued domestic demand pressures, while recovering tourism will improve investor sentiment towards the baht. We forecast the inflation rate to average 0.7% in 2022, which is below our expected outlook for an average of 2.2% in the United States.
In any case, the recovery will be slow for Thailand given restrictions on outbound travel from China (which accounted for 28% of tourist arrivals in 2019) and lagging vaccination programmes in other key markets, such as India and Russia.
TECHNICAL VIEW
From a technical perspective, we expect the baht to trade within a range of 32.00 to 34.00 over the short term. The baht appears to have bounced off the support at 34.00, while the relative strength indicator (RSI) and the moving average convergence divergence (MACD) are both giving neutral signals in the near term.
However, the baht could drift lower if Thailand faces another wave of Covid infections that stall tourism and send the economy into contraction. Similarly, a "taper tantrum" scenario could lead to a broader weakening of EM assets and a strengthening of the dollar, sending the baht to its weakest level since May 2017.
Over the longer term -- six to 24 months -- we expect the baht to appreciate slightly as the outlook for tourism improves and Thailand's economy gradually improves. We forecast the exchange rate to average 32.20 in 2022 (revised from 31.00) and 30.00 in 2023.
The depreciation of the baht throughout the pandemic will prove a boost to the tourism sector's competitiveness and, given the slack in the labour market and significant economic spare capacity, we do not expect underlying inflationary pressures to build quickly.
When coupled with our expectation for an easing of commodity prices in 2022, we believe inflation will remain contained in Thailand and also expect this to prove a boost to the current account surplus.
