Industry cowers as baht dips again

Industry cowers as baht dips again

External factors driving the shift

Tourists at a currency exchange in Bangkok. The baht is on a weakening trend and was trading at 36.31 to the dollar Thursday morning. (Photo: Somchai Poomlard)
Tourists at a currency exchange in Bangkok. The baht is on a weakening trend and was trading at 36.31 to the dollar Thursday morning. (Photo: Somchai Poomlard)

The Federation of Thai Industries (FTI) has warned against further currency depreciation to 37 baht against the US dollar, claiming it would make life more miserable for businesses and households because of higher oil prices.

Though tourism operators and exporters may reap benefits after the baht value fell on Thursday to 36.35 to the dollar, the lowest in almost seven years, the effect for manufacturers and consumers will not be as pleasant, said the federation.

A weaker baht will result in higher oil prices for Thailand as around 80-90% of oil and gas in the country are imported, said Kriengkrai Thiennukul, chairman of the FTI. Higher energy prices increase production costs in the manufacturing sector, which eventually cause people to pay more to buy goods and services.

Consumers already experience a higher cost of living. The Trade Policy and Strategy Office reported on July 5 headline inflation, gauged by the consumer price index, hit an almost 14-year high in June, rising 7.66% year-on-year from June 2021, accelerating from 7.1% in May and 4.7% in April.

"The Bank of Thailand should launch a measure to deal with the currency issue," said Mr Kriengkrai. "The baht must not be the weakest currency among our neighbouring countries."

The FTI is monitoring the foreign exchange rate fluctuations, which are expected to affect many business sectors.

The federation is especially concerned about the negative impact on small and medium-sized enterprises as they have not fully recovered from the impact of Covid-19 and now are bearing higher production costs.

However, businesses involving export and tourism can take advantage of baht depreciation as goods and services from Thailand will become less expensive.

"The tourism sector may recover faster if more foreign tourists visit Thailand this year," he said, estimating foreign arrivals at 7-10 million this year.

The Employers' Confederation of Thai Trade and Industry said an appropriate value for the baht is around 34 to the dollar. This rate would bring the most benefits to the Thai economy, said vice-chairman Tanit Sorat.

"When the Thai currency previously stood at 33.5-34 baht, our exports remained healthy. If baht weakens more, it may affect the country's trade balance," he said.

Mr Tanit said a weaker baht would mean both positive and negative effects for businesses, but the value should be in a range that best aids the overall economy.

LOWEST IN ALMOST 7 YEARS

The baht on Thursday dipped to 36.35 against the US dollar, its weakest level in almost seven years, as the dollar strengthened, according to an analyst at the market research and advisory unit of CIMB Thai Bank. The baht is on a declining trend and was trading at 36.31 on Thursday morning.

The local currency is under pressure as Thailand has a relatively low policy rate at 0.5%, which results in outflow to higher-yield countries, including the US, said the research unit. Many analysts believe the Bank of Thailand's Monetary Policy Committee will raise the policy rate by 25 basis points at its next meeting in August in response to persistently high inflation.

According to Reuters, a cocktail of global growth fears, Federal Reserve hawkishness and euro weakness has boosted the US dollar to its highest level in around 20 years, and some investors are betting there may be more gains ahead.

The dollar index, which measures the greenback against six major currencies, is up 12% against a basket of its peers in 2022 and is on track for its best year since 2014. The measure has logged a gain 7 out of the last 10 years.

Multiple factors are driving the dollar's gains. Investors believe the Fed is likely to continue raising interest rates more aggressively than many other global central banks as it faces the worst US inflation in decades, making the dollar more attractive to yield-seeking investors.

At the same time, some analysts worry that monetary tightening by the Fed and other central banks risks throwing the global economy into a recession. Other market participants are holding dollars because they believe the US will weather a looming global downturn better than other countries.

Finance Minister Arkhom Termpittayapaisith said on Wednesday the weakening baht is being driven down by external factors, but the Bank of Thailand is monitoring the situation.

According to Poon Panichpibool, markets strategist at Krungthai Bank, fear of a recession in the eurozone coupled with the European Central Bank not hinting at a hawkish rate hike could make the dollar further appreciate.

Risk remains from further China lockdowns following reports of rising Covid-19 infections in the mainland, said Mr Poon. If this happens, investors might sell assets in Asian emerging markets, which will pressure the baht value, he said.

Mr Poon estimated Thai exporters will soon gradually sell dollars after the baht falls to a range around 36 baht, which can slow down the baht weakening.

HIGHER IMPORT COSTS

Chaichan Chareonsuk, president of the Thai National Shippers' Council, said the weaker baht will definitely benefit Thai exports.

But he also expressed concern that the costs of Thai manufacturers, particularly for imported raw materials to produce for re-export, will surge if the baht weakness is left unchecked.

"The council is afraid the domestic economy will be affected in the second half this year from a rise in the prices of certain products that rely on imported raw materials," said Mr Chaichan. "An increase in foreign tourist arrivals in the second half will hopefully help offset such impact."


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