Prolonged political uncertainty is exacerbating baht volatility against the dollar as Thailand still has not formed a new government, says the head of the Bank of Thailand.
Investors see higher risk for the foreign exchange rate, especially between the baht and the US dollar given domestic political developments. Following the general election in May, factions are still squabbling over forming a government.
Given these underlying risks and vulnerabilities, the baht has been volatile against the dollar, central bank governor Sethaput Suthiwartnarueput said at a seminar on Wednesday hosted by its southern region office.
"Recent baht volatility is mainly driven by the movement of the US federal funds rate [monetary policy of the US Federal Reserve]," he said.
"Domestic political uncertainty is also playing a key role, causing pressure for baht fluctuation against the dollar."
The baht has depreciated by 9% against the dollar year-to-date, exceeding the volatility of the Malaysian ringgit, Indonesian rupiah and Philippine peso.
In Asia, Japan's yen and South Korea's won normally register higher volatility against the greenback than other regional currencies.
Chinese yuan movement, based on a high volume of business exposure between China and Thailand spanning imports and exports, tourism and foreign direct investment, also affects the baht.
In addition, the local gold trade also affects baht movement, Mr Sethaput said.
A screenshot of central bank governor Sethaput at a seminar held on Wednesday.
The central bank encourages businesses to pursue foreign exchange hedging, use foreign currency deposit accounts for liquidity management, and local currency settlement.
These instruments should help business operators to minimise foreign exchange risk amid the baht fluctuation, he said.
The weak Chinese economic recovery creates more uncertainty for both the global and Thai economies, said Mr Sethaput. More cracks are appearing in China's economic structure, particularly the real estate sector and rapid loan growth in the private sector, he said.
Given all these uncertainties, entrepreneurs should prepare stronger buffers to handle unexpected situations rather than focusing on cost efficiency, said Mr Sethaput. They should also maintain debt burdens at suitable levels, he said.
Mr Sethaput said a stagnant Chinese economy in the second quarter this year would not significantly impact Thailand's tourism as other source markets remain lively, in particular Malaysia.
The central bank estimates foreign arrivals of 29 million this year and 35.5 million in 2024.
A strong rebound in the tourism sector and resilient domestic demand are the key factors driving the Thai recovery this year as export orders slow, he said.
The delay in forming a new government will not affect the Bank of Thailand's monetary policy, said Mr Sethaput.
The central bank has gradually increased its policy rate from August last year, approaching what it dubs the "neutral zone".
"The smooth take-off of the Thai economy was completed last year. Now we are in the stage of a soft landing," he said.
Looking ahead, the central bank will look to economic data to help determine policy rate movements, in line with the Thai economic context, said Mr Sethaput.