Baht fundamentals have deteriorated
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Baht fundamentals have deteriorated

Factors that have supported the currency in the past are weakening, say BMI analysts

A foreign tourist changes his money at a Travelex booth in Bangkok. (Photo: Somchai Poomlard)
A foreign tourist changes his money at a Travelex booth in Bangkok. (Photo: Somchai Poomlard)

Uncertainty surrounding the US interest rate trajectory, alongside geopolitical tensions, underpin much of the baht's weakness so far this year. We think the baht will trade sideways and reach 37.50 to the US dollar by year-end once these temporary factors subside.

We are, however, less optimistic about the baht's long-term outlook, especially as the key fundamentals that originally supported the currency have deteriorated.

A smaller current account surplus, portfolio outflows and lesser foreign direct investment (FDI) inflows are among the reasons why we think that the baht remains on a depreciatory trend.

Looking at the short-term outlook (3 to 6 months), we note that the baht has depreciated by nearly 7% in the year to date, making it one of the worst-performing currencies in the region. For now, movements in the baht will rest mostly on the interest rate trajectory, both domestically and in the US.

An eventual stabilisation in monetary conditions will pave the way for the currency to stabilise. We forecast it to end the year at 37.50, about 2.0% weaker than the current spot rate of 36.78.


To be clear, we are not ruling out any further spikes of volatility in the baht. Much of this will be led by the constant repricing of interest rate expectations in the US. Markets are currently pricing in a 50-basis-points cut by year-end. But this could potentially shift lower given how the disinflationary process in the US has stalled.

Indeed, the Fed struck a more hawkish tone recently with chairman Jerome Powell deliberately dropping the mention of any rate cuts in his recent comments. Upside pressures on the dollar should fade once market expectations stabilise and the Fed begins its first cut. We think that this will happen in July.

Moreover, the Bank of Thailand (BoT) is now poised to begin easing sooner than the Fed. A possible 25-basis point cut in June would put the central bank ahead of the Fed in its loosening cycle, which could in turn induce short-term downside pressure on the baht.

Yet, there is a silver lining. We think that the BoT will be mindful of cutting rates too extensively due to elevated household debt levels and currency stability concerns.

In fact, we think the BoT will only embark on two rounds of easing compared to the three rounds we are currently pencilling in for the Fed. This means that interest rate differentials between the two countries will narrow in favour of Thailand.

For the long-term outlook (6 to 24 months), we think the baht will remain on a gradual depreciatory trend. We have long argued that the baht will rebound on the back of strong fundamentals. But we have been too optimistic in this regard.

One major problem is that Thailand's allure as an investment hub has noticeably diminished in recent years. The nation, once a magnet for foreign capital, now contends with escalating regional competition. Economies such as India and Vietnam have emerged as predominant recipients of shifting investment currents. In stark contrast, Thailand finds itself trailing, unable to keep pace with its peers.

Several factors contribute to Thailand's waning investment appeal. The country's demographic landscape presents a challenging picture, with an ageing population that does not bode well for its labour market dynamics.

Moreover, Thailand's political climate has been marred by instability, deterring potential investors seeking a predictable and stable environment for their capital. The impact of these impediments is starkly evident in the data. Indeed, FDI inflows as a share of GDP declined from a peak of 6.9% in 2013 to just 2.8% in 2023.

Current account surpluses will also fall short of pre-pandemic levels.The country historically ran a large surplus of 8% of GDP before the pandemic struck. But we think that the external sector will struggle to reach these numbers again. For one, we do not think that tourism revenue growth will return to trend anytime soon, given the shift in spending trends.

We have pointed out before that tourism income has fallen considerably behind the trend despite a pickup in international visitors. This shift in spending trends will likely be permanent, weighing on the country's current account balance.


A significant increase in government spending is unlikely to boost investor confidence. Given the Pheu Thai Party's history of favouring populist measures, it is expected that the country will run a wider fiscal deficit over the coming years.

In less than a year since Pheu Thai's return to power, it has already rolled out a 500-billion-baht (equivalent to 3.0% of GDP) digital wallet initiative aimed at stimulating economic growth. To finance this programme, the government has chosen a mix of budget reallocations and a one-off loan from the state-owned Bank for Agriculture and Agricultural Cooperatives.

A major point of concern is that the nation's debt has soared to unprecedented levels. If similar policies continue in the upcoming years, it's almost certain that investor confidence will wane, potentially resulting in the withdrawal of investment portfolios.

Risks to our currency outlook lean towards a stronger baht. Two factors underpin our view. First, Prime Minister Srettha Thavisin has placed a growing emphasis on attracting foreign investors into the country.

If he were to succeed, FDI inflows could pick up over the coming years, lending some support to the currency. Second, a recovery in tourism receipts and a return to trend could widen the current account surplus.

BMI is a Fitch Solutions company. BMI is solely responsible for the content of this article, without any input from Fitch Ratings.

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