Thailand's international reserves made headlines in mid-July when they fell US$3.3 billion in a single week.
The headline was that the reserves were the lowest in three years. Authorities explained lamely that receding international reserves stemmed from increased stockpiling of imported oil ahead of winter (as if Thailand is a land of snow), and hoped that a boom in tourism income would later shore up the reserves.
Unfortunately, Thailand's international reserves are now even lower. As of end-August, international reserves have declined a further $2.5 billion.
The quickly depleting reserves raise concerns about the country's economic stability. This article will explore the causes and consequences, and trends in the country's international reserves.
The author's personal concern is the way the Bank of Thailand is handling the reserve issue, particularly its impact on domestic liquidity.
There is no need to panic (yet). Thailand's international reserves as of Aug 26 (latest data available) are still at $216 billion, or 15th in the world. At this level, reserves are enough to cover 7.9 months of imports which exceeds the IMF's recommended level of six months' coverage.
Moreover, reserves are also higher than Thailand's total external debt of $200 billion. Therefore, the issue of the country's insolvency like Sri Lanka does not arise.
However, the point of concern is the rate of depletion of international reserves. Just a year ago in September 2021, the level of reserves stood at a peak of $252 billion, meaning that $36 billion was drained in 11 months.
Please do not argue that subsequent reserve depletion is a result of lack of tourism income.
The year 2021 was the worst year for the Thai tourism industry. Only 15,000 foreign tourists visited Thailand in September 2021.
In July 2022, the number of foreign tourists bounced back to 1.12 million. But instead of tourism money helping to fill Thailand's coffers, international reserves were depleted further by $1.9 billion in the month of July. Authorities blamed higher imported oil costs as the key culprit, but the data shows otherwise.
Fuel imports in July were actually $815 million less than June's imports because of lower world oil prices and weaker domestic demand. The real culprit is less export revenue -- $2.924 billion less to be exact.
Import revenue in July is 11% less than that of June. This is the fact that no Thai authorities want to mention. The world economy, particularly China's economy, is slowing down.
China is one of our largest trading partners. China 2022's second-quarter GDP growth is 0.4% (year on year) and a 2.6% contraction (quarter on quarter). This is far lower than their usual 6-7% growth. Recent lockdowns of Chengdu and Shenzhen are likely to make their economic situation worse.
Another key culprit of the reserve depletion is capital outflow. From the beginning of the year to end-July, $26 billion in reserves was lost. According to balance of payments data, only $10 billion in international reserves depletion is from regular economic activities.
Another $16 billion of reserve depletion can be assumed to come from capital outflows as investors seek a better investment yield and less economic risk elsewhere. At present, the Thai 5-year government bond yield is 2.1% as opposed to the US 5-year government bond yield of 3.4% and Indonesia's 5-year government bond yield of 6.75%. If you are a smart investor, where would you put your money?
The $1.9 billion reserve depletion in July is nothing compared to the $4 billion depletion in August. Although international reserves data is updated to the end of August, the monthly data for August on exports, imports and balance of payments will not be available until the end of September. Therefore, I am unable to analyse the causes of this massive depletion.
If the country's insolvency is not something to be concerned about, what is concerning is the current reserves depletion. For a start, it is currency depreciation. In July, the Thai baht depreciated 3.6%. But things turned around in August despite more outflows; the currency miraculously bounced back. By Aug 26, the Thai baht appreciated 2.5%, compared to end-July.
This is unnatural and against economic theory. I can only guess that the Bank of Thailand might have intervened heavily in the exchange market.
The price of this silly manoeuvre is large foreign reserves loss. It is silly because the Bank of Thailand can never suppress the world foreign exchange market. Whatever action the bank takes will only have short-term effects. Ten days later, the Thai baht depreciated 2.5%.
The real pain of capital outflows is liquidity depletion. To take money out of Thailand, investors have to exchange their baht for dollars (or whatever currency). This will cause fewer baht to be available inside Thailand for consumers, businesses, and the government.
In June 2022, the Thai money supply (broad money) fell by 101 billion baht. The money supply was further reduced by 26 billion baht in July. How can one expect the economy to grow when there is less and less money available to spend? To shock readers further, excess liquidity in July was negative 557 billion baht. Anyone able to obtain loans at this time should consider himself/herself lucky.
If falling export revenue and capital outflow are the real causes of reserve depletion, the Bank of Thailand should refrain from messing with exchange markets. Instead, the bank should start solving fundamental problems at home like domestic inflation and super negative real interest rates.
What is the trend for Thailand's international reserves which will provide clues as to trends in the baht and domestic liquidity? The answer is to read Fed chairman Jerome Powell's lips. In a recent speech, he made it clear that he would keep raising rates, aggressively too, until inflation shows indisputable signs of declining to 2%. He obviously has a long way to go as July's inflation rate is 8.5%.
Mr Powell's speech is less important to me than recent comments by Dr Somchai Jitsuchon, a member of the Bank of Thailand's Monetary Policy Committee.
He said domestic inflation will become broad-based early next year, after which Thailand will see real inflation. High inflation at home (purchasing power parity theory) coupled with low domestic interest rates (interest rate parity theory) can only mean one thing -- a non-stop outflow of capital. How bad the situation would be will depend on the bank's management ability. What else can I say?
Chartchai Parasuk, PhD, is a freelance economist.