The direction of the Thai currency for the remainder of the year is critical for local industries after the Federal Reserve cut interest rates as expected last Wednesday, putting more pressure on the Bank of Thailand's Monetary Policy Committee (MPC), which has held steady on rates since last year.
For the manufacturing, export and tourism industries, some executives estimate the short-term impact from the strong surge of the baht might not be severe, but they still want the central bank to act as the Fed signalled additional rate cuts this year and next.
While Bank of Thailand governor Sethaput Suthiwartnarueput said on Friday it is monitoring the situation, he also noted lower rates would not alleviate the country's debt problem and the MPC doesn't need to hold off-cycle meetings to address this issue.
RISING CONCERNS
Entrepreneurs in the manufacturing sector are worried about how Thailand can compete with other countries as the baht is expected to keep appreciating, following the Fed's decision to decrease interest rates, said the Federation of Thai Industries (FTI).
The aggressive rate cut of 0.5 percentage points will significantly affect manufacturers' competitiveness as their products sold overseas will become more expensive than those from their rivals, said Kriengkrai Thiennukul, chairman of the FTI.
"The large cut of 0.5 percentage points is not good for our exports," he said.
According to the latest survey of 1,330 entrepreneurs across 46 industries under the FTI in August, 40.6% of respondents named the baht's appreciation against the US dollar as a rising concern.
Manufacturers were worried about exports as the baht appreciated from 36.46 to the dollar in July to 34.92 last month, Mr Kriengkrai said during a briefing on the Thai Industries Sentiment Index (TISI) last week.
He said he expects exports to grow by 1.5-2.5% this year, driven mainly by the electronics industry, which was resurgent in July.
Only certain sectors will post good export performances in 2024, said Mr Kriengkrai.
According to the FTI, the global economy topped the list of respondents' concerns at 67.5%, followed by the domestic economy at 65.2% and oil price fluctuations 61.3%.
Their replies were used to calculate the TISI, which fell to 87.7 points in August, down from 89.3 points in July, attributed to the stagnant domestic economy, the strengthening baht and the impact of severe flooding in northern Thailand.
The global economy is a concern because it is likely to slow down, he said, citing reports on the manufacturing purchasing managers' indices (PMI) in the US, European countries, Japan and China, which all decreased in August.
The PMI is a measure of the direction of economic trends in manufacturing, based on a monthly survey of supply chain managers across 19 industries.
A currency exchange sign in various languages displayed in Phuket. The baht has gained against the US dollar, even breaking 33 last week. (Photo: Bloomberg)
CONSIDER A CUT
Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said the baht has appreciated by 2% against the dollar year-to-date, the second-strongest currency in the region after the Malaysian ringgit, which has appreciated by 6% against the greenback.
At the regional level, the chamber believes the Thai manufacturing sector still has opportunities for growth and enhanced competitiveness despite the global economic slowdown, as the purchasing power of various countries is gradually recovering.
Export items that hold promise include frozen and processed chicken, canned and processed seafood, rubber and rice, noted the chamber.
The organisation believes the central bank will work to maintain the value of the baht in a range of 33.3-33.4 to the US dollar.
As a result, exporters need to protect against exchange rate losses as baht appreciation could continue until year-end as funds from both fixed income and equity markets flow into Thai markets.
The tourism high season in Thailand and the narrowing gap between the US and Thai policy rates following the Fed cut last week are major factors in the baht appreciation.
After the Fed rate cut, the chamber wants the MPC to consider cutting interest rates to reduce the value of the baht, which would enhance the competitiveness of export, tourism and service sector operators.
TOURISM EFFECT
Tourism and Sports Minister Sorawong Thienthong said the strong baht will likely affect tourism spending in Thailand, and could play a part in causing the country to miss the government's target of 3.5 trillion baht in tourism revenue.
Mr Sorawong said the strong baht and global economic uncertainty means foreign tourists have less to spend in Thailand.
Thaneth Tantipiriyakij, president of the Phuket Tourist Association, said the strong baht could affect tourist sentiment to some extent, as expenditure on goods and services is estimated to increase by 10% based on the changing currency rate.
However, it should not lead to tourists choosing other destinations over Thailand, as Phuket remains a key destination, offering quality products and value for money, he said.
Yuthachai Charanachitta, chief executive of Onyx Hospitality Group, said a strong baht in the range of 33-34 to the US dollar derived from more domestic political certainty and the Fed rate cut.
He said the situation would hold for a short period until the US election in November, when the Thai currency is expected to depreciate to 36 to the dollar.
Mr Yuthachai said Onyx hotels charge guests in baht. The company has already sold hotel rooms for the upcoming months at the stronger baht rate, meaning a depreciation would not impact the revenue of Onyx hotels.
The group does not plan to reduce room rates because of the strong baht, he said.
For the fourth quarter, forward bookings are very robust and are poised to break the revenue record for the high season, said Mr Yuthachai.
VOLATILE THROUGH YEAR-END
Poon Panitchpibun, money market strategist at Krungthai Global Markets, a research unit of Krungthai Bank, said the baht's volatility is expected to intensify through the end of this year, largely related to the Fed's rate cuts.
While the baht has been moving in line with regional currencies and is heavily influenced by external factors, its volatility has been higher compared with its peers, he said.
Alongside the Fed's actions, it is crucial to monitor the Bank of Japan's (BoJ) monetary policy stance, said Mr Poon.
The BoJ is expected to maintain its rate unchanged through the end of the year. However, any unexpected moves by the bank could heighten global foreign exchange volatility and affect capital flows, he said.
In this scenario, foreign investors in the Thai bond and capital markets may engage in short-term profit-taking in line with market conditions, though this is not expected to significantly affect foreign capital outflows from Thailand.
"Amid increased uncertainties driven mainly by external factors, the baht is likely to fluctuate against the dollar. However, we expect it to follow a strengthening trend, ending the year at 33.40-33.50 to the dollar," said Mr Poon.
EASING CYCLE
After the central banks of many countries hiked their interest rates to bring inflation down during the past 1-2 years, they started easing monetary policies.
The European Central Bank already cut the interest rate twice this year by 0.5 percentage points in total to 3.5%, after eurozone inflation slowed to 3%.
The Swiss National Bank, which in March implemented the first rate cut among Western economies in this cycle, lowered borrowing costs again to 1.25% in June and is tilting towards another in September.
Sweden's Riksbank kicked off its easing cycle in May and the minutes of its last policy meeting signalled two or three more rate cuts were likely this year. The Bank of England last month lowered borrowing costs by 0.25 percentage points, its first cut in more than four years.
Closer to home, the central bank of the Philippines last month cut rates for the first time in four years, also by 25 basis points (bps) to support the economy, while Bank Indonesia last week delivered a surprise rate cut of 25 bps, its first cut in more than three years, to 6%.
"Either a reduction of 25 or 50 bps by the Fed is a positive factor boosting global stock markets as it encourages funds to flow into bourses, particularly emerging markets," said Thanomsak Saharatchai, senior assistant managing director of research at Krungthai Xspring Securities.
Prakit Siriwattanaket, managing director of Merchant Partners Asset Management, said a widely expected Fed rate cut resulted in fund outflows from the US money market recently.
That phenomenon increased foreign fund inflows to stock markets in South Asia, notably India, and Southeast Asia, such as Indonesia, the Philippines and Thailand.
Kuala Lumpur-based Maybank said the Fed's widely-expected rate cut would "provide room for Asian central banks to become more accommodative". This would be supportive for global growth and provide Asian currencies with a lift in relation to the dollar, noted Maybank.
But while rate cuts by central banks are generally positive for stock markets, the magnitude of the Fed's first rate cut sends different signals to investors.
"A deeper rate cut than the market expected could cause the market to worry about the state of the US economy, concerned there are risks the central bank has seen but investors haven't observed. That could potentially cause stock markets and other risky assets to become volatile," said Pichai Lertsupongkit, chief commercial officer of InnovestX Securities.
PRESSURE ON CENTRAL BANK
For Viriya Lappromrattana, senior executive vice-president of I V Global Securities, the Fed's outsized rate cut means there is greater pressure on the Bank of Thailand to follow suit in slashing borrowing costs.
Earlier this week, the Finance Ministry called for a meeting with the central bank to discuss interest rates, the strong baht and measures to inject more liquidity into the business sector, she said.
"As the Fed cut the rate by 50 bps, it might lead to pressure on the Thai central bank to lower its rate," Ms Viriya said.
Mr Prakit shared a similar view, noting the initial rate cut of 50 bps by the Fed means more aggressive cuts could follow with the central bank's next move.
"Especially with the ongoing floods in Thailand, the MPC certainly needs to cut the rate by at least 0.25 percentage points this year," he said.
Rakpong Chaisuparakul, senior vice-president of KGI Securities (Thailand), said a 50 bps cut from the Fed could further drive down the US dollar index and treasury yields.
"While this theme could be positive for markets in the short term, investors should monitor the Fed's new economic projection and the dot plot interest rate path," he said.
In the view of Asia Plus Securities (ASPS), the Fed cut should strengthen the baht, which has appreciated quite rapidly recently.
"The Fed's rate cut of 0.50 bps this week, stronger than some analysts anticipated, is likely to strengthen the baht and foreign exchange reserves are projected to increase further, boosting fund flows in Thailand," the brokerage said in a research note.
ASPS warned a drastic Fed rate cut may be followed by recession.
"The US economy could have a hard landing and fall into recession six months after a Fed rate cut of 0.50 bps, based on historical data," said the brokerage.
DECEMBER CUT PREDICTED
SCB EIC, the research unit of Siam Commercial Bank, predicts the MPC will cut its policy rate in December, followed by another reduction early next year, reducing the rate to 2% as domestic demand softens.
The recent baht appreciation is driven by a weaker US dollar, rising gold prices and easing concerns over political stability in Thailand, noted the EIC. By year-end and into 2025, the baht is expected to trade at 34-34.5 and 33-34 to the greenback, respectively, according to the EIC.
Kasikorn Research Center reported the baht has been the most volatile against the dollar among regional currencies, with a fluctuation of 7.5% year-to-date as of Sept 19, followed by the South Korean won at 7.2%, the Malaysian ringgit 5.8%, the Indonesian rupiah 5.5% and the Philippine peso 4.7%.
The baht has appreciated by 2.4% against the dollar, making it the No.2 performer in the region behind the ringgit, which gained 8%. The Singapore dollar and rupiah appreciated by 1.9% and 0.8%, respectively, while the won, Taiwan dollar and Philippine peso weakened, declining by 4.3%, 3.1% and 0.5%, respectively.
Somruedi Banchongduang and Molpasorn Shoowong
