Why the baht is surging

The baht takes its gain to 7.8% this year, more than any of its emerging-market peers except Russia’s ruble. (Bangkok Post photo)

The Bank of Thailand is finding it tough to stop the baht from surging.

The currency advanced as much as 0.3% on Friday to 30.187 per dollar, the strongest level since May 2013. That takes its gain to 7.8% this year, more than any of its emerging-market peers except Russia’s ruble.

The gains have defied the efforts of authorities, who fear the baht’s strength is becoming a drag on the economy. Finance Minister Uttama Savanayana said on Oct 9 that the central bank should “take care” of the currency.

Why is the baht so strong?

Several factors are attracting investors to Thailand, making it a haven for foreign money. But its healthy current account tops them all, according to analysts at Goldman Sachs Group Inc. The International Monetary Fund forecasts the country will post a surplus of 6% of gross domestic product this year, almost double that of Japan.

Thailand’s reserves and negligible inflation also provide investors comfort. The central bank’s foreign-cash pile stands at $220 billion, the equivalent of more than 12 months of imports. And inflation, currently 0.3%, has been running below the central bank’s target of 1% to 4% since June.

As if these weren’t enough, Thailand is getting a boost from gold. A hub for bullion trading, Thailand has benefited as jitters about the US-China trade war and global economic slowdown have driven a 17% gain in the price of the metal this year.

Why is the baht’s strength a worry?

As is always the case when currencies strengthen, exporters are suffering. The tourism industry, which accounts for about a fifth of GDP, is also hurting. The Tourism Council of Thailand last month revised down its estimate for visitor numbers this year to fewer than 40 million, citing the baht as the biggest reason.

All of which is conspiring to sap growth. The economy will expand 3% this year, down from 4.1% in 2018, according to a Bloomberg survey of analysts.

What’s the central bank doing about it?

Quite a bit. As recently as Oct 10, the BoT said it would relax capital controls to make it easier for locals to move money abroad. Governor Veerathai Santiprabhob has also called for more domestic investment to narrow the current-account surplus.

Authorities have taken measures to curb short-term capital inflows, including cutting sales of Treasury bills. In July, they reduced the cap on non-resident bank accounts to 200 million baht ($6.6 million) from 300 million baht and, to boost surveillance, said the actual owners of local debt securities must be reported.

The BoT cut its policy rate once this year, trimming it by 25 basis points to 1.5% in August. Kanit Sangsubhan, one of seven members of the Monetary Policy Committee, said a further reduction in the rate won’t help much in efforts to restrain the baht.

One thing they have been reluctant to do too much is interfere directly in the foreign-exchange market, for fear of getting labeled a currency manipulator by the United States.

How much more can the baht appreciate?

Right now, all eyes are on whether the baht will breach 30 per dollar, a level it hasn’t reached in more than six years. Of the 24 analysts surveyed by Bloomberg on the currency, Morgan Stanley is the only one expecting it to reach that point by the end of this year. The median estimate is for it to fall to 30.8 by then and to 31 in 2020.

According to the IMF’s real effective exchange rate calculations, which take into account Thailand’s trade flows, the currency’s already well overvalued. It’s at the strongest, by that measure, since its crash in 1997, which triggered the Asian financial crisis.

However, much will depend on the outcome of the US-China trade dispute and how the central bank reacts to the baht’s continued appreciation.