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Explainer: The factors behind the Thai baht's surge and why Bangkok authorities are worried

SINGAPORE — Once so weak that it was blamed for triggering the 1997 Asian financial crisis, the Thai baht is now surging in value, making it more expensive for foreign tourists taking holidays in Thailand.

The rise in value of the Thai baht means that holidays are more expensive for foreign tourists in Thailand, which has already led to a fall in tourist numbers.

The rise in value of the Thai baht means that holidays are more expensive for foreign tourists in Thailand, which has already led to a fall in tourist numbers.

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SINGAPORE — Once so weak that it was blamed for triggering the 1997 Asian financial crisis, the Thai baht is now surging in value, making it more expensive for foreign tourists taking holidays in Thailand.

At the start of the year, Singaporeans were getting about 24 baht for one Singapore dollar, but now they are getting about 22 baht.

The Thai currency has also jumped to a six-year high against the United States dollar. The exchange rate has been hovering at around 30 baht per US dollar over the past month.

Now, market analysts are looking to see whether it will strengthen further to fall below that benchmark of 30.

Since the beginning of the year, the Thai baht has gained in value 6.48 per cent against the greenback, making it the best-performing Asian currency, Bloomberg data showed.

The baht has jumped an even stronger 6.69 per cent against the Singapore dollar so far this year.

TODAY explains what is driving the surge and why Thailand's central bank is growing more concerned at its rate of appreciation.

WHAT IS CAUSING THE THAI BAHT TO SURGE?

There are two main reasons for the baht's rise, currency experts said.

The more significant and long-term driver is the overall health of Thailand’s economic fundamentals. It boasts a healthy current account surplus, which takes account of factors such as foreign trade, and it has ample foreign reserves as well as strong foreign investment flows, they said.

Mr Terence Wu, economist at the treasury research and strategy division of OCBC bank, said that with investment money flowing into Thailand, this basically means an overall increase in demand for the Thai baht, which drives its appreciation.

Ms Pan Jing yi, market strategist at trading firm IG Asia, said that when comparing Thailand’s strong economic fundamentals to other emerging markets in this region, the baht is seen as a “safety net”.

“The global economic slowdown issue hums along in the background, inviting investors to go about cautiously into the year and choosing the baht over other trade-sensitive currencies in the region,” she added.

The other short-term reason pushing the baht higher is that sentiment has become more upbeat owing to the anticipation of an interim trade deal between the US and China that could bring about a pause in the trade war that started more than a year ago.

Mr Jeffrey Halley, senior market analyst at forex firm Oanda, said that such a deal, if it comes through, would lead to higher growth through Asia, including Thailand.

“Thailand is especially well-placed to benefit from this, as would Singapore, as opposed to more closed economies such as Indonesia and Malaysia,” he added.

WHY IS THAILAND’S CENTRAL BANK WORRIED AND WHAT ARE THEY DOING ABOUT IT?

Thailand’s central bank has expressed concerns about the baht’s upward trajectory.

Mr Veerathai Santiprabhob, the governor of the Bank of Thailand, said on Monday (Nov 24) that the baht is appreciating at a rate which exceeds economic fundamentals.

The effects of the strong currency can already be seen with a slower-than-expected economic growth of 0.1 per cent for the third quarter, ending in September.

Interest rate cuts are also no longer enough to stem the rise of the baht, he added.

Earlier this month, the central bank cut its interest rate to 1.25 per cent, the country’s lowest level since the 2008 global financial crisis. A lower interest rate would typically decrease the value of a currency.

Despite the strong investment flows and current account surplus, Mr Wu of OCBC said that Thailand’s economy is not exactly booming because there is usually a time lag before investments are translated into actual economic performance.

Mr Halley of Oanda said that there is nothing much the Bank of Thailand can do at this point except to let events run their course. He believes that more rate cuts are unnecessary, while Mr Wu said that there is still room for further cuts.

The central bank had also tried to ease the rise of the baht by making it easier for Thai businesses and residents to invest overseas directly. Increased investment by Thais abroad would reduce the country’s current account surplus, thus taking upward pressure off the baht.

While Mr Wu believes that these steps will not help much, Ms Pan of IG Asia believes that the measures will have an impact, because such direct investment in foreign assets used to be restricted only to high-net-worth individuals.

HOW IS IT AFFECTING THAILAND’S ECONOMY?

A strong baht mainly affects Thailand’s exports and tourism sector, the experts said.

Thailand’s exports, which contribute about 70 per cent of its economy, would become more expensive to buy, thereby decreasing its competitiveness.

The tourism sector is already reeling from the effects of a strong baht, with a slowdown in arrivals from China. Visitors from the mainland fell 5 per cent in the first half of this year from the same period last year.

Tourism accounts for about 20 per cent of Thailand’s economy.

While a stronger baht would technically mean that Thailand’s imports would be cheaper for its own residents, Mr Halley believes that the spending power for an average Thai outside of its capital Bangkok is limited due to increasing social inequality.

HOW WILL THE BAHT MOVE NEXT?

The main factor influencing the movement of the baht would be whether an interim trade deal can be struck between the US and China, the experts said.

If successful, Mr Wu believes that the Thai baht would become even stronger and break the benchmark level of 30 baht against the US dollar. If there is no progress in the trade talks, it should remain above 30.

With measures by the central bank recently in place, Ms Pan also does not expect the baht to continue strengthening.

Mr Halley, however, expects the Thai baht to continue to strengthen gently.

Related topics

currency singapore dollar Thai baht tourism economy trade war US China

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