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Thailand can weather EM crisis

Sep 11. 2018
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By Special to The Nation

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  IT’S A CLASSIC emerging markets crisis: Fed raises rates causing US dollar to appreciate; emerging markets’ (EM) currencies fall and dollar-denominated debt blows up; import prices rise as currencies fall, pushing up inflation which in turn adds more pressure on the currencies. 

So far the crisis has been concentrated in countries with weak external positions, namely Turkey, Argentina and, to lesser extent, Philippines, India and Indonesia.

The biggest impact is likely to come through currency weakness, and the policy response it triggers. Standard response to stem currency weakness and fund outflows is to raise interest rates aggressively. This will, in turn, causes affected emerging market economies to slow down sharply. Another channel of impact is through the so-called wealth effect, whereby falls in asset prices cause household wealth to decline, leading to a slowdown in consumer spending. 

Thailand, on the other hand, should hold up well against these external shocks, given its exceptionally strong external positions. 

Current account surplus at close to 10 per cent of GDP is one of the highest in the world and could act as buffer for foreign funds outflow. Low foreign holdings in both stocks and bonds markets mean the potential outflows would be manageable. 

Inflation is also very low at around 1.6 per cent . As expected, headline inflation peaked in August and is expected to trend down towards 1.0 per cent in December amid abundant agricultural product supply and higher base of energy prices in the second half.

Domestic consumption remains robust as durable and semi-durable goods consumption helped offset slowdown in services. Non-durable goods consumption remained weak but is expected to recover as farm income continues to rise and consumer confidence hits highest level in 5 years.

We reiterate our view that the Bank of Thailand will keep its policy rate at +1.5 pef cent throughout 2018 as inflation is expected to soften. For external factors; the resilience of the baht relative to the currencies of emerging markets’ and strong bond market inflows mean immediate central bank action should not be warranted.

Contributed by KOMSORN PRAKOBPHOL, head of strategy at TISCO Economic Strategy Unit. He can be reached via or


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