Thailand faces high Baht volatility from internal and external risks

The year 2026 continues to be a period of high uncertainty for Thai businesses, driven by geopolitical tensions, global economic policies, interest rate directions, and the transition to new technologies.

Meanwhile, domestic factors such as a strong Thai Baht, high household debt, weak demand, and a fragile economic structure are further intensifying the pressure on the business sector.

Patrick Poulia, Deputy General Manager and Head of the Financial Markets Function at Siam Commercial Bank (SCB), stated that the overall economy and financial markets in 2026 face multidimensional challenges.

Global financial markets are experiencing high volatility due to overlapping issues, including geopolitical tensions, international trade uncertainties, structurally high global interest rates, supply chain restructuring, and the rapid adoption of digital technology and AI.

He emphasised that these factors not only impact financial markets but also affect cost structures, competitiveness, and revenue volatility for businesses.

Highlighting the specific risks of currency fluctuation, he stated, "The concerning data is that SMEs hedge only 50% of their liabilities amidst a 7-8% currency volatility, which is higher than in the past. This level of coverage may not be sufficient. Therefore, the bank aims for corporate clients to increase their hedging proportion to 70-80% to cope with the volatility. But what is concerning is complacency, doing nothing because they think a stagnant market means safety and hoping the Bank of Thailand (BOT) will take care of the Baht. These mindsets are still dangerous."

Echoing these concerns, Wachirawat Banchuen, Senior Financial Market Strategist, highlighted that the Baht's volatility in 2026 will increase in tandem with global financial markets.

The Baht is facing simultaneous appreciation pressures from fluctuating gold prices, domestic politics, capital inflows into emerging markets, and improved investor confidence post-election.

He noted that previous factors driving the Baht's appreciation involved capital inflows of up to 100 billion baht into the stock and bond markets, reflecting speculation on both interest rates and the currency.

The US dollar remains the primary variable, affecting the market by 40-50%, and could weaken by another 2-3% this year due to uncertainties surrounding US economic and trade policies, as well as the Federal Reserve's independence.

Additionally, AI disruption is causing capital to shift from risky to safe assets like bonds, indirectly affecting the Baht.

He stated, "If we look at the correlation between gold prices and the Baht, it remains at a high level. Especially when gold prices move sharply by over 100 dollars per ounce overnight, it causes the Baht to appreciate immediately by 30-40 satang. What is concerning is that some foreign investors have started to view the Baht as an asset in the same group as gold, using the Baht as a tool to create exposure instead of holding gold directly, which further increases the Baht's volatility."

Furthermore, he assessed that the Thai economic structure remains weak, projecting the 2026 GDP at only 1.8%, which is below its potential of 2.5-2.7%.

This fragility stems from weak domestic demand, negative inflation, tight financial conditions, shrinking credit, and high household debt.

Other monitoring risks include El Niño-induced droughts, fires, and geopolitics, which could potentially push the GDP below 2% and prompt further rate cuts by the Monetary Policy Committee (MPC).

He also cautioned that the BOT's currency intervention over the past 12 months has reached 1.8-1.9% of GDP, dangerously close to the US Treasury's 2% threshold for monitoring currency manipulation.

Short-term support for the Baht is seen at 30.85 per dollar, though it may gradually weaken in the second half of the year due to foreign investors repatriating dividends declared mid-year.

Providing a slightly more optimistic forecast, Pimnara Hirankasi, Head of Economic Research at Bank of Ayudhya PCL (Krungsri), revealed at the "2026 Economic Outlook: Between Headwind and Hope" event that Krungsri has revised its 2026 GDP projection up to 2.0% from 1.8%.

This growth is driven by foreign capital inflows, confidence in government stability, potential stimulus measures, and THB1.87 trillion in Board of Investment (BOI) applications benefiting from base relocations from China to Southeast Asia in megatrend industries like data centres, electronics, EVs, and agriculture.

The tourism sector is also expected to recover, projecting 35.5 million visitors generating THB1.67 trillion, supported by new flight routes in China and India, with Q1 2026 Chinese tourists already recovering to around 400,000.

However, she warned of surrounding headwinds: exports are expected to contract by 0.4% in 2026 (down from a 12.7% growth in 2025) due to US protectionism and a global trade slowdown.

Private consumption is slowing following the end of the co-payment scheme, and short-term stimulus hopes face challenges from limited fiscal space.

The agricultural sector faces a 50% El Niño risk, though ample dam reserves from this year's rainfall and expected higher crop prices may mitigate the impact.

Regarding the MPC's decision to lower interest rates, Pimnara noted that while faster than expected, it was necessary due to sub-potential growth, low inflation, and tight liquidity from six consecutive quarters of credit contraction.

She remarked, "This decision to cut interest rates is considered a lifeline for the economic system, as people will benefit from lower loan rates, helping to ease the burden of household debt. However, in terms of stimulating credit growth, there are still many related factors. Part of it is the effective transmission of policy to commercial banks and the economic system."

Research indicates significant challenges for lower-income groups; those earning under THB10,000 lack sufficient income for expenses, and those earning under THB30,000would use 31% of any increased income purely to pay off debts.

Krungsri expects the policy rate to remain at 1% for the entire year, leaving the MPC with only two potential rate cuts for emergencies.

Similarly, TRIS Rating has adjusted its 2026 GDP forecast upward to 2.1% from 1.7%, driven by stronger-than-expected economic momentum in Q4 2025, which pushed the overall 2025 GDP to 2.4%.

Despite the upward revision, TRIS notes that the 2026 growth represents a slowdown from the previous year, reflecting weak private consumption, delayed 2027 government budget approvals for consumption and investment, and export slowdowns from a high base and trade policy uncertainties.

However, the economy remains supported by tourism recovery, improved private investment confidence (especially in digital industries), and accommodative monetary policy.

TRIS expects the policy interest rate to remain unchanged at 1.00% through the end of 2026, following February's 25 bps cut, aligning with the BOT's communication.

Additionally, they project the Baht to appreciate slightly, averaging 32 THB per USD in 2026 (compared to THB32.9 in 2025), primarily supported by a weakening dollar fueled by market expectations of Fed rate cuts.