Baht remains strong despite rate cut

"Exports remain tough although the baht has weakened," Supant Mongkolsuthree told reporters after a joint meeting of the Thai Chamber of Commerce and the Thai Bankers' Association.

In a Reuters report, Supant said the group wanted to see a gradual weakening of the baht and expected more interest rate cuts by the Bank of Thailand to promote economic recovery.

The baht lost as much as 1.1 percent to 33.32 per dollar on Wednesday, its weakest since Jan 2010. 

The Bank of Thailand has made two surprise rate cuts in a row in the meetings in March and April, apparently to weaken the baht and prop up Thai exports. The actions followed calls for a weaker baht by the Finance Ministry and the private sector, amid doubts from some economists. Several economists are convinced that the That baht would remain strong compared to regional currencies thanks to the current account surplus.

 

In a note yesterday, Fitch Ratings expressed its surprise to the central bank's decision on April 29, citing the strength of the Thai baht. 

"This was unusual as the BOT has not recently cited the exchange rate as a driver of monetary policy actions," it said, adding that the baht appreciated 4.3 per cent on a trade-weighted basis in the first quarter compared with a 1.1 per cent depreciation for the median of 22 major emerging-market economies. It noted that the strength was in part caused by Thailand's hefty current-account surplus, which was US$8.2 billion in the quarter. This, in turn, reflects the weakness of domestic demand. This will contend with the announced measures to spur capital outflows in exerting an influence on the currency. 

"A cheaper baht is unlikely to be a panacea for Thailand even if it can be achieved. Gross exports in Thailand have not grown since 2012, according to official data, suggesting a broader, structural decline in competitiveness. We highlighted the ability of Thailand's export industries to improve their competitiveness as a potential key factor that affects ratings in our recent sovereign review published in April," it said. 

Expecting the Thai economy to grow 3.5 in 2015 and 3.7 per cent in 2016, Fitch added that structural issues, including relatively high household debt and lingering political uncertainty weigh on domestic demand, and could turn out to be more serious in their effect than current forecasts anticipate. 

As such, it said the ability of rate cuts to spur demand is also likely to be limited by the already high level of private-sector indebtedness. 

Bank credit to the Thai private sector totaled 159 per cent of GDP in 2014, up from 113 per cent in 2008. That is substantially higher than the median 61 per cent of its 'BBB' rated peers, and even tops the medians for 'A'-rated (107 per cent) and 'AA'-rated (110 per cent) sovereigns. Household indebtedness is likely to drag on consumption, Fitch said.

It added that Thailand's net international investment position (NIIP) is negative as foreign direct investment into Thailand - counted as a liability - more than offsets the country's net asset position in debt-like instruments. 

"Easing capital account restrictions to facilitate cross-border capital flows could boost Thailand's NIIP over time. But Fitch sees limited upside from this for the credit profile as we already regard Thailand's external finances as a strength. A large current account surplus, status as a net external creditor in debt-like instruments, and robust external liquidity buffers provide the economy substantial protection from external shocks."