The Thai baht's recent rally is losing momentum as the government plans to reopen its economy despite low inoculation rate creates high risk of another outbreak of the novel coronavirus.
The local currency, among the worst performing in the region, ended August at this year’s high of 32.20 to the dollar, a 3.9% gain from this year’s low of 33.47 on 9 August thanks to falling number of COVID cases and on expectations of economic reopening.
“The USD/THB has followed Thailand’s pandemic curve closely so the recent easing in daily new cases and activity curbs has seen the baht rebound,” Jennifer Kusuma, Singapore-based rates strategist at ANZ, told Capital.com
Reopening too quickly
Starting this month, the government allows mall reopening, dining-in as well as resumption of select-domestic travels, including to and from Bangkok – deemed red zone due to high infection rate.
In the first seven days of September, however, the baht has slipped to 32.32-32.50 to the dollar.
Tourism-reliant Thailand has reopened popular destination Phuket since 1 July, exempting tourists who had been vaccinated from quarantine procedures.
More tourism destinations open
On Monday (6 September), the government announced plans to expand such scheme to Chiang Mai, Prachuap Khiri Khan (Hua Hin), Chon Buri (Pattaya) and Phetchaburi on 1 October, arguing that many of those areas have higher vaccination rate compared with the national average, Bangkok Post reported.
“I don’t think the rally in THB will be sustained since I think the government eased the lockdown measures too early,” Poon Panichpibool, Krung Thai Bank markets strategist, told Capital.com.
“Since the government decided to ease the lockdown measure when overall positive rate remained high like 30% and overall vaccination rate was quite low, I think we could see a return of COVID-19 outbreak within 3-4 weeks,” he said.
Sideways in near term
Poon attributed the recent baht rally on foreign investors returning to country’s equities and debt markets, with no changes in the government meant that Thailand avoided political uncertainty.
Over the weekend, Prime Minister Prayuth Chan ocha survived the no-confidence vote, causing the baht to jump as high as 0.9% intraday on Monday, though settled lower compared with last week’s level.
“Regarding PM Prayut, I think the market viewed his survivorship as positive new as it reduced chances of policy discontinuity,” Poon said, adding “right now, THB might move sideways.”
On Tuesday, the baht went as high as 32.44 in early trade, but slipped to 32.50 in late afternoon Asia from 32.49 in the previous day.
Though reopening tourist destinations can attract overseas travellers, reviving local economy as well as providing much-needed foreign currency, the plan is not going to be “a positive story in Q4/2021 (the fourth quarter of 2021) as I think Thailand might face another COVID-19 wave later…Should COVID outbreak occurs again, baht could weaken to 33-level a dollar,” Krung Thai’s Poon viewed.
An analysis by Bank of America Global Research showed that for Thailand to achieve herd immunity by the end of the year, it needs to increase its daily vaccination to 540,000 per day from 500,000 currently. As of 1 September, only 11% of the population were fully vaccinated.
“We see 32.0-32.1 as the key technical support level for USD/THB near-term,” said ANZ’s Kusuma.
Structural weakness in current account
Sharp fall in tourist arrivals (from nearly 40 million in 2019 to under seven million last year) have caused Thailand to post current account deficit since November 2020, causing structural weakness to the baht.
“The Balance of Payments support for THB has been eroded and is not likely to recover near term…High commodity prices have led to persistent current account deficits since November 2020. The trend is likely to continue as we expect any meaningful recovery in tourism receipts only from 2022 and Thailand’s terms of trade to remain under pressure,” said Kusuma.