Thai baht weakens on trade deficit and Fed taper fears
04:45, 20 August 2021
Thai baht looks set to cement its place as weakest Asian currency this year as COVID-19 outbreak hits its tourist-heavy economy and drive its first current account deficit in eight years.
The baht has lost over 10% of its value against the dollar so far in 2021 and is currently trading at four-year low levels at 33.30 and current account weakness could make this worse.
Thailand’s National Economic and Social Development Council is predicting the first current account deficit in eight years, of minus USD10.3bn this year.
Dim economic outlook
The agency also slashed this year’s economic growth forecast to 0.7%-1.2% and flagged that the estimate could be cut further if vaccinations roll-out comes short of expectations. The revised outlook is similar to the Bank of Thailand’s (BOT) projection of 0.7% gross domestic product (GDP) growth.
“The sell-off in the THB started around the 31-level in June, when the BOT slashed its 2021 GDP growth forecast to 1.8% from 3.0%. With the tourist-dependent economy weighed by record infections, quasi-lockdowns and travel restrictions, the BOT lowered its growth forecast again to 0.7% at its meeting on 4 August. Another downgrade for the tourist-dependent economy cannot be ruled out if the pandemic is not brought under control by early 4Q21,” DBS said in a note.
Thailand currency's difficulties will be worsened by the increased of tapering by the US Federal Reserve (Fed).
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Fed taper concerns
“We believe that the Fed might taper asset purchases in late 2021 or early 2022. The Fed might unveil a clearer timetable at its Jackson Hole meeting on 27-28 August. If so, this could keep the USD strong. Against this background, the THB faces depreciation pressure from two fronts. First, our economist expects Thailand to deliver a 25bps rate cut in the coming months. Second, Thailand’s current account surpluses have given way to deficits since November [2020],” said DBS.
Prakash Sakpal, senior Asian economist at ING bank, said the BOT will keep rates unchanged at current record low 0.5% this year and throughout 2022 as fiscal spending will do a better job to jump-start the economy.
“Our end-2021 USD/THB exchange rate forecast is 35.00.”
If the BOT decides to cut rate to fresh record low, the currency could be heading to as low as 36 to the dollar in the first quarter of 2022, DBS said.