Stuck in a vicious circle of coins

A man walks past an electronic board displaying forex rates at the currency exchange on September 30 (Photo: Pornprom Satrabhaya)

A man walks past an electronic board displaying forex rates at the currency exchange on September 30 (Photo: Pornprom Satrabhaya)

Industry leaders called on the government and relevant authorities to do more to prevent the devaluation of the baht and mitigate the impact of the Bank of Thailand’s recent interest rate hike.

However, market analysts point out that there are several good reasons for the central bank to proceed cautiously in its embrace of interest rate increases as they could dampen the expected economic recovery.

More work

The central bank’s Monetary Policy Committee (MPC) decision last week to raise interest rates by 25 basis points is not surprising, but the Federation of Thai Industries (FTI) wants to see more action from the government to slow the weakening of the baht. .

The group also asked the government to deal with the after-effect after increasing the benchmark interest rate to 1%, as this will increase the financial burden on entrepreneurs.

Kriengkrai Thiennukul, head of the FTI, said the central bank and the Ministry of Finance need to work together to determine the appropriate value of the Thai currency and its impact on the economy. He said more measures are needed to deal with the baht.

Kringkray said the value of the baht could fall further if there were no additional measures to deal with it.

The Thai currency fell to 37.75 baht per US dollar last Monday, its lowest level in 16 years.

“It could drop to 38 baht per dollar, which was strengthened after a significant rate hike by the US Federal Reserve,” he said.

US interest rates are expected to rise to 4.4% by the end of this year, causing weakness in other currencies.

“If we do nothing, the baht could drop to 39 against the dollar and continue to fall,” Kriengkrai said.

The policy price increases are seen as a necessary step to curb the depreciation of the baht, which leads to an increase in the prices of imported oil and gas as well as raw materials.

Thailand imports a lot of LNG, which is currently expensive, as the country uses it as a fuel to generate electricity.

Higher energy and production costs will put more pressure on manufacturers, who may need to increase commodity prices in the local market. This, he said, will therefore lead to a higher rate of inflation.

Kriengkrai said authorities need to consider the impact of higher interest rates on businesses, especially small and medium-sized businesses, which will face more financial costs.

additional burden

The increase in interest rates will increase the burden on hotels as most of them rely on bank loans, especially to pay salaries while trying to attract staff, said Marisa Sokosul Nonbhaki, president of the Thai Hotel Association.

She said that with banks expected to raise interest rates soon, hoteliers’ hopes of turning a profit this year are fading fast. On top of the price hike, many costs are going up this year, including electricity, labor, raw ingredients for food, and a land and construction tax, which now require the full tax to be paid.

Ms Marisa said hotels have to absorb those fixed and variable costs themselves, including higher interest rates, unlike airlines, which can charge extra fuel over ticket prices to offload extra costs on passengers.

“Hotels cannot raise room rates immediately to offset higher operating costs as tourism demand remains relatively weak compared to current supply,” she said. “Medium and small hotels are suffering the most as the mass market, their main target, has been affected by the global economic downturn.”

Ms Marisa said the lower rate of the baht against the dollar appears to be an advantage for inbound tourism, but only luxury operators are benefiting most from the trend as high-end travelers tend to prefer five-star hotels.

“A lot of mid-level properties that previously claimed mass market or tour groups from Asia as major clients are still struggling to maintain profits because not every Asian country has fully reopened, especially China,” she said. “Tourists with higher purchasing power as a result of currency appreciation will probably not choose three-star or less hotels.”

Ms Marisa said the upcoming peak season may bring more guests to all hotels, but revenue from this period alone will not make up for previous stagnant months as operators had to invest to reopen and spend on staffing and setup services.

Baht keeps falling

Chanchai Kultavarakorn, CEO of ASL Securities, said the baht could fall below 40 against the dollar in line with the decline in other Asian currencies against the dollar as the Fed continues to raise rates.

He said that even with the Bank of Thailand raising interest rates, the baht is likely to reach 40 against the dollar as the Fed appears to be ignoring the impact on other currencies. The Fed said it will keep raising interest rates until inflation eases back to its 2% target, down from 8.3% last month, with rate hikes continuing through 2023.

Other countries are also concerned about the devaluation of their currencies, prompting financial authorities to intervene in the currency or introduce quantitative easing by injecting money into the system to reduce volatility in the bond market.

Since the global supply of dollars is huge, no country can resist capital outflows. This ultimately destabilizes many countries’ reserve funds, Chanchai said, causing the currencies to depreciate further.

He said that if central banks continue to raise interest rates to stem cash outflows, local economies will be affected as both companies and borrowers bear a higher interest burden amid unfavorable economic conditions.

Foreign exchange rates are displayed on the Currency Exchange on September 30th. Pornprom Satrabhaya

The situation can be exacerbated if a country falls into an economic crisis and companies are forced to sell assets cheaply to pay off debts. This situation would be similar to Thailand’s experience during the Asian financial crisis in 1997, Chanchai said.

In Thailand, he said it was too late to block foreign capital outflows because US interest rates had been raised several times, with a lot of money already out of the country.

Chanchai said that raising Thai interest rates will affect the country’s economic recovery, while only commercial banks will benefit.

“I think Thailand should not play according to the American game because we cannot resist the massive inflows of dollars. The Thai interest rate does not need to increase like the US interest rate. The authorities should monitor the situation until the United States lowers interest rates,” he said.

“Until then, many countries will have problems. But the Thai private sector remains strong. Many listed companies are still profitable and growing from domestic and international expansion. Foreigners will return to invest in Thailand, pushing the baht higher.

“Whenever a financial or economic crisis occurs, the same cycle occurs. But this time, Thailand’s foreign exchange reserves and the private sector are strong. Consumers have high household debt, so raising prices will increase costs in the economy further and reduce consumer buying power.”

To support the economic recovery, Chanchai said Thailand should focus on boosting the tourism sector to take advantage of the currency’s depreciation, as many countries are doing.

“Thailand is one of the most famous countries in the field of tourism. We should take advantage of this opportunity,” he said.

The primary concern is inflation

Last Wednesday, the Monetary Policy Committee raised the interest rate by 0.25 percentage points to 1% in an effort to tame high inflation amid an uneven economic recovery.

The Monetary Policy Committee said overall growth and inflation expectations were in line with its previous assessment. In August, the Monetary Policy Committee raised the rate for the first time in nearly four years, by 0.25 percentage point to 0.75%.

Sethaput Suthiwartnarueput, Governor of the Bank of Thailand, said last week that the central bank is ready to continue raising the policy rate if core inflation rises faster than expected.

Core inflation has risen over the past four months month on month, but growth slowed in late August.

Sitaboth said the central bank is ready to move, either by maintaining the current rate or raising it by up to 50 basis points, depending on the situation. He said the MPC could calibrate actions in response to the situation, including holding an additional meeting if conditions change, such as a dramatic faded volatility.

Although the baht has weakened 12.1% against the dollar since the beginning of the year, the decline is in line with other currencies because the main reason for the move is a stronger dollar, Sitaboth said.

He said that the devaluation of the baht will not affect the economic recovery in Thailand or lead to a significant rise in inflation. Sethabot said that for every 1% of the baht weakening, the headline inflation rate would increase by just 0.06%.

Banks began increasing interest rates on deposits and loans after raising interest rates, but they promised to help vulnerable individual borrowers deal with the impact of higher interest costs.

Not so bad

Sanan Anjubulkul, president of the Thai Chamber of Commerce, said a moderate increase in the Bank of Thailand’s policy could lead to capital flight and increase pressure on the baht.

However, it is still believed that the value of the baht is still manageable and can have a positive impact on the Thai economy, especially the tourism sector.

Sinan said inflationary pressures in Thailand are likely to subside as global oil prices begin to stabilize at US$75-85 per barrel.

Chichan Charwinsok, chairman of the National Shippers Council of Thailand, sees the recent central bank rate hike as appropriate. However, exporters are asking the government to keep a close eye on the baht to ensure it moves in line with other regional currencies.

The drop in the baht to 38 per dollar, down from 32, affects a wide range of businesses, including the IT sector, said Somsak Bigthavipurndij, CEO of IT distributor VST ECS in Thailand.

“The company is proceeding with currency hedging to mitigate the impact and help our distributors,” he said.

Somsak said, policy makers must find ways to address the lackluster weakness because it is not good for the economy. He said those who import raw materials or components may be at risk due to higher costs.

Somsak said a rapid devaluation of the baht would raise speculation, so the government should step in to ensure it does not weaken too quickly.

Little impact on retail

Thapana Sirivadhanabhakdi, CEO of Thai Beverage (ThaiBev), the Singapore-listed food and beverage company, said the weakness of the baht is also a challenge for the company.

However, he said ThaiBev has so far not felt the impact of a lackluster decline as the company ordered some imports of raw materials a year ago.

“We expect the weakening of the baht to only affect barley and aluminum, which are the main raw materials for our sentiment business,” Thabana said. “We have already adjusted our business plan by purchasing our raw materials in advance.”

However, he said that in the long run, the company will have to pass on higher production costs to consumers if the baht continues to weaken, ultimately affecting overall production costs.

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