The baht is predicted to strengthen further to 35.30 per US dollar in the short term, following a rise to a four-month high of 35.72 earlier this Wednesday. However, political instability and a declining fiscal position from the government’s populist policies may restrict the Thai currency’s recovery.
Following the Bank of Japan’s (BoJ) decision to raise interest rates to approximately 0.25% and to reduce its extensive bond-buying program, the baht, along with other Asian currencies, experienced significant gains. The yen surged up to 0.8%, reaching a high of 151.58 per dollar soon after the announcement but later retraced to 153.25.
Around noon Wednesday, the baht was trading at 35.72 to the dollar, an improvement from Tuesday’s closing rate of 35.99, according to Kanjana Chockpisansin, head of research in the banking and financial sector at Kasikorn Research Center.
“The baht’s appreciation was in line with regional counterparts due to signs of monetary tightening by the BoJ, rising gold prices, and a weakened dollar ahead of this week’s Federal Reserve meeting,” she explained to the Bangkok Post.
“If the US central bank does not provide clear signals regarding a widely anticipated rate cut in September, the baht could potentially strengthen further to 35.30 against the dollar this time,” she noted.
BMI, a division of Fitch Solutions, projects that the baht will reach 35.00 against the dollar by year-end, driven by the expected commencement of the US central bank’s easing cycle in September.
“With the 450 billion baht digital cash distribution approaching, we believe the Bank of Thailand will want to fully assess its inflationary impact before considering any rate cuts. Therefore, we expect policy easing to begin early next year,” BMI stated in a research note.
This scenario will shift interest rate differentials in favor of Thailand for the time being, providing some support for the baht.
“However, the baht’s recovery is likely to lag behind many regional peers. Political instability and a weakening fiscal position will restrict any substantial upward pressure on the currency,” the London-based research firm highlighted.
Considering the Pheu Thai party’s history of implementing populist policies, BMI anticipates a larger fiscal budget deficit in the coming years. A more pressing concern is the rise in government debt, which is projected to climb to approximately 64.2% of GDP by 2026, nearing the 70% cap established by lawmakers.
“If debt levels continue to rise, investor confidence may wane, leading to significant capital outflows,” the firm cautioned. “Looking beyond the short-term, we expect the baht to continue on a gradual depreciating path.”
