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Baht Experiences Its Largest Surge Since 1998, Posing Risks to Tourism and Exports

Baht Reaches 19-Month Peak Against the US Dollar

Thailand’s baht is on track to achieve its largest quarterly appreciation since the Asian financial crisis, raising concerns about the potential negative effects on the crucial tourism and export sectors of the economy.

The currency has surged 10% against the dollar since the end of June, marking its most significant increase since early 1998. This spike has led representatives from tourism, hospitality, and various business associations to urge moderation. This week, Commerce Minister Pichai Naripthaphan and Deputy Finance Minister Paopoom Rojanasakul appealed to the Bank of Thailand (BoT) to take measures to curb the currency’s rise and mitigate its volatility.

The baht’s rally can largely be attributed to the weakening US dollar in anticipation of the Federal Reserve’s rate cut on Wednesday. However, this substantial gain relative to the currencies of Thailand’s trading partners may lead some buyers to look for cheaper alternatives, according to the Federation of Thai Industries (FTI). Although foreign tourist arrivals remain strong, concerns are growing that the baht’s strength will eventually impact spending on shopping and hotels, cautioned the Tourism Council of Thailand.

This surge in the baht presents a new challenge for Prime Minister Paetongtarn Shinawatra, who has committed to boosting Thailand’s economy and lowering living costs. While the country’s gross domestic product (GDP) growth lags behind neighbors like Indonesia and the Philippines, tourism and exports remain significant areas of strength.

With Thai exports constituting nearly 60% of GDP, the government is actively seeking ways to maintain a recent rebound in shipments. The rapid appreciation of the baht exacerbates difficulties faced by the private sector, including high production costs and an influx of inexpensive imports from China, noted FTI Chairman Kriengkrai Thiennukul during a press conference on Wednesday.

“The swift rise of the baht has worsened conditions for exporters,” Mr. Kriengkrai stated. “They are struggling and find it increasingly challenging to survive. What we need is a stable baht and assistance with elevated financing costs.”

The volatility of the Thai currency has created challenges for exporters, according to Mr. Paopoom. He emphasized the need for measures that ensure the baht remains “neither too weak nor too strong, and importantly, not excessively volatile.”

In response to soaring volatility, BoT Governor Sethaput Suthiwartnarueput indicated on Friday that the central bank is closely monitoring the currency’s movements and aims to minimize drastic fluctuations in exchange rates.

As per Bloomberg data, the implied volatility of the baht against the dollar for the past three months stands at 9.12%, close to its highest since January and above this year’s average of 7.98%. Additionally, foreign investments have poured $2.6 billion into Thai bonds and stocks this quarter, contributing to the currency’s rise and boosting the main equities index.

The baht’s strength may be a factor for BoT rate-setters to consider when evaluating monetary policy at their next meeting on October 16, explained Nattaporn Triratanasirikul, an economist at Kasikorn Research Centre.

“In light of the central bank’s growing concerns regarding asset quality, an uneven economic recovery, and a reduction in benefits from the government’s aid scheme in the near future, the likelihood of easing monetary policy in the coming months is increasing,” noted Krystal Tan, an economist at Australia & New Zealand Banking Group. “There is a possibility of a rate cut by the year’s end.”

Currently, the baht’s rally has not yet severely affected travelers, but it could create a “psychological impact” on foreign tourists’ shopping and spending behaviors, remarked Surawat Akaraworamat, vice-president of the Tourism Council of Thailand.

If the currency remains strong for an extended period, it could hinder the number of foreign tourist arrivals due to higher costs incurred by travelers, warned Suksit Suvunditkul, president of the southern chapter of the Thai Hotels Association.

Despite these concerns, Thailand is on track to meet its goal of welcoming 36.7 million tourists this year and generating 2 trillion baht in revenue. To date, tourist arrivals have reached nearly 25 million, reflecting a 31% increase from the previous year.

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