(Bloomberg) — A nascent rally in the Thai baht may be short-lived as the central bank is likely to maintain a dovish policy stance to support an economy hit by elevated oil prices, according to analysts.
The baht has strengthened 0.9% so far this month, ranking as the second-best performer among Southeast Asian peers. From here, it may dip to 33.50 per dollar through the end of the year, according to BNP Paribas. MUFG Bank Ltd. expects the currency to weaken about 4% to 34.4 in the fourth quarter as higher oil prices weigh on Thailand’s trade balance.
The nation’s current account swung to a $17.7 billion deficit last quarter, from a $1.4 billion surplus in the prior period due to higher energy imports. Policymakers have signaled a willingness to look through near-term price pressures brought on by higher crude prices to support growth, with the central bank expected to keep borrowing costs steady at 1% at its August 26 meeting.
“The Bank of Thailand is likely to keep policy rate at 1% to support growth, putting pressure on the baht as US yields stay elevated,” said Lloyd Chan, a foreign-exchange strategist at MUFG in Singapore. Thailand’s trade balance may remain in deficit in the coming months following a rebound in oil, removing a pillar of support for the currency, he added.
Higher energy costs are adding to broader strains on the economy, with elevated jet fuel prices and instability from the ongoing Middle East conflict weighing on tourism, a key contributor to growth. Fiscal concerns are also mounting as plans to raise $12 billion in new borrowings to fund economic stimulus and energy-transition programs raise concerns over whether Thailand can keep public debt within the ceiling of 70% of gross domestic product.
“The baht is showing greater signs of a twin deficit problem, especially the budget deficit,” said Kobsidthi Silpachai, head of capital market research at Kasikornbank Pcl. A potential deterioration in fiscal sustainability may “prompt investors to increase the risk premium, translating to higher bond yields and a weaker baht,” he said.
Thailand’s benchmark interest rate remains the lowest in emerging Asia, even as peers including Indonesia and the Philippines have tightened to curb inflation and support their currencies.
“The baht has more room to depreciate against the dollar in the second half of this year” on potentially widening interest rate differentials with the US, said Chandresh Jain, Asia emerging markets rates and FX strategist at BNP Paribas, who expects the Federal Reserve to implement three consecutive rate hikes from December. That would temper the seasonal boost to the baht from year-end tourism, he said.
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