Thailand: Baht’s reversal of fortune

The year started with both the Finance Ministry and the Bank of Thailand (BoT) intensifying their efforts to curb the currency's appreciation. A strong currency is bad for the country's export recovery and also weighs on the tourism sector, which now faces an added threat from the coronavirus. Up until now, tourism was the only really good sector in an otherwise sluggish economy.

Tourism makes up a fifth of the economy and visitors from China alone account for about a quarter of total tourism receipts. A sharp fall in tourism spending will undoubtedly put a big dent in the current account surplus, which has been the main reason behind the Thai baht's appreciation in recent years. Data released today on the balance of payments in December showed the annual current account surplus at $37 billion in 2019 (about 7% of GDP), up from around $28 billion (5.6% of GDP) the year before.

The knock-on effect of the ban on Chinese tourists alone could reduce the current surplus this year to half the level of last year; receipts from Chinese tourists in 2019 are estimated at $18 billion, out of total tourism receipts of $64 billion. Moreover, the impact isn’t going to be limited to Chinese tourists, nor is it going to be short-lived. This could mean even more damage to the current account, which will put sustained pressure on the Thai baht throughout this year.

We are cutting our current account forecast for 2020 to 3.5% of GDP from 5.6% earlier. This, together with broader demand weakness, is expected to hold back any recovery in GDP growth this year from the five-year low of about 2.3% estimated for 2019. Hence, we are also cutting our 2020 growth forecast to 2.3% from 3.0%.

The possibility of an extended central bank easing cycle is another factor that could weigh on the currency this year. We expect a 25 basis point BoT policy rate cut to 1.00% at the meeting next week (5 February).