Thailand: Expect no monetary policy support for baht

A counter question is whether the latest USD/THB spike has been strong enough to provoke a response from the central bank, which has been vocal about the need for continued accommodative monetary policy to support growth and less worried about a weak currency. We don’t think so. An accelerated THB depreciation in recent months has reversed the appreciation early in the year and maybe a bit more. But it’s still an Asian outperformer; the 0.2% year-to-date depreciation compares with big losers such as the Philippines, Indonesia and India- countries whose central banks moved to tighten recently. We don’t think THB performance is weak enough to justify central bank action yet.

Among other monetary policy drivers, Thailand’s GDP growth has been firm – 4.8% year-on-year in the first quarter of this year was the fastest in five years. And inflation has been benign despite a spike to 1.5% year on year in May from 1.1% in the previous month. This growth-inflation mix provides no compelling reason for a change to policy while central bankers have recently intensified rhetoric for a prolonged period of monetary accommodation. Hence the unanimous consensus behind an on-hold BoT policy decision this week.

The THB derived its strength last year and early this year from large external trade and current account surpluses. But that support is now fading. The customs-basis foreign trade data for the month of May due later this week (21 June) is expected to reinforce this view. The consensus forecast of an $88 million trade deficit in May will be a big improvement from a $1.3 billion deficit in April. However, this also implies a roughly $4.5 billion negative swing in the cumulative five-month trade balance from a year ago.

With global trade wars weighing on exports and rising oil prices boosting imports, the narrowing trade surplus trend is here to stay. As we see it, 2018 is shaping up to be the first year with an annual trade deficit – to the tune of $4-5 billion – after three years of surpluses ($13.9 billion surplus in 2017). We expect this to be associated with a near-halving of the current account surplus in relation to GDP to about 5.5% this year from 10.6% in the last, which is a key negative for the THB.

We retain our forecast for the BoT to remain on hold this year. The lack of interest rate policy support and a deteriorating external trade balance suggest that the Thai baht will remain under weakening pressure for the rest of the year. We revise our USD/THB forecast for end-2018 to 33.8 from 32.3.