Despite King Dollar’s rampage against the Euro, sterling and emerging market currencies, the Thai baht has been the stellar outperformer in Southeast Asia, up almost 6% in 2019. The Thai baht has also appreciated 5% on its trade weighted index, thanks to $3 billion in global capital inflows in the Kingdom of Siam’s stock and bond markets. The Thai baht strength was entirely predictable. Moodys and Fitch raised Thailand’s sovereign credit rating. MSCI increased the allocation of Thai equities in its global emerging market index. The military government in Bangkok eased political risk in government policy.
The Thai economy, the Detroit of Asia, benefits from the exodus of supply chains/FDI from China. Thailand is the obvious safe haven in Southeast Asia, due to its trade surplus, large domestic economy, fiscal discipline and vast infrastructure programs. Tourism anchors Thai services sector earnings. After all, Thailand delivered a 6% current account surplus in 2018, way more than any of its deficit plagued Southeast Asian peers. The Thai baht was thus the ideal Asian currency to own in 2019, rising from 32.23 to 30.73 now. But what next?
One, Thai GDP growth has slumped to 2.8% due to China, Japan and South Korea’s economic slowdown and global trade tensions. There is no way Thailand can replicate 2018’s fabulous 4.1% GDP growth rate.
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Two, the spectacular rise of the Thai baht against the US dollar, Philippine peso, Malaysian ringgit and the Vietnamese dong hits the kingdom’s competitiveness and export growth prospects at a time of stress in global manufacturing. The strong Thai baht will have a double whammy by pricing Thai exports out of slowing export markets and squeeze corporate earnings growth on the SET index in Thailand. The strong Thai baht is, ultimately, its own nemesis.
Three, the strength of the Thai baht is now in conflict with the Bank of Thailand’s concerns over economic growth risk and a trade war blowback. As a survivor of the post Thaksin overthrow yellow/red shirt political chaos decade in Thai equities, it is hard for me to see the Thai baht morph into Southeast Asia’s safe haven swissie, a role once reserved for Singapore dollar. Yet this is exactly what has happened in the past two years. The Thai baht, while low yield, has become a magnet for global safe haven funds terrified by the political convulsions in China, Malaysia, Philippines, Vietnam, India and Pakistan.
Yet if the Bank of Thailand moves from signaling discomfort with the baht’s strength to an actual cut in money market rates, all bets are off. Thai baht bulls will get gored in a soft place with all the venom of the bulls run amok in the streets of Pamplona. Ironically, the Bangkok central bank’s last rate hike to 1.75% in December 2018 amplified speculative hot money inflows into the Thai baht. If economic growth data deteriorates, the Bank of Thailand will undo the December rate hike and cut its money market rate twice – a cumulative 50 basis point cut. This will unquestionably deal a fatal blow to the Thai baht bull market.
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Four, the Thai government, with institutional memories of the hot money tsunami of the 1990’s that preceded the 1997-98 Asian financial meltdown, has cut permissible balances of offshore investors in the Thai banking system and securities markets. The Bank of Thailand has also cut its issuance of three to six-month Treasury bills in July, an obvious attempt to combat global speculative inflows. The Thai baht bulls are now skating on dangerously thin ice.
Five, success in financial markets necessitates analyzing a risk/reward calculus amid hypothetical, conditional second derivative scenarios. So it is no surprise to me that the Thai current account surplus has peaked and just begun to narrow. Exports have fallen 3% in 2019 and domestic demand growth cannot remain immune to global trade angst. A German/Chinese growth slump and sterling’s post Brexit decline will also hit tourist arrivals. This all spells potential Thai baht weakness for me this autumn and winter, now that it is trading near six-year highs against the greenback on Planet Forex. As the old Wall Street cliché goes, the trend is your friend – until the trend comes to an end.
Six, the US dollar is the ultimate hedge against the risk of no deal Brexit, a German recession, the Hong Kong revolt, a trade war and the financial malaise in the Middle Kingdom. This means, as in the late 1990’s, a rising US dollar against emerging market FX – and the Thai baht will no longer dodge the macro storm clouds in Asian currencies. While a real conviction call necessitates a due diligence visit to Bangkok, my instincts tell me to short the Thai baht at 30.5 for a 12 month target at 32.50. Hence I decided to outline the bearish case for the Thai baht for my fellow investors, peers and readers in the Gulf.
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