Is coronavirus the baht’s kryptonite?

Throughout 2019, the baht was Asia’s best-performing currency, with an appreciation of nearly 8% against the US dollar. Despite falling exports and various measures introduced by the Bank of Thailand to weaken the baht, nothing was effective in checking the rise of the currency. That changed abruptly in January 2020 as the news of the new coronavirus generated fear and market sell-offs across the world. The baht has weakened by about 4% year-to-date against the dollar, to a seven-month low.

The new coronavirus, also known as the Wuhan virus, is believed to originate from the wet market in Wuhan, a city of 11 million in China. The incubation period is roughly 1-14 days, therefore it’s too early to say how many people will be infected globally. The rapid rise of the infected has now surpassed the peak of Sars in 2003, which is undoubtedly terrifying. This prompted the World Health Organization to declare the deadly virus outbreak a global health emergency, but the WHO stopped short of a worldwide travel ban.

Compared with other epidemics, however, the new coronavirus so far appears to be less fatal. According to the WHO, the current fatality rate is low at 2.2%, compared with Ebola (65.5%), Mers (34.4%) and Sars (9.6%). This is certainly good news, but the full extent of the current epidemic may not become known for months.

The policy response by the Chinese government has been swift and unprecedented, leading to a lockdown of Wuhan and surrounding cities. Under the lockdown, about 50 million people in China are advised to stay home and are banned from travelling into and out of the zone. The Chinese New Year holiday this year has been extended to February 2, and in some places to Feb 9. In addition, China has banned all outbound tour groups from China. Several countries have closed land borders with China, issued a travel warning against travel to China, and many airlines have suspended flights to China. Chinese tourists have been made to feel unwelcome in many countries as a result. This will clearly take a toll on global tourist spending, and not just from outbound Chinese tourists, as many with Chinese descent are being discriminated against. Any attempt to compare the impact of the coronavirus on the global economy with the impacts of Sars could be seriously misleading, as well as understated. Back during the Sars outbreak of 2003, China’s GDP was US$1.7 trillion, ranked sixth largest in the world, whereas in 2018 China’s GDP was $13.6 trillion, second only to the US. The importance of China to the global economy has manifested in violent sell-offs in risk assets around the world. The outbreak of the novel coronavirus could have a significant impact on global economic growth, especially for countries in Asia. The direct hit will come from the dent in tourism revenue, especially from Chinese tourists. In recent years, the number of outbound Chinese tourists has risen from about 20 million in 2003 to over 160 million in 2018, roughly an eightfold increase. According to Capital Economics, a 50% fall in Chinese visitors can bring down the vulnerable economies’ GDP by up to 3%-points. Countries such as Hong Kong, Cambodia and Thailand would bear the most brunt of the impact, as they are heavily exposed to Chinese tourist arrivals. For instance, average spending by these visitors accounts for 8% of GDP in Hong Kong and 3% of GDP in Thailand. Further extension of the Chinese New Year holiday could disrupt global trade and supply chains such as the likes of global giant Apple. Empty streets in cities where people are disinclined to leave home, such as Shanghai and Beijing, will lead to a slump in consumer spending. The outbreak also forced retail F&B chains such as Starbucks to close half their stores in China, for instance.

According to the Tourism Authority of Thailand, the share of Chinese visitors to the country associated with tour groups is around 40%, but China’s decision to ban all outbound group travel could lead to an even larger drop in the total number of Chinese tourists to the Kingdom as the virus outbreak intensifies. Moreover, Thailand is also the most popular destination for visitors from Wuhan.

Chinese tourists account for about 28% of total visitors to Thailand, and have therefore been an increasingly important source of growth for the past couple of years as exports have faltered amid global trade tensions. Because Thailand has the largest number of people infected with the coronavirus outside of China, this is likely to discourage others to visit the country. With this outbreak, the Thai economy will be impacted by both a slower global economy and a sharp fall in tourist arrivals. Depending on the length and severity of the epidemic, we revise down our 2020 GDP growth forecast to 2.5% from 2.8% based on our assumption of a sharp drop in the number of tourists lasting two quarters.

Based on a dimmer outlook for growth in Thailand, we have pencilled in a cut at the MPC meeting on Feb 5, taking its benchmark rate to 1% — a record low. At the end of last year, we forecast the baht to be 31.50-32.00 against the US dollar by year-end 2020, but this coronavirus outbreak appears to be accelerating the baht towards our target in a hurry. Whether coronavirus proves to be kryptonite to the 2019 Supercurrency remains to be seen, but it certainly has brought the baht back to earth.