Despite economic weakness, baht poised for long-term gain
Several indicators for the Thai economy are pointing to weakness ahead. Consumption remains weak amid low consumer confidence. The latest retail figures in April (data lagging by two months) showed sales dropping 28.1% year-on-year after a 12.3% decline in March, in line with the timing of city lockdowns from the end of March to April. Retail sales are expected to show moderate improvement in May and June, reflecting the lifting of restrictions. The number should remain in negative territory because activity is yet to return to normal. Social distancing measures and temperature checks are still required in many public places, such as restaurants and mass transit, and businesses like cinemas and entertainment venues remain temporarily closed. The international travel ban is expected to impact the economy further.
Demand for big-ticket items is also in a declining trend. May car sales plunged 54.1% year-on-year as the outbreak hit domestic and external demand. The decline marked a 12th straight month of contracting car sales. The figure has been decreasing since the second half of last year, but the pandemic has compounded the weakness. The auto industry is facing a major downturn; in Thailand, we could see production down 40-50% from a year ago. Based on the grim outlook, we revised down our GDP forecast to -9.7% for 2020 with growing downside risk.
As a general trend, we see the baht poised to gain strength against the US dollar. During 2013-15, the US dollar index remained weak in a prolonged period of low interest rates, quantitative easing and the Federal Reserve’s forward guidance. This year, the Fed again cut rates aggressively and said it foresaw no rate hikes through 2022. The balance sheet expanded from the pre-pandemic level of $3.8 trillion at the end of February to the current $6.2 trillion. The total is expected to reach $6.8 trillion by year-end. The surge in US dollar supply will become the driving force for the dollar to depreciate. In addition, interest rate differentials have become non-existent as central banks worldwide bring rates down to near zero to alleviate the impact of the pandemic.
Meanwhile, the demand for safe assets, especially the US dollar, has gradually declined since the end of March, as risk appetite grows in part due to optimism from worldwide easing of lockdowns and improvement in some US economic indicators, such as non-farm payrolls and initial jobless claims. A press release on July 14 regarding American biotech firm Moderna’s progress in developing a Covid-19 vaccine added to that buoyancy.
The US and several emerging-market economies are reporting a surge in the number of Covid-19 cases. The US alone has surpassed 3.6 million cases and 141,000 deaths. Despite an improving situation in the northern and eastern US, other areas still face critical outbreaks. If US officials fail to contain the virus while the rest of the world slows the spread, this could further accelerate the weakness of the US dollar.
Against the pandemic backdrop, the baht remains highly volatile. Foreign exchange could swing with news, data releases, major transactions and capital flows. Over the longer horizon, we see the baht picking up and appreciating against the US dollar due to dollar weakness as a general trend.