March 28, 2019

Will the Thai Baht Continue to Defy Gravity?

So far, 2019 has been a mixed year for the U.S. dollar. It has been more resilient against developed market currencies than against emerging market currencies, especially Asian currencies.

Within the Asian currency basket, the Thai baht stands out as the best performer even after it weakened nearly 3 percent over a period in February and March, making this a surprising result.

There are clear factors supporting the baht. The country enjoys a favorable balance of payments position and benefits from strong tourism demand. It also has enjoyed inflows due to a relatively hawkish central bank, as Thailand's export economy has held up well despite a slowdown in China amid trade tensions with the U.S.

However these strengths mask underlying weaknesses in the Thai economy. Falling productivity, deteriorating infrastructure and a rapidly aging population put the country at risk of falling behind its regional neighbors.

Before any of these structural issues can be addressed, however, the country needs to get itself out of its current political mess. Since 1932, when the absolute monarchy was abolished, Thailand has endured a dozen successful coups. The frequency of these upheavals has seemingly made markets comfortable with these regime changes, including the most recent, bloodless coup that took place in 2014.

After years of military rule, the country finally held its long-awaited general election this week but it seems to have done little to ease political tensions. Beyond complaints of voting irregularities, the new constitution was written in a way that greatly biases election results toward a military-friendly government, throwing into question the fairness of the election.

My View: In Thailand, politics play an important part in the macroeconomic outlook. While the Thai baht has been a strong performer year-to-date, and remains supported by a strong current account surplus, domestic and foreign investment has slowed over the past several years since the coup in 2014.

Thailand is at an important economic juncture and further investment is needed to improve productivity. However, political uncertainty likely played a big part in the investment slowdown. And with political lines hardening, the Thai baht seems unlikely to be able to continue defying gravity.

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