BMI View: Recent developments do not augur well for the Thai baht as we head into 2012. A narrowing trade surplus, growing risk of a recession and the threat of capital flight all suggest that the Thai baht would come under further selling pressure over the coming months. The scenario for large-scale capital flight notwithstanding, we expect the currency to depreciate from its present level of around THB31.55/US$ to THB33.00/US$ by end-2012. However, we caution that the risks to our outlook on the Thai baht remain skewed towards the downside.
Recent economic data coming out of Thailand support our conviction that economic damage brought about by the recent floods would further compound the downside risks of cooling external demand, leading to a narrowing of Thailand's trade surplus and continued weakness for the Thai baht in 2012. Figures published by the Bank of Thailand (BoT) showed that Thailand's manufacturing production index fell by 48.4% y-o-y seasonally-adjusted in November, following a 30.0% y-o-y decline in October. Meanwhile, industrial capacity utilization has fallen from its previous peak of 64.5% in August to just 40.4% in November, reflecting the impact of key industrial zones that were forced to shut down amid the recent floods.
Although local media reports claim that floods in the Thai capital of Bangkok are receding, the manufacturing sector is unlikely to return to full production anytime soon (industry leaders estimate that production activity will only see a full recovery by the end of H112). This, combined with an expected slowdown in global economic growth that is already putting pressure on exports, means we are seeing increasing risks of a recession in Thailand. At present, we are pencilling in a 3.2% y-o-y contraction in real GDP growth in Q411, translating into full year growth of just 1.5% for 2011. Notwithstanding a reconstruction-led bounce in the coming quarters, we are keeping our forecast for growth in 2012 below consensus at 4.0%, in line with our view for sustained weakness in exports. Accordingly, we expect Thailand's trade surplus to shrink from a healthy 4.5% of GDP in 2010, to 2.9% and 2.1% of GDP in 2011 and 2012 respectively. From our standpoint, a narrowing trade surplus means that the Thai baht is becoming increasingly susceptible to capital flows.No Bright Spots For The Thai Baht
Risks Are Skewed Towards The Downside
Growing risk aversion towards emerging market assets prior to the floods, had already triggered capital flight from Thailand albeit at a manageable scale. This was witnessed by the recent sell-off across emerging Asia currencies in September, which was accompanied by significant declines in foreign reserves as central banks attempt to stabilise their currencies. With the Thai economy staring at a potential recession in 2012, we expect the Thai baht to come under renewed selling pressure as investors take their capital elsewhere in search of better opportunities.
Even without taking into account the above scenario in which we see large-scale capital flight, we are already pencilling in further weakness for the Thai baht. We expect the currency to depreciate from its present level of around THB31.55/US$ to THB33.00/US$ by end-2012. Recent developments do not bode well for the Thai economy and we are increasingly concerned that further negative shocks would throw the economy into recession, a serious threat to investor sentiment. Thus, we caution that the risks to our outlook on the Thai baht remain skewed towards the downside.