|Source: BMI March 7, 2013|
|One Day Repo Rate (%)||2.75||2.75||2.75|
The Thai baht has remained relatively stable against the US dollar in recent weeks and the Bank of Thailand (BoT)'s foreign reserve holdings showed no evidence of intervention by policymakers to weaken the currency amid fears of competitive devaluation across the region. From a technical standpoint, the Thai baht is facing very strong resistance at around the THB29.60/US$ level. The risk of a sharp sell-off in the equity market remains, given that valuations are becoming increasingly overextended in our view. Accordingly, we see the baht trading sideways with risks skewed towards weakness in the near term.
|Against Strong Resistance|
|Thailand - Thai Baht Spot, THB/US$|
Our view that structural deficiencies in the Chinese economy will begin to resurface and weigh on external demand in H213 remains a key factor underpinning our cautious outlook on the Thai baht in the medium term. Recent trade data, which indicate that the Thai economy is in the midst of rebalancing towards domestic demand, reinforces our view that the country will run a balanced trade and current account in 2013. We expect the current account to come in at a small surplus of 0.4% of GDP in 2013. Without a sizeable current account surplus that would normally help to cushion the currency from the risk of hot money outflows, we caution that the Thai baht is becoming increasingly vulnerable to a sell-off in the equity market.
|Expecting A Balanced Current Account|
|Thailand - Balance Of Payments Breakdown, US$mn|
Furthermore, we believe that the BoT's stance on its exchange rate policy remains in favour of weakening the baht as external demand begins to wane in H213. As the accompanying chart shows, the Thai baht has outperformed regional currencies as benchmarked by the Asia Dollar Index (ADXY) by a significant margin since the beginning of the year. Further strength in the Thai baht relative to the region would risk undermining the competitiveness of Thailand's export sector. Given that the export sector remains a major source of employment, we believe that the BoT will intervene to weaken the baht in the event of a collapse in external demand. Indeed, the BoT has repeatedly hinted of possible intervention if required. Policymakers are also fully aware that allowing the Thai baht to strengthen further could risk attracting more hot money inflows into speculative asset markets such as equities and real estate. Consequently, we believe that a sell-off in the equity market, which would present selling pressures on the Thai baht, to be welcomed by the BoT. Based on the factors mentioned above, we maintain a neutral-to-bearish stance on the Thai baht in 2013.
|Thailand - Thai Baht Spot, THBUSD Versus Asia Dollar Index (ADXY) & Ratio|
Although we acknowledge that the government is keen on allowing the economy to rebalance, and this would mean allowing the currency to appreciate going forward, we expect this to be a gradual process and that policymakers will aim to run small current account surpluses rather than deficits over the coming years. As such, we continue to see supportive pressures that will keep the Thai baht on a mild appreciatory path over the longer term. Accordingly, we forecast the Thai baht to average around THB30.09/US$ in 2013 before appreciating slightly towards THB29.30/US$ by the end of 2014.
|The Key Risk To Watch Out For|
|Thailand - Foreign Capital Inflows, THBmn|
Risk To Outlook
The key risk to our outlook comes from a continued bull market in equities. This could see the Thai baht outperforming regional currencies in 2013, albeit at the expense of a severe slowdown across the export sectors. On the flip side, we could see a sudden and sharp reversal in sentiment result in major capital flight, forcing the BoT to intervene to stabilise the currency.