Thai baht rally set to fade on twin deficits and diverging rate paths
A recent rally in the Thai baht is expected to reverse as widening current account and budget deficits, combined with a dovish central bank, expose the currency to higher US yields.
The Thai baht is poised to give up its recent gains as structural economic vulnerabilities and a passive monetary policy undermine investor confidence. Despite strengthening 0.9 per cent this month to become the second-best performer in Southeast Asia, analysts expect the currency to weaken significantly by year-end.
BNP Paribas forecasts the baht will slide to 33.50 per US dollar by the end of the year. MUFG Bank Ltd. projects a steeper 4 per cent decline to 34.4 in the fourth quarter, driven largely by the impact of elevated energy prices on the nation's trade balance.
The country’s current account swung to a $17.7 billion deficit last quarter, a sharp reversal from a $1.4 billion surplus in the prior period. This deterioration is primarily the result of surging energy import costs, which policymakers are choosing to absorb rather than combat with tighter monetary policy.
The Bank of Thailand is expected to hold its benchmark interest rate steady at 1 per cent during its August 26 meeting to prioritize economic growth over inflation. “The Bank of Thailand is likely to keep policy rate at 1% to support growth, putting pressure on the baht as US yields stay elevated,” said Lloyd Chan, a foreign-exchange strategist at MUFG in Singapore.
Chan noted that the trade balance may remain in deficit in the coming months following a rebound in oil, removing a traditional pillar of support for the currency. This dynamic leaves Thailand with the lowest benchmark interest rate in emerging Asia, even as regional peers like Indonesia and the Philippines have tightened policy.
Beyond the current account, fiscal pressures are mounting as the government plans to raise $12 billion in new borrowings for economic stimulus and energy-transition programs. These measures have sparked concerns about maintaining public debt within the legal ceiling of 70 per cent of gross domestic product.
“The baht is showing greater signs of a twin deficit problem, especially the budget deficit,” said Kobsidthi Silpachai, head of capital market research at Kasikornbank Pcl. He added that a potential deterioration in fiscal sustainability may “prompt investors to increase the risk premium, translating to higher bond yields and a weaker baht.”
Higher energy costs are also exacerbating broader economic strains, with elevated jet fuel prices and Middle East instability weighing on the vital tourism sector. These headwinds threaten to diminish the typical seasonal boost the currency receives from year-end holiday arrivals.
The primary catalyst for further depreciation remains the widening interest rate differential with the United States. Chandresh Jain, an Asia emerging markets rates and foreign exchange strategist at BNP Paribas, expects the Federal Reserve to implement three consecutive rate hikes starting in December.
“The baht has more room to depreciate against the dollar in the second half of this year” on potentially widening interest rate differentials with the US, Jain said. This aggressive tightening cycle is expected to offset any residual support from seasonal tourism revenues, leaving the currency vulnerable to sustained selling pressure.
