Perils and Promise Beneath Global Enthusiasm for Thai Baht
There has been a certain buzz around the Thai baht. But the attention could be short lived if the government fails to navigate deeper structural problems.
There appears to be a surge of excitement around the baht. Established Chinese investors and small family offices are eyeing Thai assets to hedge against Western sanctions and China’s own uncertain political economy. Some Hong Kongers are emigrating and moving businesses to Bangkok. In New York, acquaintances in finance talk of bets on the baht’s rise. Investor and Financial Times contributing editor Ruchir Sharma tapped this sentiment with enthusiastic praise for Thailand’s currency in an essay in February.
Does the newfound attention to the baht augur strong growth for Thailand’s economy and a larger role for the baht in international finance? It is possible that Thailand could revive dreams of prominence in Asian and global finance as Bangkok policymakers envisioned in the 1990s. A fuller answer, though, is that the baht’s promise depends on the government’s ability to navigate deeper structural problems and avoid the debt and asset bubbles that afflicted Thailand during earlier booms. Without these measures, attention to the baht will be short-lived, and Thailand’s economy will continue a disappointing trend.
In the long term, strong currencies tend to emerge from strong — more productive and investible — economies. Since the Asian Financial Crisis of the late 1990s, Thailand’s economic performance has been mixed. While the country saw stronger growth in the 2000s, its catch-up record is mediocre. At a relative peak in 1996, Thai GDP was about 2.3 per cent of U.S. GDP (or 10.1 per cent in per capita terms). In 2021, it was 2.2 per cent (again 10.1 percent in per capita terms). It is likely to fall to 2.1 per cent or lower in 2022 and 2023
Similarly, the baht outperformed currencies of low-growth emerging economies, like Malaysia’s ringgit, but had a poor record against faster-growing regional tigers. Compared to 1996, the baht has depreciated from 25 baht to the U.S. dollar, to 35 baht today, a decline of over 30 per cent. By contrast, the Singapore dollar appreciated from 1.4 per U.S. dollar in 1996, before the crisis, to 1.3 per U.S. dollar today. Other major regional currencies have either appreciated, like the Chinese yuan (from 8.3 yuan per U.S. dollar to 6.8), or returned closer to their pre-crisis level.
Asian Tigers Outrun Baht
For the baht to durably strengthen, Thailand’s government must address pressing economic and societal challenges. Thailand now faces an ageing population and labour shortages, particularly in the tourist sector. The education system inspires little public confidence. Corruption and unreliable law and regulatory enforcement remain deterrents to efficient private investment. A political system afflicted by repeated coups has struggled to reassure private investors and undertake bolder reforms.
Thailand needs a national government that can rise above Bangkok’s partisan feuds and stay pragmatically focused on implementing whatever policies will make more businesses grow and most household living standards rise.
Meanwhile, is the baht helping average Thais? Many tourists with U.S. dollars and similarly strong currencies find vacations in Thailand easier to afford. Their post-pandemic travel helps lift Thailand’s tourism sector and employment. Yet given high U.S. inflation, Thais travelling to the U.S. would need quickly rising wages or an appreciating currency to afford the same level of U.S. goods and services they could have enjoyed a few years ago.
So far, it does not seem that Thailand’s economy is providing either. The baht is weaker against the U.S. dollar than at any point from 2018 through 2021. Recent national labour force surveys suggest increases in average nominal wages, measured in baht, of only about 5-10 per cent since right before the pandemic. Unless the surveys greatly underestimate any rise in informal earnings, such modest wage gains are outweighed by the baht’s depreciation in the last year and a half, ranging from about 12 to 20 per cent of the baht’s value versus the U.S. dollar.
In the 1990s, enthusiasm for Thai assets generated bubbles in real estate, stocks, and Bangkok financial institutions. In 1994, Thailand’s Board of Investment endorsed projects for about 30,000 condominium units in the Bangkok area, a figure which fell to just 240 units four years later. These bubbles brought a temporary rise in Thai GDP followed by pain as the bubbles burst. GDP shrank by over a third, the stock exchange collapsed by over two-thirds, and consumers’ living standards fell.
Thailand is in a far better position today, but still experiences some warning signs. Income and wealth inequality are high, residential property prices are growing again, and debt levels — which surged during the pandemic — look more precarious, at about 90 per cent of GDP for households and for private non-financial businesses. To benefit from incoming investment and avoid the excesses of the 1990s, policymakers must closely monitor prices for key asset categories and try to steer investment toward competitive business sectors, such as medical tourism. There should be upgrades in broadly beneficial infrastructure, such as for schools, hospitals, rails, ports, sanitation, and farm irrigation.
Most of all, Thailand needs a national government that can rise above Bangkok’s partisan feuds and stay pragmatically focused on implementing whatever policies will make more businesses grow and most household living standards rise. Authorities’ recent commitments to ventures that lack clear or sustainable markets within Thailand — like in marijuana or electric vehicles — look less pragmatic to this observer.
Recent enthusiasm for the baht has a few good rationales. Since 2000, Thailand has avoided financial crises, attracted foreign investments, and greatly expanded access to primary education. By the standards of many emerging economies, property rights in Thailand are stable and secure, and government data are reasonably comprehensive and reliable. By building upon these advantages and further opening the economy to foreign participation, Thailand would be well-placed to gain from growing interest by global investors.
But one should also ask why, despite these advantages, Thailand has remained “emerging” for decades. There are manifold reasons: high debt, widespread inequality, worsening demographics, capital outflows to neighbouring countries, and most of all, unstable and ineffectual governance. Unfortunately, an appealing baht alone cannot overcome such difficulties.
Richard Yarrow is a Fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School and a Visiting Fellow at the East Asian Bureau of Economic Research at the Australian National University.