What does the aggressive US rate cut mean for Thailand?

Main photo: From L; Sethaput Suthiwartnarueput, Supavud Saicheua, Kobsak Pootrakool, Visit Limlurcha

An interest rate cut in the US would usually be welcomed in Thailand, with the potential for funds inflows. But the current scenario does not appear to be as simple.

The US Federal Reserve surprised global markets with an aggressive 50 basis points cut on September 18.

The cut boosted stock markets worldwide, including the Stock Exchange of Thailand Index, as capital flows returned to emerging markets. Gold prices also soared to a new high.

The Fed move has been welcomed worldwide, as it paves the way for many central banks to follow suit. Maintaining high interest rates for long periods takes a toll on economic growth.

The Fed explained the interest rate cut to a steady decline in inflation and cooling of the job market. Some experts believe any delay in cutting the rate or a lower rate of cut would have increased the risk of US recession.

BOT not ready for rate cut yet

Before making the move, Fed chairman Jerome Powell had sent signals to the markets about the impending lowering of the interest rate. In comparison, BOT Governor Sethaput Suthiwartnarueput said on September 20 that the Thai central bank did not need to follow the Fed, as the economic conditions in Thailand were different.

The BOT is taking a closer look at three factors: trajectory of economic growth, inflation, and financial stability.

“There is not much change related to the first two factors, as the economy is gradually recovering and the inflation rate is moving towards the target range of 1-3 per cent,” said Sethaput.

He admitted, however, that credit risks had increased and banks had tightened their lending.

He referred to the rise in non-performing loans, as many borrowers had defaulted on mortgage payments, car hire purchases and repayment of credit card debts.

Those three are a major part of Thailand’s household debt, which has remained high for long periods at around 90 per cent of gross domestic product (GDP).

From the BOT's perspective, the policy of having low rates in previous years had only encouraged more borrowing and posed a threat to financial stability.

The BOT has implemented debt restructuring by offering relief to vulnerable groups, which has not been successful so far in reducing household debt. The BOT targets household debt at 80 per cent of GDP.

Sethaput has repeatedly argued that the central bank did not agree with blanket measures, such as rate cuts, because it would not help much. Instead, he prefers macro-prudential measures designed to meet the specific needs of targeted groups.

Contrary to the BOT’s logic, many experts are making a case for a rate cut, seeing the need to provide some debt relief amid slower economic growth, high household debt and high cost of living.

The current policy rate of 2.50 per cent per annum has often been described by the central bank as appropriate, known as neutral in the context of the local economy.

Some economists believe that even if the central bank goes for a rate cut, it would not be an aggressive one like the Fed.

“It is hard to decide what is the neutral rate — may be 2 per cent or 2.5 per cent — nobody knows,” says Kobsak Pootrakool, senior executive vice president at Bangkok Bank.

He said there was room for a rate cut following the Fed’s move, but the central bank could not lower the rate by much as the current rate was not high, when compared to the US’s range of 4.75 to 5 per cent after the 50 basis points cut.

“The Thai policy rate should not exceed 2 per cent. If the BOT does not cut its policy rate, the baht would become stronger than other regional currencies,” Supavud Saicheua, chairman of the National Economic and Social Development Council, state think-tank, warned.

The baht has appreciated by about 4 per cent since early this year, strengthening towards 32 to the dollar recently.

The BOT explained that the baht’s appreciation was in line with other regional currencies, as all of them were impacted by the weaker US dollar. However, the baht has risen rapidly in September compared with other currencies, partly due to rising gold prices.

“Compared to other currencies, the baht moves in tandem with gold prices,” said Sethaput.

International gold prices recently soared to a record high of US$2,600 per ounce. Thailand has large export and import of the precious metal, as gold is very popular among Thai people as a store of value and for ornamental purposes.

Some market analysts believe that the central bank might have intervened in the market recently by selling baht to buy dollars, judging from the rise in forex reserves.

Impact of stronger baht on exports

There is a difference in the perception on how the stronger baht impacts exports. Sethaput often argues that growth of Thai exports depends on the state of trading partners, but exporters complain that the stronger baht makes their products more expensive than those of competitors.

Sanan Angubolkul, chairman of the Thai Chamber of Commerce, believes the baht should be at around 34 to the dollar and said business leaders would seek a meeting with the BOT and the Finance Ministry to discuss the issue.

Visit Limlurcha, vice chairman of the Thai Chamber of Commerce, said there would not be much trouble if global economic growth is robust. But the slow current recovery has made consumers reluctant to spend. Although, the Fed rate cut may eventually lead to a global recovery.

Large companies involved in both imports and exports could manage the exchange rate better as the stronger baht would make import of materials cheaper.

However, exporters of farm and food products face a tough situation, as most of the content in their finished products is local, he explained.

]“Food exports usually have thin margins, and when the baht swings sharply they could quickly turn to losses,” he said.

The rapid appreciation of the baht comes at a critical time when exporters are expecting more orders leading up to the long Christmas and New Year holiday seasons.

Now, exporters may find it hard to quote prices and they could potentially lose profits or worse be unable to sell their products, Visit lamented.

Role of exchange rate hedging

The BOT and commercial banks often encourage exporters to hedge their exchange rate risks by buying insurance from commercial banks, but many of them still do not do so.

“Large corporations could hedge their exchange rate risks effectively due to their financial ability and competent chief financial officers who are knowledgeable on exchange rate matters,” said Visit.

Thailand's average monthly exports are currently valued at around US$25 billion, with export growth projected at 2 per cent this year, said Visit.

The sector is a key driver of the economy, accounting for 65 per cent of GDP.

Meanwhile Thanawat Pholvichai, dean of the University of Thai Chamber of Commerce, estimates that the export value of Thailand's farm and processed agricultural products has dropped by 50 billion baht and warns that should the baht continue to rise further towards the end of this year, potential losses for these products could top 130 billion baht.