Thailand’s popularity among bond investors is creating a headache for policy makers counting on exports and tourism to drive growth.
Some $2.1 billion of foreign money has flowed into the nation’s debt this year, making it the top destination among Southeast Asia’s emerging markets. That’s buoying the baht, the region’s best developing-nation performer in 2017, and spurring speculation the currency will cope with rising U.S. interest rates better than its peers.
It’s also causing problems for policy makers who are trying to revive an economy whose growth has slowed for the past two quarters. Bank of Thailand Governor Veerathai Santiprabhob said Feb. 23 that foreigners saw the country as a “safe haven” and the baht’s strength wasn’t helping the economy.
“It’s an export-oriented economy, and if their currency is resilient while others are weakening, it’s negative for them,” said Masakatsu Fukaya, a Tokyo-based emerging-market trader at Mizuho Bank Ltd. “The central bank may hint that it will take some steps to address the baht’s outperformance, or verbally intervene in the market.”
With an economy registering a current-account surplus of more than 10 percent of gross domestic product as well as growing foreign-exchange reserves, foreign funds have been lured to Thai debt, but the country has also benefited as other Southeast Asian markets lost their luster.
Investors have turned cautious on Malaysia due to changes to rules on forwards late last year that deterred currency hedging, while foreign funds already have big positions in Indonesian debt, said Vincent Tsui, an economist at AllianceBernstein LP in Hong Kong. Meanwhile, the travails of President Rodrigo Duterte have damped demand for Philippine assets.
Foreigners own 8.4 percent of Thai bonds, according to a Bloomberg calculation using central bank figures, compared with 38 percent in Indonesia and 31 percent in Malaysia.
The demand for Thai notes has helped drive a 2.2 percent increase in the baht against the dollar this year. That compares with advances of 0.8 percent in Indonesia’s rupiah and Malaysia’s ringgit, and a 1.3 percent drop in the Philippine peso.
Markets are positioning for a Federal Reserve interest-rate increase next week, so inflows to the region are likely to moderate, said BOT Assistant Governor Chantavarn Sucharitakul. In the event that the Fed doesn’t hike, Thailand won’t be the only country that could see its currency appreciate, she said.
Thailand’s outsized external surplus makes the baht a one-way appreciation bet, according to Tim Condon, head of Asia research at ING Group NV in Singapore and the most accurate Asian currency forecaster in Bloomberg rankings in the first half of 2016. The baht will end the year at 34 a dollar, he said in a Feb. 28 note, 3.1 percent stronger than current levels. The currency fell 0.1 percent to 35.05 a dollar as of 10:23 a.m. in Bangkok on Monday.
If the currency does strengthen that much, it will make it difficult for Thailand to sustain a recovery in exports that started in the middle of last year. Overseas sales have risen in six of the eight months through January, after a run in which they dropped in 16 of the previous 17 months.
China, the U.S. and Japan take the most Thai shipments, in that order. The baht has rallied 10 percent against the yen over the past six months, and gained 2.3 percent against the yuan. It’s declined 1 percent against the dollar.
Given the importance of exports to Thailand — they accounted for 69 percent of GDP in 2015, according to the World Bank — it will also make reviving economic growth tougher. GDP increased 3 percent in the fourth quarter from a year earlier, the slowest pace in a year, and more than 1.5 percentage points less than Malaysia, Indonesia or the Philippines.
While the central bank has tools to manage the baht, it can only reduce volatility and can’t go against the market trend, said BOT Governor Veerathai. In a sign the authority has probably been selling baht to stem gains, the country’s reserves stockpile has swelled 5.5 percent this year to $181.3 billion.
“The baht’s appreciation could provide some headwind for the exports,” said Vasu Suthiphongchai, a Bangkok-based fund manager at Manulife Asset Management. “But the Bank of Thailand is doing its best to mitigate it, as evident in the rising foreign-exchange reserves from intervention.”