If you have relocated to Thailand and your daily needs are funded in baht, then you are fine as long as the baht’s purchasing
power is not significantly diminished against other major currencies or trading partners of Thailand.
However, if your lifestyle centres around your base currency, then you will need to measure your capital gains or losses in your base currency.
What happened to Thailand during the Asian Financial Crisis?
When Thailand’s economy slowed down and the kingdom needed to lower interest rates to stimulate its economy, foreign funds were withdrawn in search of better returns, also known as capital outflows. When capital pulls out, they are typically pulled from the share market, property market and loans (which are lent to Thai businesses). This caused a severe shock to Thai businesses as funds became scarce. Businesses dependent on foreign lending started to suffer, as their access to capital became restricted. As funds left Thailand, interest rates began to rise.
The Thai government needed to use reserves to prop up the Thai baht by selling USD to buy baht, supporting its value. This used up large amounts of foreign reserves (typically US dollars) that were pitted against hedge funds, which ended up gifting the hedge funds tens of billions of dollars in a hopeless defence of the Thai baht, which saw it devalue. When the Thai baht depreciated, more Thai businesses went bankrupt as they held large debt, which were in US dollars.
What is different in Thailand today?
As a result of learning from the painful experience of pegging the exchange rate in 1997, the exchange rate is now allowed to float freely. This prevents price and value distortion from building up. When the baht is freely floated, there is little price distortion, as the traded exchange rate reflects the market value more closely. Thailand’s debt-to-GDP ratio is below 50 percent, nowhere near dangerous. The kingdom’s foreign reserves can more than pay off its government’s external debt if it wants to as it has US$160 billion in reserves, while approximately US$130 billion in external debt. At present, Thailand’s foreign reserves are one of Asia’s largest at around US$160 billion. The Thai government has a strong foreign exchange reserve position, which is one of the highest among developing economies. It is continuing to run a trade surplus, accumulating foreign exchange reserves.
Due to the free float of currency exchange, it is able to set its own interest rate more effectively. At a time when the Thai economy is starting to see signs of a slowdown, and the US economy and US dollar are showing signs of strength, instead of raising the interest rate to prevent funds outflow and maintain the exchange rate, it surprisingly lowered and kept interest rates at 1.5 percent to continue to keep borrowing costs low for Thai businesses.
Doing so weakens the Thai baht and creates some capital outflow, which Thailand is able to withstand while it stimulates the economy and further increases export competitiveness. A country’s currency is very dependent on the strength of its financial system. Some ways to measure a currency’s susceptibility to being attacked by speculators include monitoring government absolute debt, debt to GDP, foreign currency reserves, inflation, elevated stock market and property prices, and a distorted market (i.e. pegged interest rates; pegged currency exchanges, etc.). Thailand has a high foreign reserve and a manageable budget deficit of 2.5 percent (most countries run budget deficits. It has run trade surpluses for most of the last 10 years. For a developing economy such as Thailand, less than 50 percent government debt-to-GDP is considered low.
The external debt is also manageable. Thailand’s household debt rose to 71.6 percent in Q1 2016, but this is nonetheless still manageable. The house price index is also high, which is expected during prolonged periods of economic growth. Capital inflow in 2016 has not been strong, and we can only surmise that it may be neutral or negative. If there is capital outflow, this shows that the Thai economy is weathering the outflow of capital well without shocks to its economy. Of course, there are many factors to consider as to whether a currency will remain strong or weak, such as politics, social factors, technological innovation, environmental factors and laws. All these affect currency values, especially political events. Paul Ho is the founder of www.iCompareLoan.com Disclaimer: The opinions expressed herein represent that of the author’s and do not necessarily reflect the view of Hua Hin Today, its management, or employees. Information provided in this publication is general in nature and does not constitute professional financial advice.