Reason for a mixed sentiment

Thailand’s trade data showed a significant negative swing in the trade balance as it entered a deficit of $516 million in July from a $1.6 billion surplus in the previous month. This came within stable trade growth - export growth of 8.3% year on year and import growth of 10.5%, both minor changes from the June print. The cumulative trade balance resulted in a $2.9 billion surplus in the first seven months of the year compared to a $7.5 billion surplus a year ago.

That being said, the trade surplus is on track to narrow in 2018 for a second straight year. In 2017, the annual surplus narrowed by $6 billion year on year to $15 billion. Considering the country’s current pace, it is anticipated to narrow by $8-9 billion in 2018, assuming the possible escalation of a global trade war also boding ill for exports and the trade balance in the rest of the year. This sets a negative tone for the Thai baht (THB).

Secondly, the Bank of Thailand's (BoT) minutes of the policy meeting held earlier this month unveiled that policymakers contemplated the timing for monetary policy normalisation. However, the timing depends on continued economic growth and inflation "firmly" in the target range of 1-4%.

BoT Governor Veerathai Santiprabhob signalled the unwinding of an extremely accommodative standpoint in his response to a better-than-expected 2Q18 GDP growth earlier this week. In this case, this was a positive signal for the Thai baht.

Nonetheless, the central bank's optimism on growth and inflation remains at risk. Growth reduced to 4.6% in 2Q18 from a five-year high 4.9% in 1Q18. With a continuous weak domestic demand and the global trade war going on, growth could be pushed down to below 4% in the second half of the year, conveying a downside risk to the BoT's 4.4% forecast for 2018. In addition to, an absent food or oil price shock could result in inflation slowing down below the BoT target in coming months.

Tighter policy needed?

Unless it is merely to create policy space for the future or to prevent the currency from weakening, the economy isn't begging for monetary tightening just yet. In my opinion, the signals indicate that the BoT will keep its monetary policy on hold for the rest of the year. Only a significant shift in consensus within the BoT policy board in favour of tightening, from the 6-1 vote for no change at the last meeting, would indicate otherwise.

Moreover, assuming a continued narrowing of the trade surplus and a potential escalation of the US-China Trade war could possible depreciate the THB to 35 against the USD by end-2018. However, the THB has returned to be among the Asian outperformers since July, from the worst performer in the second quarter of the year. This, together with the fact that the BoT is already deliberating tightening, prompts a revision of the USD/THB forecast for a smaller depreciation to 33.5 by the end of the year.


This article was issued by Maria Fenech, investment manager support officer at Calamatta Cuschieri. For more information visit, The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.