The recovery of the US economy, with higher interest rates and bond yield rates, has an impact on capital flows and the Thai baht exchange rate.
The rise in global oil prices from geopolitical tensions pushes our petrol prices and other prices up, while the looming US-China trade war will have a definite effect on our performance while the changes in global farm prices are having an impact on Thai farmers’ incomes.
With rising interest rates in the US and inflation at home, Thailand’s interest rates are also on an upward trend. The policy rate and government bond yields in the US have been rising, resulting in capital outflows from emerging markets to the US.
Countries with high foreign debt, low international reserves, and current account deficits such as Argentina, are badly hurt by the outflows. At its latest meeting this month, the Fed raised its policy rate to 1.75-2.00%, surpassing Thailand’s policy rate of 1.50%. Moreover, the Fed is likely to raise rates two more times this year, each time by 25 basis points.
This has spurred capital outflows from the Thai stock market over the past few weeks. However, Thailand still enjoys large capital inflows from a current account surplus as exports and tourism continue to grow robustly; the inflows surpass the amount of capital outflows many times.
Moreover, Thailand’s foreign debt is low and international reserves are high, making it less vulnerable to capital outflows compared to other emerging economies. As a result, the baht will strengthen further from last year by around 7% according to the consensus forecast.
The rise in global oil prices this year, as a result of increasing demand in the first half of this year and the re-institution of sanctions on Iran, has led to an increase in our oil prices over the past months. This is expected to ease in the second half of the year as Opec and US shale oil production increase. Global oil prices this year will average US$70 per barrel, a 30% increase compared to last year.
This has put an upward pressure on petrol prices in Thailand as well as logistics costs. The Bank of Thailand has estimated inflation this year to be at 1.1%, up from 0.7% last year. With regard to the farm sector, prospects are brighter for rice farmers, compared to rubber planters.
Global rice prices are expected to go up by 5% this year due to the lower global supply compared to last year’s. In addition, Thailand’s rice production is estimated to be higher than last year’s due to favourable weather conditions.
However, rubber prices will be 10% lower this year compared to the exceptionally high…