Baht volatility looms amid political risk and new government formation

Kasikornbank (KBank) has warned investors that the formation of a new government and political risk may result in increased baht volatility over the next month. The bank forecasts that the baht will fluctuate between 33.80-35.40 per US dollar during this period due to various internal and external factors. The primary determinant is the direction of the US Federal Reserve’s policy rate.

KBank believes that domestic politics will influence baht volatility after the next four weeks. The Federal Reserve is expected to raise its policy rate by a quarter of a percentage point twice more this year, beginning in September and continuing in December.

“Domestic politics is a risk factor that could trigger baht fluctuation against the dollar,” said Kobsit Silpachai, head of KBank’s capital market research department. “Investors are concerned about the formation of the new coalition government amid uncertainty following the general election.”

Although the baht may be volatile against the dollar in the short term, it is predicted to appreciate to 33.8 by the end of this year. The anticipated tourism-driven economic recovery is expected to support baht appreciation in the second half of the year.

KBank has projected a 3.7% expansion in Thai GDP for fiscal 2023, with foreign arrivals estimated to reach 28.5 million, a significant increase from 11.2 million last year. In the first four months of this year, the number of foreign arrivals totalled 8.6 million.

The National Economic and Social Development Council is forecasting GDP growth of 2.7% this year. Moreover, Kobsit stated that the Bank of Thailand is likely to increase its policy benchmark rate by 0.25% points this month to 2%, up from 1.75%.

KBank expects the central bank to maintain its policy rate at that level for the remainder of the year unless inflation rises significantly. If the new government fulfils its pledge to increase the daily minimum wage amid rising inflation, the central bank could raise its policy rate above 2% this year.

The central bank intends to follow the new government’s economic policies. In 2022, the minimum monthly wage in Thailand was US$293, surpassing Malaysia’s US$275 and Vietnam’s US$193, but falling short of Indonesia’s US$307 and the Philippines’ US$308, reports Bangkok Post.