When investing in overseas properties, the fluctuations in foreign exchange come to play. For the past few years, the Thai Baht has been on an upward trend against most major currencies. Recently, the Thai Baht hit a post-coup high against the US Dollar. Here are some reasons for this.
To understand the flow of money, we have to understand how interest rates work. High-interest rates incentivise savers and discourage borrowing. Interest rates for savings and borrowers more in tandem. There cannot be a situation whereby one rate was set for savers and another for borrowers. The central bank sets the key interest rate and the banks base their rates off that key interest rate.
In December 2018, the Thai central bank raised the key interest rate for the first time in seven years. This is in contrast to the US where the Federal Reserve has been signalling that it will adopt a slower pace of normalising interest rates. This caused money to flow into Thailand as money would earn a higher rate of return if it were placed in Thailand as Baht rather than in the US as the US Dollar. One of the main reasons why the Thai central bank has to raise interest rates is due to the strong economic growth in Thailand. GDP growth has been robust for the past two years, clocking in at just around 4 per cent per annum (Source: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=TH and https://www.bangkokpost.com/business/news/1612202/world-bank-trims-thailand-2019-gdp-growth-to-3-8-) and unemployment has been very low less than 1 per cent (Source: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2129rank.html). As the economy becomes stronger, the residents get wealthier and they take on more debt as they invest in assets like real estate or take on loans to start a business. In fact, the local resident demand for Thai real estate has been so strong that the Thai government has had to step in and place loan curbs on the locals when purchasing property.
Moving forward, an overly strong Thai baht is not good for Thai exports as they will become more expensive to purchase. It may cause Thailand to be seen as a less affordable tourist destination and thus see fewer travellers. My take on this would be that as Thailand progresses, it will invariably be faced with such a dilemma. As its people get wealthier, it will have to cope with a stronger baht. London is the second most travelled city in the world behind Bangkok and the UK Pound is not exactly cheap when compared to the region. In fact, when the pound was strong, London was still one of the most visited cities in the world. Thailand is faced with, in my opinion, a good problem. A growing middle class, interest from foreign investors like the Chinese, it is located in the centre of South East Asia and earmarked to be a transportation hub. All these factors, barring any major shock to the system, will contribute to Thailand’s growth.
I wrote an article narrating about the strength of the Thai baht previously. You can find my article here: My views on the Singapore and Bangkok property markets.
This article is in response to this article: Thai baht soars to post-coup high, threatening local business.