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How does a weaker baht affect Thailand’s economy?
A weaker currency can have both positive and negative effects on a country’s economy, depending on various factors. For Thailand, a weaker baht may benefit some sectors, such as exports and tourism, but hurt others, such as manufacturing and imports.
According to some experts, a weaker baht makes Thai products more competitive in export markets, as they become cheaper for foreign buyers. Thailand’s exports account for about 67 percent of its gross domestic product (GDP), so a boost in exports can help the economy grow.
Thailand more attractive to foreign tourists
A weaker baht also makes Thailand more attractive to foreign tourists, who can spend more on local goods and services. Tourism plays a significant role in Thailand’s economy, contributing approximately 12 percent to the country’s GDP. Therefore, an increase in tourist arrivals can have a positive impact on stimulating economic growth.
Moreover, the tourism sector plays a vital role in attracting foreign direct investment (FDI). When investors see a thriving tourism industry, they are more likely to invest in related sectors such as hospitality, infrastructure development, and entertainment. This FDI contributes to the overall growth and development of the country.
Imports and energy more expensive
However, a weaker baht also has some drawbacks for Thailand’s economy. For one thing, it makes imports of capital goods and energy more expensive, which can raise the production costs for many industries, such as manufacturing and pharmaceuticals.
One of the main disadvantages of a weaker baht is that it makes imports of capital goods and energy more expensive. This means that industries that rely on imported machinery and equipment, such as manufacturing, may face higher production costs. Similarly, the pharmaceutical industry, which often imports raw materials and equipment, may also be affected.
Higher production costs can have a negative impact on these industries’ profitability and competitiveness. If the cost of importing capital goods and energy becomes too high, businesses may struggle to maintain their current levels of production or may be forced to pass on the increased costs to consumers through higher prices.
Moreover, a weaker baht can also lead to inflationary pressures in the economy. When imports become more expensive, it can increase the overall price level of goods and services in the country. This can erode the purchasing power of consumers and reduce their standard of living.
Additionally, a weaker currency can make it more expensive for Thai residents to travel abroad or purchase foreign goods and services. This can negatively impact tourism and consumer spending, which are important drivers of economic growth in Thailand.
Eroding the purchasing power of Thai consumers
This can reduce their profits and competitiveness, as well as increase inflation. For another thing, it can erode the purchasing power of Thai consumers, who have to pay more for imported goods and services, such as electronics and health care. This can lower their consumption and savings, which can affect the domestic demand and investment.
How can the Bank of Thailand intervene in the foreign exchange market
There are different methods that BOT can use to intervene in the foreign exchange market, such as:
- Reserves and borrowing: BOT can use its foreign exchange reserves to buy or sell baht in the market, depending on whether it wants to appreciate or depreciate the currency. BOT can also borrow foreign currency from other central banks or international institutions to increase its reserves and intervene more effectively 2.
- Interest rate policy: BOT can adjust its policy interest rate to influence the demand and supply of baht in the market. A higher interest rate makes baht more attractive to investors, who will demand more baht and increase its value. A lower interest rate makes baht less attractive, and reduces its value 2.
- Open mouth operations: BOT can communicate its views and expectations about the exchange rate to the market participants, and influence their behavior and sentiment. For example, BOT can signal its willingness to intervene, or announce its target range or level for the exchange rate.
BOT’s foreign exchange intervention is guided by its inflation targeting framework, which aims to achieve price stability and support economic growth. BOT monitors the exchange rate movements and intervenes when necessary, but does not target a specific level or range for the exchange rate. BOT also discloses its intervention data to the public on a monthly basis, to enhance transparency and accountability
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