Thai reserves are running out fast

Thailand’s international reserves made headlines in mid-July when they fell by US$3.3 billion in a single week.

The headline was that reserves were the lowest in three years. Authorities awkwardly explained that dwindling international reserves were the result of rising inventories of imported oil ahead of winter (as if Thailand were a land of snow), and hoped a boom in tourism revenue would bolster later reserves.

Unfortunately, Thailand’s international reserves are now even lower. At the end of August, international reserves fell by a further $2.5 billion.

The rapidly depleting reserves raise concerns about the country’s economic stability. This article will explore the causes and consequences, as well as trends in the country’s international reserves.

The author’s personal concern is how the Bank of Thailand handles the reserve issue, particularly its impact on domestic liquidity.

No need to panic (yet). Thailand’s international reserves as of August 26 (latest data available) are still at $216 billion, the 15th in the world. At this level, reserves are sufficient to cover 7.9 months of imports, which exceeds the IMF recommended level of six months of cover.

Moreover, the reserves are also greater than Thailand’s total external debt of $200 billion. Therefore, the question of the insolvency of a country like Sri Lanka does not arise.

However, the area of ​​concern is the rate of depletion of international reserves. Just a year ago, in September 2021, the level of reserves reached a peak of $252 billion, which means that $36 billion has been depleted in 11 months.

Do not pretend that the subsequent depletion of reserves is the result of a lack of tourism revenue.

2021 has been the worst year for Thailand’s tourism industry. Only 15,000 foreign tourists visited Thailand in September 2021.

In July 2022, the number of foreign tourists rebounded to 1.12 million. But instead of money from tourism helping fill Thailand’s coffers, international reserves were depleted by another $1.9 billion in July. Authorities have blamed rising costs for imported oil as the main culprit, but the data shows otherwise.

Fuel imports in July were actually $815 million lower than June imports due to lower global oil prices and weak domestic demand. The real culprit is lower export earnings – $2.924 billion less to be exact.

Import receipts in July are 11% lower than in June. This is the fact that no Thai authority wants to mention. The global economy, especially the Chinese economy, is slowing down.

China is one of our major trading partners. China’s GDP growth in the second quarter of 2022 is 0.4% (year-on-year) and a contraction of 2.6% (quarter-on-quarter). This is well below their usual growth of 6-7%. The recent closures of Chengdu and Shenzhen are likely to worsen their economic situation.

Another major culprit of reserve depletion is capital outflow. From the start of the year to the end of July, $26 billion in reserves were lost. According to balance of payments data, only $10 billion of the depletion of international reserves comes from regular economic activities.

An additional $16 billion in reserve depletion can be assumed to come from capital outflows, as investors seek higher investment returns and less economic risk elsewhere. Currently, the yield on 5-year Thai government bonds is 2.1%, compared to 3.4% for US 5-year government bonds and 6.75% for government bonds. Indonesians at 5 years old. If you are a smart investor, where would you put your money?

The depletion of reserves of $1.9 billion in July is nothing compared to the depletion of $4 billion in August. Although data on international reserves are updated at the end of August, August monthly data on exports, imports and the balance of payments will not be available until the end of September. . I am therefore not in a position to analyze the causes of this massive exhaustion.

If the country’s insolvency is not something to worry about, what is worrying is the current depletion of reserves. For starters, it’s currency depreciation. In July, the Thai baht depreciated by 3.6%. But things turned around in August despite more releases; the currency miraculously rebounded. As of August 26, the Thai baht appreciated by 2.5% compared to the end of July.

This is unnatural and contrary to economic theory. I can only guess that the Bank of Thailand may have intervened heavily in the forex market.

The price of this stupid maneuver is a significant loss of foreign exchange reserves. It’s silly because the Bank of Thailand will never be able to suppress the global forex market. Whatever action the bank takes will only have short-term effects. Ten days later, the Thai baht depreciated by 2.5%.

The real pain of capital outflows is the depletion of liquidity. To withdraw money from Thailand, investors must exchange their baht for dollars (or any currency). This will cause less baht to be available in Thailand for consumers, businesses and the government.

In June 2022, Thailand’s money supply (broad money) fell by 101 billion baht. The money supply was further reduced by 26 billion baht in July. How can the economy be expected to grow when there is less and less money available to spend? To further shock readers, excess liquidity in July was negative 557 billion baht. Anyone who can get loans right now should consider themselves lucky.

If declining export earnings and capital outflows are the real causes of reserve depletion, the Bank of Thailand should refrain from playing with the foreign exchange markets. Instead, the bank should start addressing fundamental issues at home, like domestic inflation and super negative real interest rates.

What is the evolution of Thailand’s international reserves that will provide clues on the evolution of the baht and domestic liquidity? The answer is to read the lips of Fed Chairman Jerome Powell. In a recent speech, he made it clear that he would continue to raise rates, also aggressively, until inflation showed clear signs of falling to 2%. He obviously has a long way to go since July’s inflation rate is 8.5%.

Mr. Powell’s speech is less important to me than recent comments by Dr. Somchai Jitsuchon, a member of the Bank of Thailand’s monetary policy committee.

He said domestic inflation will become widespread early next year, after which Thailand will experience real inflation. High domestic inflation (purchasing power parity theory) combined with low domestic interest rates (interest rate parity theory) can only mean one thing: uninterrupted capital outflow . The seriousness of the situation will depend on the management capacity of the bank. What else can I say?


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