THE THAI BAHT
Investing in Thai Baht
The relative strength of any national economy will typically have a bearing on the strength of its currency. Many of the economic factors discussed above could affect the Thai currency, but other considerations can also impact the exchange rate.
It is important to understand the relevance of “the currency question,” and how having a property investment valued in Baht could affect your returns in the years ahead. Currency fluctuations do matter, not just for the calculation of profit or loss, but also because changing exchange rates affect the market as a whole.
Investors should be aware that markets – whether stock, bond or currency – go through short and long-term cycles. Even a small shift in a currency can change buying trends, while major shifts can more significantly affect the Phuket property market.
Currency valuations are a two-way street. The THB may see little change against a basket of currencies, but should someone’s home currency suffer a significant devaluation (i.e. against all global currencies), that would-be buyer may find themselves temporarily priced out of the market.
On 16 September 1992, the UK government was forced to withdraw from the European Exchange Rate Mechanism. Dubbed “Black Wednesday,” the cost to UK taxpayers that day was over GBP 3.3 billion. The resulting devaluation of Sterling was a good example of how a single currency can lose ground on others, even one historically perceived to be strong.
Two more recent examples are the declines of the Euro in the mid-2000s, and of the Russian Rouble, in the autumn of 2014. These devaluations changed the spending power dynamic, leading to a drop off in sales (and rentals) in Phuket, first from Western Europeans, and later from Russians. (There was another devaluation of the Rouble in early 2022, but instead of a decrease in demand from Russians, the ongoing War in Ukraine saw Phuket property in high demand among those Russians – and Ukrainians – who were able to extricate themselves and their finances from that region.)
The strength or weakness of individual foreign currencies is not the sole driver of the Thai Baht exchange rate. The Baht has at times in its history moved unilaterally against all other currencies. In 1997, for example, George Soros (who was behind the devaluation of the Pound in 1992) was involved again, as he sold short many Asian currencies. The Baht lost significant ground against most major currencies.
Exchange rate adjusted in major western currencies, Phuket property prices nearly halved after the Asia Crisis. The real estate market for foreigners in Phuket was in its infancy at the time, and while this may have impacted existing owners, it also provided an opportunity for future foreign buyers.
Currency Devaluation: A Double Edged Sword
A weakening or strengthening Baht can be a double edged sword, depending on an individual’s perspective. If a buyer sees the THB strengthen against their home currency, and they already own a Phuket property, they will see the value of that investment rise in exchange-adjusted terms – even if the price of the home remains unchanged in THB.
So while a trip to visit their Phuket holiday home may become more expensive, they will have profited on paper from the devaluation of their home currency vs. the Baht. However, any of their fellow countrymen(or women) who haven’t bought yet will now find it harder to make the purchase because they will have lost spending power in THB.
Conversely, if the THB devalues against someone’s home currency, any overseas investment (including property) will lose value on paper in exchange-adjusted terms. For anyone who has yet to consider the purchase of Thai property, a weaker Baht will make buying a property in Phuket easier because they will get more “bang for their buck”.
The success of any overseas property investment typically has as much to do with a fluctuation in the exchange rate between purchase and sale as with any change in the underlying property’s actual THB value.
Why Currency Fluctuation Matters for Investors
Anyone who pays the slightest bit of attention to FX markets knows how frequently currencies fluctuate. In our experience, many foreign buyers give little thought to the currency exposure they assume when buying overseas, but everyone seems to be conscious of exchange rate fluctuations when it comes time to sell.
Owing to the US dollar’s role as the world’s reserve currency, the strength or weakness of the Baht in dollar terms is the frame of reference used by most analysts. But the USD-THB exchange rate is only relevant if the buyer has their savings in US dollars (e.g. US nationals or workers on US$ contracts). Someone from Geneva transferring Swiss Francs for the purchase of a Phuket property is unlikely to be similarly affected.
If a purchase requires installments during the construction process, payments usually become due as and when project milestones are achieved. If the currency of the buyer is undergoing a sharp fluctuation against the Baht, the otherwise equal THB payments may turn out to be dramatically unequal in the buyer’s home currency.
Please note this isn’t necessarily a negative – currency swings can also be a good thing. But whether ultimately beneficial or detrimental, the uncertainty can nevertheless be an unwelcome distraction from a carefully planned financial transaction.
Strategies for Investors Transferring Foreign Currency to Thailand
For larger purchases, such as property, there are ways for investors to mitigate exchange rate risk when transferring money into Thailand.
One of the simplest is to make multiple smaller payments over a period of time, rather than sending the whole amount at once. This “cost averaging” allows the transferor to buy into any short-term currency fluctuation, rather than risking a poor daily rate on a one-time transfer of funds.
There is a small risk that this strategy works against, rather than for, the buyer, but the difference either way is likely to be small. If the currency does begin to move more sharply to the detriment of the buyer, however, he or she may choose at that time to transfer the balance of the money.
For anyone purchasing a new build, the payments may already be arranged in installments over the construction period(as alluded to above). Such transfers will automatically be taking advantage of “cost averaging”.
Buyers should refrain from paying in full unless there are strong financial incentives when it comes time to make the decision. For example, a developer may offer an attractive discount to encourage the buyer to pay 100% upfront. Alternatively, the Baht may be at near-record lows (meaning the Yuan, Rouble, Euro, Dollar, or Pound would buy more THB).
In some cases, very satisfactory exchange rates can be found using forward contracts and options. For extremely large purchases it is advisable to enquire with an authorised currency specialist in either the buyer’s home country, or in Thailand.
When transferring money in installments, it is important to secure an FETF from the Thai bank on each instalment. This is essential if the foreign buyer ever intends to move the funds back out of Thailand one day, each inward transfer must be correctly logged as relating to the property purchase.
What Economic Factors Affect the Strength of a Currency?
Very few currency analysts (if any) can correctly forecast exchange rates all the time. There are simply too many variables, foreseeable and unforeseeable, which can determine the direction a currency will move.
In the short-term, central bank policy, and even rhetoric from policy makers or talking heads (e.g. sanctions or threats of sanctions), can push a currency higher or lower on a short-term whim. Longer-term, however, quantifiable fundamentals will determine one currency’s value against all others.
When we talk about fundamentals, we are referring to certain key drivers of national economies, which also have a direct influence on the movement of exchange rates.
Economic Factors That Affect the Strength of a Currency
Higher rates typically see a currency strengthen because of increased demand for assets in that currency. A lowering of interest rates, however, tends to have the opposite effect.
When investors in government bonds (and even local bank depositors) can get a higher rate of return relative to what they are getting elsewhere, money will flow into higher-interest rate countries. (It should stand to reason that this does not include countries suffering from run-away inflation, which have been forced to set astronomically high interest rates out of necessity. A certain political and economic stability must also prevail to attract depositors or bond investors.)
As mentioned above, this has a very real and direct impact on the real estate sector. Low or falling rates stimulate the property sector in the same way they stimulate the economy as a whole. The main driver for any property market is mortgage affordability, and as rates fall, mortgage payments become lower. Cheaper financing translates into greater investment in real estate.
If demand for Phuket property was driven solely by the local population, then any movement in Thai interest rates would significantly impact that demand. Fortunately, as mentioned above, this is not the case. Because foreigners almost exclusively purchase in cash, even global interest rates don’t have an overarching impact on Phuket property sales.
The rule of law and sound economic policy are also key ingredients for a stable currency.If foreign governments and corporations find a country to be appealing, it will attract Foreign Direct Investment (FDI), which further strengthens the economy and stabilises the currency.
This is an important point: governments do not want to see a continually strengthening currency, just a stable one. A currency that is too strong makes locally manufactured products too expensive, and therefore uncompetitive, which can be damaging to an export-led economy.
A weak currency is likewise unwanted because imports become too expensive, which could be inflationary. Finding the “sweet spot”between currency strength and economic growth is the goal of policy makers in every country.
A country with a current account surplus is generally one that exports more than it imports, and as a result it has amassed substantial foreign currency assets. Countries with the largest current account surpluses tend to be exporters of manufactured goods, either mass production exporters like China, or countries which specialise in high-value products such as cars and electronics (e.g. Germany, Japan or South Korea).
During the economic turmoil of 1997 Thailand was running a current account deficit as high as 8% of GDP. Two decades of fairly consistent Current Account Surpluses led to a very stable Thai Baht.
A country that maintains consistent surpluses usually sees upward pressure on its currency, so it may be no surprise that the deficits Thailand experienced since the pandemic have corresponded with a slightly weaker Thai Baht. Thailand posted a Current Account surplus of US$ 1.1 billion in December 2022, which was only the third month in surplus in 2022.
Thailand has not witnessed the soaring, bubble-level residential property prices seen in other countries enjoying similar economic conditions, and this is down to a combination of Thailand’s general political stability, as well as its willingness and ability to get the current account under control.
Foreign Direct Investment (FDI)
As a result of the pandemic, Foreign Direct Investment in Thailand saw its biggest hit since 1997. FDI has certainly not hindered the Baht’s stability. FDI had an increase of THB 69.5 billion in the third quarter of 2022, but this was after seeing net outflows in 2020.
In 2022, there were roughly 400 new condominium units sold in Phuket, down from over 3,500 in 2019. On the other hand, the number of villas sold has risen, reflecting the demographic trend toward more long-term residents on the island. With only one year of data since the pandemic, it is hard to say how much impact property purchases are having on FDI, but the cash purchase nature of the market for foreigners would indicate that the property market had a role to play.
No matter how solid the fundamentals supporting the Thai Baht appear to be, it may not be immune to the contagion which could occur if there is a “flight to safety”.
In times of financial crisis, money has a tendency to move from emerging economies into currencies perceived to be “safer”. No matter how good the stewardship of the Thai economy and the Baht may be, in times of turmoil money pours back into major currencies (e.g.the USD or Swiss Franc).
It would be foolhardy to suggest that a flight to safety would not affect the THB; however, it is important to note that during troubled times currencies with strong fundamentals hold up much better than those with weaker fundamentals.
As a rapidly emerging economy, Thailand regularly sees significant investment into its stock market. Periods of high inflows into the stock market generally coincide with a strengthening Thai Baht, while outflows from the stock market usually seethe Baht falling.
One of the reasons for this is that mutual funds investing into Thailand are usually priced in USD, and any sale of units in the fund puts downward pressure on the THB. For the underlying USD investor, the fund is most likely currency hedged to avoid losses when the THB fluctuates. But when the fund, or a portion of the fund is liquidated, the underlying assets (i.e. the Thai company shares owned by the fund) must be sold in THB, then exchanged for USD in order to return US dollars to its investors.
This places downward pressure on the Baht, and the impact is typically more pronounced during crashes or major sell-offs, such as those that occurred in 1997, between 2000-2002, and in 2008.
Thailand’s Big Mac Barometer as a Way to Forecast the Baht
Against the USD, the Thai Baht is undervalued by 29.85%
Implied Exchange Rate of US$ 1 = THB 23.88
ADJUSTED FOR PER CAPITA GDP
The GDP-adjusted Index, on the other hand, sees the Thai Baht only undervalued by 11.1% against the USD.
In fact, using the GDP-adjusted Big Mac Index as a barometer, the Thai Baht is also undervalued against Sterling and the Euro, while being overvalued against the Chinese Yuan and the Japanese Yen.
The Big Mac Index
Pioneered by The Economist in 1986, The Big Mac Index is a tongue-in-cheek way to demonstrate purchasing power parity between two countries, and by extension, the relative overvaluation or undervaluation of one currency versus another. The Big Mac was chosen because, with very few exceptions, the ingredients are the same the world over, meaning the price of a Big Mac should (in theory) be accurately reflected in the exchange rate between any two currencies.
Some economists view the index as too subjective, and in countries where price controls exist on certain ingredients, or where cultural differences mean the burger is vastly different, this criticism is valid. Nevertheless, it has proven to be a remarkably accurate and reliable barometer.
In a world with perfect purchasing power parity, the price of a Big Mac (in Thailand for example) would be the price of Big Mac in the US multiplied by the USD-THB exchange rate. Any variation in the “optimum” price would indicate that the Baht is either overvalued or undervalued vis-à-vis the dollar.
The Economist also has an adjusted index, which addresses the differences in production costs of the Big Mac in different countries. This is an attempt to overcome any flaws in the original methodology by taking into consideration the costs of labour and raw materials. This secondary calculation, based on per capital GDP, may be the more accurate gauge, as it also addresses the overall wealth of the nation, as well as its residents’ incomes relative to other countries.
The Baht In A Nutshell (or perhaps, a Burger Bun)
The Thai Baht is 30% weaker against the US dollar today than it was in the 1990s (when it was pegged at around 26:1). It would require an appreciation of 15% in each of the next two years to return to that level.
Some consider the THB to be overvalued but it has actually weakened against global currencies during the last few years. 2013 saw the Baht approach the strength of its pre-1997 peg. Since then, it has weakened against all major currencies. Based on that, and on current fundamentals, maybe the Big Mac Index has the Thai Baht pegged just about right.
The Thai central bank has significant foreign currency reserves, adequate gold reserves, and strong economic growth, which should keep the currency risk for property investors in check.
Excessive household debt, the potential for interest rate movements, and a host of other variables can determine a currency’s strength (or weakness). When these natural adjustments occur, exchange rates will almost always be affected. Investors need to be aware of this when considering an investment in Thai property.
It is our view that those investors in the Thailand property sector who have a long-term view will be rewarded. Any bumps in the road will likely include the occasional pothole for the Thai Baht, but this should be expected and accepted when investing in any foreign currency.