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7 Aug 2019

International Economy

From trade war to currency war… Thai authorities must be prepared (Current Issue No.3016)


            The People's Bank of China allowed its currency to fall below 7 Yuan to the US Dollar for the first time in 11 years after the US announced last week that it would slap a 10 percent tariff on USD300 billion of Chinese goods. The latest move by Beijing signals its readiness to retaliate against the US by allowing the Yuan currency to depreciate. China may use additional currency depreciation measures as a retaliatory action, and to ease the negative impact of tariffs on the Chinese economy. KResearch views that the Chinese authorities are unlikely to let the Yuan currency significantly weaken, because a drastic change in currency value could adversely affect China's financial stability and shake investor confidence.

            For letting the Yuan currency drop, China was declared a currency manipulator by the US, as officials had previously only hinted at. Beijing's role in the latest round of Yuan depreciation justified the punitive economic and trade measures Washington had announced, which the US administration claimed was necessary to address unfair trade practices. After this, both sides are likely to launch more trade war salvoes at each other. The tit-for-tat standoff could severely damage the economies of the US and China as well as the global economy in 2020, stoking fears of recession.

            Regarding the impact on Thailand, KResearch expects that the Thai Baht will encounter more volatility. With limited options, the Bank of Thailand may be able to introduce measures to cushion the swings of the Thai Baht. A rapid gain in the Thai currency against others would erode Thailand's international competitiveness and further weaken Thailand's exports, which are already losing steam due to the slowing global economy. Such negative developments would stall Thai economic growth. 

            Hence, Thai authorities must consider immediate measures to mitigate impacts on the Thai economic sector, which is facing heightened risks. The Bank of Thailand may face certain restrictions in implementing monetary policy easing in the future, because the central bank would have to consider overall risk to the financial system, amid growing private-sector debt.  Nonetheless, the government may have some room to maneuver when it comes to fiscal policy to cushion any direct impacts on the Thai business sector; such measures could include business tax reduction and acceleration of export tax refund reimbursement. 

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