A tourism collapse has sharply worsened Thailand’s external balances and hurt the baht’s performance; the pressures may persist in the near term.

From 2014 to early 2020, the Thai baht was the top-performing Asian currency by a large margin, displaying strong nominal and volatility-adjusted returns. The key to this exceptional performance was the large and steady current account surplus that Thailand enjoyed, averaging 8% of GDP over this period. A big chunk of it came down to a single factor: tourism receipts. From 2012 to 2019, tourist arrivals in Thailand roughly doubled to around 40 million a year. Net tourism receipts contributed a staggering 125% of the current account surplus in 2019. These dynamics led to the baht behaving like a regional safe-haven currency, unperturbed by political turmoil, worsening demographics or mini-economic cycles.

And then, the pandemic happened. Tourist arrivals collapsed to 6.7 million in 2020. With tourism-related revenues trickling to close to zero, Thailand registered two consecutive quarters of current account deficit—the first time this had happened since 2014. While the external accounts got some support from a sharp drop in goods imports and a large repatriation of savings, this did not prevent the baht from underperforming and losing roughly 9% against the JP Morgan Asia Dollar Index since the end of 2019. A lack of tourism hurt growth as well: Tourism and travel contributed 20% of GDP in 2019, leading to a sharp contraction in 2020.

We expect the baht to continue with its struggles in the near term. The planned limited reopening of a few popular tourist destinations—aptly named the “Sandbox model”—is heavily dependent on the authorities’ ability to accelerate vaccinations. Due to limited supply and vaccine hesitancy, only 3% of population has been vaccinated thus far. Further, with other Asian countries struggling with their own vaccination programs, hopes for a material revival of tourism are bleak at best. The Bank of Thailand expects tourist arrivals to recover to only 12 million in 2022. We do not expect the higher goods surplus from last year to be sustained, as a recovery in capital imports and higher oil prices will likely be significant drags in 2021. Neither do we expect a similar repatriation of domestic savings as occurred last year, the bulk of which was likely one-off in nature. Finally, Thailand’s growth recovery looks set to lag most of the region, keeping the central bank on an extended accommodative stance. With adverse growth and interest rate differentials providing additional headwinds, we see scope for further baht underperformance and do not expect a meaningful recovery before mid-2022.