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Baht best-to-worst move set to quicken

The Thai baht’s transformation from Asia’s best-performing currency in 2019 to one of its worst this year is poised to accelerate after the central bank cut interest rates and said it would boost financial-market liquidity to counter the impact of the coronavirus.

The decisions came in a blitz of announcements starting with the emergency rate cut on Friday evening, and carrying through to a press briefing on Sunday afternoon.

The new measures are a further negative for the baht, which has already slipped more than 9% this year due to slowing economic growth, the worst drought in decades and a delay in the government’s budget due to political wrangling.

Friday’s move to cut rates by 25 basis points to a new record-low 0.75% was the second reduction in as many months, and came ahead of the scheduled policy meeting on Wednesday. The policy committee said the virus outbreak was likely to be “more severe” than it previously thought, and it would take time for the situation to normalise.

Policy makers appeared before the press on Sunday, saying they would set up a mechanism to allow banks to use money-market and bond funds for collateral to enhance liquidity, and would also make funds available for companies to refinance corporate bonds. All these steps have the effect of driving down local bond yields, which will do little to support the baht.

The coronavirus has already taken its toll on the struggling currency. The pandemic has decimated the nation’s tourism industry, especially by reducing visitors from China, who alone account for some 3% of the country’s gross domestic product. Data Monday showed tourism receipts slumped 43% in February from a year earlier, while exports tumbled 4.5% the same month.

The central bank’s benchmark rate is now a fraction above the level of inflation, putting Thailand on the precipice of joining the list of nations with negative real policy rates. Policy makers plan to go ahead with their scheduled meeting Wednesday, and at the very least, are likely to draw attention to the nation’s worsening economic outlook.

A lot has changed for the baht in a short period of time. Just a few months ago, the currency was outpacing all its Asian peers, with investors attracted by the nation’s current-account surplus, healthy level of foreign reserves and buoyant economy. The central bank even introduced a range of measures to limit the baht’s strength, including making it easier for locals to send money abroad.

There’s no need for anything like that now. The odds of a recession over the next 12 months have jumped to 30% from just 10% a year ago. Across the rest of of Asia, only Japan has a higher probability, according to Bloomberg surveys of economists.

While the number of virus cases in Thailand remains well below those in the world’s worst-affected countries, the recent spike suggests there’s potential for the situation to get a great deal worse. That will mean more bad news for the baht.

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