Question 21N.2.HL.TZ0.1d
| Date | November 2021 | Marks available | [Maximum mark: 8] | Reference code | 21N.2.HL.TZ0.1d |
| Level | HL | Paper | 2 | Time zone | TZ0 |
| Command term | Evaluate | Question number | d | Adapted from | N/A |
The strong Thai baht
- Thailand’s currency, the Thai baht, ended 2019 at its highest value in more than six years. With a 7.8 % gain against the United States dollar (US$), it was the currency that appreciated the most among major Asian currencies.
- The Thai baht’s appreciation was caused by several factors. Many foreign investors are attracted by Thailand’s economic stability, high levels of foreign reserves, low inflation rate and low unemployment (Table 1). However, the inflation rate is below the central bank’s target.
- Initially, the central bank of Thailand (BoT) was not too concerned, as the strong Thai baht was helping Thai importers and those who had foreign debts. Additionally, Thai producers could afford to import new technology and capital equipment. An appreciating currency could also help improve the country’s terms of trade.
- However, a strong currency can have severe consequences on an export-oriented country like Thailand. Exports account for 65 % of gross domestic product (GDP), and in 2019 exports declined by 7 %. Additionally, the tourism industry, which makes up approximately 20 % of GDP and accounts for 16 % of employment, started to express concern. Economic growth in 2019 was 3 %, down from 4.1 % in 2018.
- Therefore, towards the end of 2019, the BoT implemented measures to prevent further appreciation of the Thai baht. The BoT reduced controls on capital outflows to make it easier for Thai citizens to move money abroad. Additionally, restrictions were placed on the amount of money foreigners could hold in Thai bank accounts.
- The BoT is considering further measures including the use of foreign reserves, a decrease in the interest rate, and imposing controls on capital inflows, to prevent speculative inflows. However, these controls may impact the country’s credibility and financial markets. Expansionary monetary policy may also increase household debt which, at 78.6 % of GDP, is among the highest in Asia.
- The BoT is concerned about using foreign reserves, as this may result in Thailand being labelled a currency manipulator* by the US. Currently, Thailand’s overall large current account surplus is the only requirement it meets to be labelled a currency manipulator. However, Thailand’s bilateral trade surplus with the US is currently US$19 billion, which means it is close to meeting a second requirement. Thailand wants to avoid being labelled a currency manipulator as the US may use trade protection in retaliation.
* currency manipulator: the US will label a country as a currency manipulator if the following three requirements are met (a country will be placed on a watchlist if they meet two of the requirements):
1. The country is using its foreign reserves to change the value of its currency to gain an advantage
2. The country has a bilateral trade surplus with the US of over US$20 billion
3. The country has a current account surplus of more than 2 % of its GDP.
Table 1: Thailand macroeconomic indicators 2019
[Source: Bloomberg News, 2020. Thailand moves closer to US currency watchlist [online]. Available at:
https://www.bangkokpost.com/world/1831214/thailand-moves-closer-to-us-currency-watchlist
[Accessed 27 October 2020]. Used with permission of Bloomberg L.P. Copyright © 2022.
All rights reserved. Source adapted.
Bloomberg, 2019. The Thai Baht reached a new 6-year high. Here’s why it’s surging [online]. Available at:
https://www.thestar.com.my/business/business-news/2019/10/25/the-thai-baht-reached-a-new-6-year-high-hereswhy-
its-surging [Accessed 27 October 2020]. Used with permission of Bloomberg L.P. Copyright © 2022.
All rights reserved. Source adapted.
Cumperayot, P., 2019. What Does a Rising Baht Mean for Thailand’s Economy? [online]. Available at:
https://thediplomat.com/2019/08/what-does-a-rising-baht-mean-for-thailands-economy/
[Accessed 27 October 2020]. Source adapted.]
Using information from the text/data and your knowledge of economics, evaluate the implications of the strong Thai baht on Thailand’s economy.
[8]
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the information provided.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
- Definition of appreciation.
Economic analysis may include:
- AD/AS
- Marshall Lerner
- J-curve
- Elasticities
- PPC
- Terms of Trade.
Implications of strong Thai baht on inflation rate may include:
- Imported factors of production cheaper, which results in an increase in SRAS and less inflationary pressure (paragraph [3]).
- Makes exports less competitive and may result in a decrease in AD (paragraph [4]), which results in less inflationary pressure (could be a problem as inflation rate is under target (paragraph [2])).
- The inflation rate is at 0.3 % (Table 1), which is lower than target rate any increases in AS or decreases in AD may make it more difficult for the central bank to reach its inflation target (paragraph [2]).
Increase in SRAS and decrease AD may lead to deflation concerns, as inflation is very low at 0.3 % (Table 1).
Implications of strong Thai baht on economic growth may include:
- Export-orientated country, exports become more expensive (paragraph [4]). AD decreases. may restrict/hinder economic growth, which is down to 3 % from 4.1 % (paragraph [4]).
- Long-term impact of lower domestic investment if government reduces controls on capital outflow to curb the appreciation, may decrease investment leading to a decrease in AD and real GDP (paragraph [5]).
- Producers can afford new technology and capital equipment, improves productivity, quality and quantity of resources, leads to positive impact on SRAS/LRAS/PPC/RGPD/Economic growth (paragraph [3]).
- Foreign debt is easier to pay off, businesses may have less costs leading to SRAS increases leading to increased output (paragraph [3]).
Implications of strong Thai baht on employment may include:
- Increased unemployment due to lower exports, particularly in tourism which makes up 16 % of employment (paragraph [4]), but lower unemployment rates of 1 % (Table 1) give less significance to this argument (paragraph [2]).
Implications of strong Thai baht on balance of payments may include:
- Current account surplus (Table 1) may decrease as exports, become more expensive for foreigners and imports cheaper for Thai citizens (paragraph [4]).
- The effect on net exports depends on the price elasticity of demand for both export and imports.
- Appreciation may help with trade relationship with the US. Thailand wants to avoid being labelled a currency manipulator and its current account surplus is close to the US threshold and the appreciation may help reduce this surplus (paragraph [7]).
- Improve terms of trade (paragraph [3]).
- Helps with foreign debt repayment (paragraph [3]).
- Marshall-Lerner and J-curve discussion.
Any reasonable evaluation.
To reach level 3, students must make reference to the extract/context, not just present a discussion on the implications in general.
Many students were able to identify relevant issues in the text and link these to economic concepts, showing some knowledge and understanding regarding the implications of the strong baht on the Thai economy. A significant minority of candidates were able to use the data and information in the text to develop an effective analytical answer, using economic concepts and theory, though a lot of the analysis did not go beyond AD/AS diagrams. Other students had a sound understanding of the economics involved but failed to effectively apply it to the case study presented. Too often, there was a lack of context relating to the extract, with answers that were purely theoretical. At the other extreme, some answers lacked analysis and relied on an overly descriptive approach, often merely paraphrasing the text with little attempt at applying economic concepts. There were often too many statements / assertions with no or limited reasoning / analysis.
While it is essential for students to use economic theory and concepts, these must be applied in context. In this case, for example, PED, the Marshall Lerner condition and the terms of trade were often mentioned but too often not applied effectively or not always interpreted in a way that showed real understanding of these theories.
