Impact of exchange rate volatility on the export a case study of thailand

The study aims to analyze the impact of exchange rate volatility on exports, using Thailand as a case study. Exchange rate volatility refers to the fluctuations or instability in the value of a countrys currency relative to other currencies. This research is motivated by the need to understand the relationship between exchange rate volatility and export performance in the specific context of Thailand, considering its importance as an exportdriven economy. Importance of Export Sector: Thailands economy heavily relies on its export sector, which plays a vital role in driving economic growth, employment generation, and foreign exchange earnings. The country is known for its diverse range of exports, including manufactured goods, agricultural products, and services. Therefore, comprehending the factors that influence export performance is crucial for policymakers, businesses, and stakeholders in Thailand.

FOREIGN TRADE UNIVERSITY FACULTY OF BANKING AND FINANCE

Table of Contents

CHAPTER 1: INTRODUCTION 1

1.1 The rationale of the study 1

1.2 Objective and significance of the study 1

1.3 Research gaps 3

CHAPTER 2: LITERATURE REVIEW 4

2.1 Theoretical framework 4

2.2 Previous studies on the impact of exchange rate volatility on exports 5

2.3 Factors affecting exchange rate volatility 8

2.4 The Thai economy and its export sector 12

CHAPTER 3: METHODOLOGY 16

3.1 Sample and data collection 16

3.2 Population and sample 16

3.3 Data collection methods 16

3.4 Data analysis 16

3.5 Ethical considerations 16

3.6 Limitations of the study 17

CHAPTER 4: THAILAND CASE STUDY 18

4.1 Trends in exchange rate volatility in Thailand 18

4.2 Analysis of the Impact of exchange rate volatility on Thai Exports 19

4.3 Sectoral analysis of the impact of exchange volatility on Thai exports 20 4.5 Macroeconomics also affects the export industry 25

CHAPTER 5: DISCUSSION AND RECOMMENDATIONS 27

5.1 Implications for policymakers and Exporters 27

5.2 Recommendation for Viet Nam exports 28

CHAPTER 6: CONCLUSION 30 REFERENCES: 31

Table of Figures

Graph 1: Thailand: Export, percent of GDP 13 Graph 2: Thailand's export sectors 14 Graph 3: Thailand's exchange rate volatility (2010-2021) 19

Graph 4: Export value of the four products: electronics, machinery, rubbers, vehicle from 2010 to 2022 (in billion $)

23

CHAPTER 1: INTRODUCTION

1.1 The rationale of the study

The study aims to analyze the impact of exchange rate volatility on exports, usingThailand as a case study Exchange rate volatility refers to the fluctuations orinstability in the value of a country's currency relative to other currencies Thisresearch is motivated by the need to understand the relationship between exchange ratevolatility and export performance in the specific context of Thailand, considering itsimportance as an export-driven economy

Importance of Export Sector: Thailand's economy heavily relies on its exportsector, which plays a vital role in driving economic growth, employment generation,and foreign exchange earnings The country is known for its diverse range of exports,including manufactured goods, agricultural products, and services Therefore,comprehending the factors that influence export performance is crucial forpolicymakers, businesses, and stakeholders in Thailand

Exchange Rate Volatility and Export Performance: Exchange rate volatility canhave significant implications for a country's export performance Fluctuations inexchange rates can affect the competitiveness of exports by influencing their prices ininternational markets When a country's currency depreciates, its exports becomerelatively cheaper, potentially boosting export volumes Conversely, currencyappreciation can make exports more expensive, leading to a decline incompetitiveness

However, the relationship between exchange rate volatility and exportperformance is complex and multifaceted Various factors, such as the structure of theeconomy, trade openness, market diversification, and the presence of hedgingmechanisms, can mediate the effects of exchange rate volatility on exports Thus,conducting a detailed case study analysis specific to Thailand is essential to understandthe unique dynamics of its export sector

1.2 Objective and significance of the study

1 To examine the trends and patterns of exchange rate volatility.

2 To assess the relationship between exchange rate volatility and exportvolumes

3 To analyze the impact of exchange rate volatility on export diversification andmarket competitiveness in Thailand

4 To identify potential strategies and policy recommendations to mitigate thenegative effects or leverage the positive effects of exchange rate volatility on exports

Significance of the Study:

1 Policy Guidance: The findings of this study will provide policymakers inThailand with valuable insights into the relationship between exchange rate volatilityand export performance This knowledge can guide the formulation of effectivepolicies and strategies to minimize the adverse impacts of exchange rate volatility andmaximize the benefits for the export sector

2 Business Decision-Making: The study's outcomes will assist businesses,especially exporters, in understanding the effects of exchange rate volatility on theiroperations This understanding can help them make informed decisions regardingpricing, risk management, and market diversification to enhance their competitiveness

in international markets

3 Trade Promotion: By analyzing the impact of exchange rate volatility onexport diversification and market competitiveness, the study can contribute to effortsaimed at promoting and expanding Thailand's export base The findings can guidetrade promotion agencies and organizations in devising targeted initiatives to supportexporters in navigating exchange rate fluctuations effectively

4 Economic Stability: Exchange rate volatility can have implications for overalleconomic stability Understanding the relationship between exchange rate volatilityand export performance in Thailand will enable policymakers to develop measures thatpromote stability, reduce uncertainty, and ensure sustainable economic growth driven

by the export sector

5 Academic Contribution: The study will contribute to the existing body ofknowledge on the impact of exchange rate volatility on exports, specifically within the

insights into the unique dynamics of the Thai economy and export sector, thusenriching the academic literature in the field of international trade and finance.

Overall, this study holds significant importance for policymakers, businesses, andstakeholders in not only Thailand but all over the world as a salient example Thefindings will inform decision-making processes, foster economic stability, and providevaluable contributions to academic research in the field of exchange rate volatility andits impact on exports

While numerous studies have examined the relationship between exchange ratevolatility and exports, there is still a research gap when it comes to analyzing theimpact on Thailand's export sector Existing research often focuses on largereconomies or regions, neglecting the nuances of smaller and emerging economies likeThailand By conducting a case study on Thailand, this research aims to fill this gapand provide valuable insights into the specific dynamics of exchange rate volatility andexports in Thailand

CHAPTER 2: LITERATURE REVIEW

The theoretical framework for this study encompasses three key concepts:exchange rate volatility, export performance, and the mediating factors that influencethe relationship between the two

 Exchange Rate Volatility:

Exchange rate volatility refers to the fluctuations and instability in the value of acountry's currency relative to other currencies This concept is rooted in internationalfinance and macroeconomics theories The literature on exchange rate volatilityemphasizes the impact of currency fluctuations on trade flows, including exports Itsuggests that higher levels of exchange rate volatility can lead to uncertainty, affectingexport competitiveness and market outcomes

 Export Performance:

Export performance refers to the ability of a country to sell goods and services toforeign markets It is influenced by various factors, including exchange rates Theliterature on export performance examines the determinants of export growth, marketdiversification, and competitiveness It suggests that exchange rate volatility can haveboth positive and negative effects on export performance Currency depreciation canenhance export competitiveness, leading to increased export volumes Conversely,currency appreciation can make exports more expensive, potentially decreasing exportvolumes

 Mediating Factors:

Several mediating factors influence the relationship between exchange ratevolatility and export performance These factors shape the extent to which exchangerate volatility affects exports Some key mediating factors include:

a Economic Structure: The structure of the economy, including its reliance onspecific export sectors, can impact the sensitivity of exports to exchange rate volatility.For instance, countries with more diversified export portfolios may be less affected bycurrency fluctuations

b Trade Openness: The degree of trade openness, measured by the ratio of

exports to GDP, can influence the sensitivity of exports to exchange rate volatility.More open economies may have a higher exposure to international markets and, thus,greater sensitivity to exchange rate movements.

c Market Diversification: The degree of market diversification refers to thepresence of multiple export destinations Exporters that have diversified their marketsmay be less vulnerable to exchange rate volatility because they can redirect theirexports to less affected markets

d Hedging Mechanisms: The presence of hedging mechanisms, such asforward contracts or currency derivatives, can mitigate the negative effects ofexchange rate volatility on exports Exporters that actively engage in hedging may bebetter able to manage currency risk and maintain export competitiveness

The theoretical framework provides a foundation for understanding the complexrelationship between exchange rate volatility and export performance It acknowledgesthat exchange rate volatility can directly impact export volumes but also recognizes themediating factors that influence the strength and direction of this relationship Byconsidering these factors, the study aims to provide a comprehensive analysis of theimpact of exchange rate volatility on Thailand's export performance, taking intoaccount the specific characteristics of the Thai economy and export sector

2.2 Previous studies on the impact of exchange rate volatility on exports

Trade theory has been evolving since the constant development of the globaleconomy requires it There are many methods that were applied and each gave adifferent rationale and different outcome As we mentioned before, it is hard to decidewhich methodology is correct because there is no solid relationship between exchangerate volatility and trade and sometimes it can be ambiguous even with consideration ofall key drivers We believe each one has certain advantages to compromise withdifferent cases so we had collect the information of the most recent studies in the tablebelow as we want to have the broadest perspective:

No Study Sampling

Selected country/

Standard deviation

of weekly rates ofchange of intra-ems effectiveexchange ratewithin a quarter

Prices andvolumes ofexports ofmanufacturedgoods to emscountries ols

Significant andnegative effects

in volumes;mostlysignificanteffects onprices

bilateralimports

GARCH model 2 Import prices

IVE, 3SLS

Significantnegative forU.K and W.G.,insignificant forJapan

3 Bélanger

et al

(1992)

Quarterly1975-87Canada-U.S

2 measures:

squared of forecasterror defined as 90-day forwardspread; andnonparametricmethod to isolaterisk premium inforecast error

U.S imports from Canada: 5sectors IVE,GIVE

Not significant

4 Kumar

(1992)

Annual 1962-1987(88) U.S.,W.G.,

Standard deviation

of monthlypercentage change

in real exchange

Intra industrytrade, net tradeand ratio ofintra industry to

Mixed results

No Study Sampling

Selected country/

Standard deviation

of change inexchange rate

Cross-section Only

unanticipatedreal exchangerate variabilitysignificant andnegative

Calibratedusing U.S tradewith 5 countriessimulationanalysis

Not statisticallysignificant

Standard deviation

of first difference

of log of nominal(and real)exchange rate

Cross-sectionOLS and IV

Small effect,negative in

GARCH model Aggregate

export volumesand prices jointestimation

Significant,varied signsand magnitudes

No Study Sampling

Selected country/

Overall, a larger number of studies seems to support the conventional assumptionthat exchange rate volatility reduces the degree of trade There are a few exceptionsdiscussed that the magnitude of that effect would be rather small and some foundevidence of a positive effect of volatility on export volumes of some industrialcountries

2.3 Factors affecting exchange rate volatility.

Exchange rate volatility refers to the fluctuation in the value of one currencyrelative to another It is a critical factor that significantly influences international tradeand economic stability The impact of exchange rate volatility on export performancehas been a subject of interest for researchers and policymakers worldwide In the case

of Thailand, as an open economy heavily reliant on exports, understanding the factorsthat contribute to exchange rate volatility is crucial for formulating effective economicpolicies This literature review aims to explore the various factors that influenceexchange rate volatility and their implications for export performance

 Macroeconomic Factors:

a Inflation: High inflation rates can lead to currency depreciation and increasedexchange rate volatility When a country experiences persistent inflation, iterodes its export competitiveness and may discourage foreign investment

To be specific, high inflation rates can have significant implications for acountry's currency depreciation, exchange rate volatility, export competitiveness, andforeign investment Understanding the relationship between these factors is crucial forpolicymakers in formulating effective economic strategies This section provides adeep analysis of how high inflation rates can affect these variables

 Currency Depreciation: High inflation rates often lead to currency depreciation.When a country experiences persistent inflation, it erodes the purchasing power of itscurrency As the value of the currency decreases, it takes more units of the domesticcurrency to purchase the same amount of goods and services This depreciation makesimports more expensive, contributing to an increase in the exchange rate

 Exchange Rate Volatility: Currency depreciation resulting from high inflationrates can also lead to increased exchange rate volatility Exchange rate volatility refers

to the fluctuations in the value of one currency relative to another When a currencyexperiences significant depreciation, market participants may become uncertain aboutits future value, leading to heightened volatility Increased volatility can createuncertainties in international trade and financial transactions, impacting export-oriented industries

 Export Competitiveness: High inflation rates can erode a country's exportcompetitiveness When a country's inflation rate is significantly higher than that of itstrading partners, its exports become relatively more expensive This rise in exportprices reduces the competitiveness of domestic products in international markets As aresult, the country may experience a decline in export demand, leading to lower exportvolumes and revenues

 Foreign Investment: Persistent inflation can discourage foreign investment.High inflation erodes the value of future returns on investment, as the purchasingpower of future cash flows is diminished Foreign investors become more reluctant to

profitability associated with such investments This reduced foreign investment canhave adverse effects on a country's economic growth, employment, and overalldevelopment.

To illustrate the relationship between high inflation rates and these variables, let's consider a hypothetical scenario in Thailand Suppose Thailand experiences a prolonged period of high inflation compared to its trading partners As a result:

 The Thai baht may depreciate against other currencies, making imports more expensive and reducing the purchasing power of Thai consumers and businesses.

 The increased exchange rate volatility may create uncertainty in the foreign exchange market, making it challenging for businesses to plan and engage in international trade.

 The higher export prices resulting from currency depreciation can decrease the competitiveness of Thai exports in international markets This may lead to a decline in export demand and market share, affecting the overall export performance of the country.

 The reduced export revenues and uncertainties surrounding the economy may discourage foreign investors from investing in Thailand This can hinder capital inflows, limit economic growth, and constrain job creation.

In conclusion, high inflation rates can have far-reaching consequences for acountry's currency depreciation, exchange rate volatility, export competitiveness, andforeign investment Understanding these interrelationships is essential forpolicymakers to implement appropriate measures to manage inflation, stabilizeexchange rates, enhance export competitiveness, and attract foreign investment,ensuring sustainable economic growth and stability

b Interest Rates: Differentials in interest rates between countries affect theattractiveness of investments and influence capital flows, thereby impactingexchange rate movements and volatility

c Economic Growth: Economic growth rates play a significant role in exchangerate volatility Higher growth rates may lead to increased foreign investment,while lower growth rates can lead to capital outflows and currency depreciation

 Market Sentiments and Speculation:

a Investor Sentiment: Market participants' expectations and sentiment caninfluence exchange rates Optimistic or pessimistic views on a country'seconomic prospects may lead to significant currency fluctuations and volatility

b Speculation: Speculative trading in foreign exchange markets can amplifyexchange rate volatility Large-scale currency trading based on short-term profitmotives can lead to excessive exchange rate movements

 External Factors:

a Global Economic Conditions: International economic events, such as changes

in global demand, geopolitical tensions, and trade policies, can significantlyimpact exchange rates These external factors can create volatility in exchangerates and subsequently affect a country's export performance

b Commodity Prices: Countries that heavily rely on commodity exports arevulnerable to fluctuations in commodity prices Changes in commodity pricescan affect a country's terms of trade, leading to exchange rate volatility

 Monetary Policy and Central Bank Interventions:

a Central Bank Actions: Monetary policy decisions, including interest rateadjustments and foreign exchange market interventions by central banks, caninfluence exchange rate movements Central bank interventions are oftenemployed to stabilize exchange rates and minimize volatility

b Exchange Rate Regimes: The choice of exchange rate regime, such as fixed orfloating exchange rates, can affect exchange rate volatility Flexible exchangerate regimes are generally associated with higher volatility, while fixed regimesprovide more stability

 Financial Market Development:

a Capital Market Integration: The degree of financial market integration affectsexchange rate volatility Highly integrated capital markets may experience moresignificant capital flows and speculative activities, leading to increasedvolatility

b Exchange Rate Derivatives: The availability and use of exchange ratederivatives, such as futures and options, can affect exchange rate volatility.These financial instruments allow market participants to hedge against currencyrisks, which can reduce volatility.

Exchange rate volatility has profound implications for a country's exportperformance, and understanding the factors influencing this volatility is essential forpolicymakers and businesses Macroeconomic factors, market sentiments, externalfactors, monetary policy, and financial market development all contribute to exchangerate volatility This literature review provides a comprehensive overview of thesefactors and highlights their significance in the context of Thailand Further researchand empirical analysis are needed to gain a more precise understanding of therelationship between exchange rate volatility and export performance in Thailand,which can inform policymakers in designing appropriate strategies to mitigate risksand enhance export competitiveness

2.4 The Thai economy and its export sector

The Thai economy and its export sector have been key drivers of economicgrowth and development, contributing significantly to the country's GDP,employment, and foreign exchange earnings Thailand has a predominantly export-driven economy, where exports contribute to approximately 65 percent of its GDP.The country's primary export products are manufactured goods, which make up around

86 percent of its total shipments Notably, electronics, vehicles, machinery andequipment, and foodstuffs are the key contributors to Thailand's export sector.Agricultural goods, particularly rice and rubber, constitute around 8 percent of thecountry's total exports Thailand's major export partners include China, Japan, theUnited States, and the European Union, accounting for 12 percent, 10 percent, 10percent, and 9.5 percent of the exports, respectively Additionally, Thailand maintainssignificant trade relationships with other countries such as Malaysia, Australia, andSingapore

 Contribution to GDP:

The export sector has played a crucial role in Thailand's GDP growth In 2020, Thailand's total GDP was approximately 10.5 trillion Thai Baht (THB), of which

exports accounted for around 63% (approximately 6.6 trillion THB) according to theBank of Thailand This demonstrates the substantial contribution of exports to theoverall economic output of the country Throughout this period from 1960 to 2021, theaverage value for Thailand was 39.95 percent The minimum value recorded was 15.02percent in 1970, while the maximum value reached 71.42 percent in 2008 As of 2021,the latest available data shows Thailand's export indicator at 58.21 percent To providecontext, the global average for this indicator in 2021, considering data from 160countries, is 42.10 percent.

Graph 1: Thailand: Export, percent of GDP

 Top Export Products:

Thailand's export sector encompasses a diverse range of products Some of thetop export products include:

a Automobiles and Automotive Parts: Thailand is a major global exporter ofautomobiles and automotive parts In 2020, the export value of automobiles andparts amounted to approximately 827 billion THB, accounting for a significantportion of total exports

b Electronics and Electrical Appliances: Thailand has established itself as a

value of these products reached around 876 billion THB, reflecting thecountry's competitive edge in this sector.

c Food and Agricultural Products: Thailand is renowned for its agriculturalproducts and processed foods Exports of food and agricultural productsgenerated an export value of about 493 billion THB in 2020, showcasing theimportance of this sector in international trade

d Textiles and Garments: Thailand's textile and garment industry has a strongpresence in global markets In 2020, exports of textiles and garmentscontributed around 171 billion THB to Thailand's export revenue

Graph 2: Thailand's export sectors

Source: Export Genius

 Regional and International Trade Partners: