• Ginola
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A Man's Random Walk
politik, economik, foreign affairs
Permalink : http://blog.nationmultimedia.com/ginola
Friday , February 29 , 2008
In Defense of the Bank of Thailand
Posted by Ginola , Reader : 675 , 23:09:06  
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Since the 30% reserve requirement measure was put into place in December 2006, the Bank of Thailand under the leadership of Dr.Tarisa has been under a lot of criticisms and attacks. This capital control measure, many argue, has been more harmful than beneficial to the Thai economy.

I, however, hold a very diffrent view of the measure. I certainly think that the policy has been a considerable success, helping steer the Thai economy well in the past 15 months, and I feel that the BOT should be given credit for this.

Why do I have such a view? Well, just take a look at the data.

In 2007, the economy performed just fine. Though not impressive, economic growth of 4.6% is indeed satisfactory given the facts that the country was politically unstable under the control of a military government.

Political instability had brought about a decline in investors and consumers' confidence. Yet we didn't have anything close to a big recession, and the BOT's macroeconomic management should be given credit for.

Throuhgout 2007, when consumption and investment were slaggish, the export sector became the only important driver of growth. The BOT needed to ensure that export would continue to do well. Maintaining exchange rate stability was thus an important factor in ensuring the competitiveness of the Thai exporters.

The capital control measure had done just that. Yes, the Thai baht continued to appreciate vis-a-vis the US dollar but looking at the exchange rate alone is not meaningful if you want to assess the effectiveness of the policy. One needs to look at the baht appreciation in comparison to other currencies in the region.

Looking at the exchange rate in a comparative view, we see that the rate of the baht appreciation was generally the same as that of other currencies. Thus, the competitiveness of Thai exports has not been undermined and exports grew 18% in 2007, providing the much-needed impetus to growth.

True, the capital control was not without costs. The BOT made a mistake at the beginning when it shocked the market by announcing the policy out of the blue. It indeed had made life more difficult for many banks and businesses that needed foreign sources of funds. To some extent, it might have harmed the development of capital markets in Thailand (but this effect is perhaps temporary).

But looking at the big picture, I don't think we can deny the fact that the BOT has managed the macroeconomy reasonably well. During the politcally unstable period in which consumers and investors were short of confidence, maintaining economic growth and stability was a top priority, and the BOT did achieve that. If the BOT did not do its job well, the Thai economy might have plunged into a big recession last year, and that would have much more profound negative effects on Thailand. I think critics of the BOT have tended to overlook this.

Now that the politics has become more stable and the private sector has started to regain confidence in the economy, the BOT has good reasons to remove the capital control and it just did. Looking back, I think the BOT can take pride in its success in effectively managing the economy through potentially bad times, although it should also learn at least one important lesson: do not surprise the financial markets; they just don't like surprises!

Lastly, I urge every critic of the BOT to look at the data and reconsider their views. Frankly, it could have been worse for Thailand without that famous 30% capital control.

Read comment

comment 10
MaxHeadroom date : 05/03/2008 time : 13.16
http://blog.nationmultimedia.com/maxheadroom

Ian - sorry for the financial language escapade. I will try to make that clearer when I have more time available - the work week's catching in on me.

Dalamsian: thanks for a voice of reason amidst the general silence on this topic. Maybe if Ginola had named this post 'Sex with gigs not hurt much by appreciating Baht thanks to BoT ' more people would be concerned.
comment 9
MaxHeadroom date : 05/03/2008 time : 12.07
http://blog.nationmultimedia.com/maxheadroom

I don't think my argument is flawed and your number reflect just one thing perfectly: we have gotten rid of long term investors building up solid foundations for our economy and have replaced them with short term speculators parking money in the stock exchange.

You make a big mistake here: the 30% rule did not at all concern investments made in buying stock but concerned industry which in part is dependent on the capital markets. So if you exchanged USD to THB to buy stock the 30% rule could do nothing against that. So while long term investors panicked that the government had gone mad and become unpredictable, the speculators shifted their funds to the stock market. We lost the full front on overseas pension funds pulling out billions.

So this is on reason why the Baht continued to appreciate. Another one is that the Surayud government delayed fiscal spending worth trillions throughout 2007, thus keeping surplus money driving up currency, while keeping up to issuing more government bonds. Most of which had a target inline with the Thai fiscal year that goes October to October - but guess what most of all government budgets only started to arrive in April or even later.

Furthermore the BoT refused to take any measure to build up their foreign currency reserves and work with the government to spend them on commodities traded in USD - a plan widely regarded as a valid solution to reduce inflation while lowering the pressure on the Baht. Something short of strategic oil reserves.

So the currency was manipulated badly by the above but the 30% rule was no working instrument to solve the currency crisis.

One more: the main increases in cost for exporters were due to oil prices which are a USD commodity. For exports that use a lot of materials traded in USD that was a good year, but for exporters that use a lot of local raw materials especially transport intensive that was a bad year.

And after all you have to look more at the USD Yen ratio.

Again - where is the justice here with crimes this large having been committed?
comment 8
Ian date : 05/03/2008 time : 11.29
http://blog.nationmultimedia.com/anterian36

I think this debate is a perfect example of the lay person's dilemma. As I read each comment I can roughly understand the points being made, yet I have not the knowledge to judge whether they are valid or not.
So I am like a spectator at a tennis match who knows nothing about the rules of the game, I look left, then right, then left again, and so on.
How can an electorate decide which economic policy is best for them if they don't understand the rules.
Imagine, Max and Ginola each standing for election on their economic ideas, Which is right for me?
In the end I choose the person and his promises, not the policy.
This is I think a global problem, economics has become too complex for ordinary voters to understand, we are at the mercy of economists that speak a strange foreign language. It creates either resentment or apathy, depending on the individual.
Yesterday my Thai gf could not find my calculator, so she asked me what is 23 times 10!
Now if I find this debate difficult what do you think it would be like for her and millions like her?
Somehow you have got to learn to talk to ordinary people in ways they can understand.
comment 7
Ginola date : 04/03/2008 time : 15.15
http://blog.nationmultimedia.com/ginola
ginola

Max,

We really seem to see things differently. Let me just list them out and explain my arguments one by one.

“To claim that GDP or export growth is a result of the 30% rule is absolute nonsense and pure invention lacking any understanding of how these figures got there as well as any proof by data.”

Of course, I can’t run a meaningful regression to prove my point to you. Yet, I think it’s simple to understand: the 30% rule has helped curb the influx of capital and thus reduced the degree of the baht appreciation, thereby helping the export sector to sustain its projected growth. And this is certainly very extremely important to economic growth.

If what you said about foreign investors turning away from Thailand (“erosion of investor confidence and capital influx”) is true, then that combined with the fact that the baht has continued to appreciate, may reinforce (note the word “may”) the argument in support of the 30% rule. Even with some investors turning away from Thailand, we still saw continued appreciation. This may imply that without the 30% rule, we would likely have seen MORE appreciation of baht last year.

But I would say that your point that the 30% rule has led to the “erosion of investor confidence and capital influx” is mostly worng. Yes, the measure did induce outflow of capital in Dec 2006 when it was imposed. But after that, the evidence is that investors confidence in the Thai market has not eroded and capital influx has not reduced. To see this, just take a look at the data.

First, the stock market. Net portfolio flows in equity securities actually INCREASEd in 2007 - $4.2 billion in 2007 compared to $2.8 billion in 2006. If you look at net flow of foreign equity investment, you see a decline from $8.5 billion in 2006 to $7.5 billion in 2007. Yet, this figure is misleading because it is totally explained by the fact that in 2007 we did not have the Temasek-Shin deal. And the disaggregated figures reflect just that: net foreign equity investment from the US, Japan, and the EU actually increased in 2007 while that from Singapore declined sharply.

Now, look at FDI. We see a decline of about $2 billion in 2007. This, however, is explained again by the Temasek deal in 2006. Controlling for the effect of the deal, FDI in 2007 does not decrease.

These figures clearly suggest that there was no “erosion of investor confidence and capital influx” of which you claimed. Investors might be panicked and moved their money out initially, but they came back soon after Max. Your “destruction of capital at an unprecedented scale” lasted in just weeks. After that, capital flows came back. If you think there will be future damages, I will await and see, but so far the damage has not been evident.

This suggests that imposing a capital control is not the end of the world anymore. Many economies have imposed capital controls and managed their currencies. Capital controls will most likely cause immediate panic but the important thing is to regain investors’ confidence after the capital control is imposed. If the fundamentals of the economy are strong, the international markets are willing to put their money in Thailand. The BOT made a mistake in the WAY it implemented the policy and should have avoided the big crash in capital market, but the policy PER SE is not a mistake. Investors then realized that Thailand is still a good place to invest in and they did come back.

“What is more true is that the BoT cost us 1-2% points of GDP growth.”

Because your argument about investors turning away from Thailand is flawed, you can’t say that the BOT cost us 1-2% of GDP growth. But even if less funds flow into capital markets, it doesn’t translate into the decline in GDP growth as you said.

The decline in growth was due to the simple fact that growth in domestic demand was sluggish. Consumers just don’t spend, and that hardly has anything to do with the 30% rule. People just don’t buy as many houses and cars and other stuff as before, and that has nothing to do with 30% rule. Domestic investors slow down their investments because they are not sure about the political future, and also because consumers are not buying their goods, and this also has hardly anything to do with the 30% rule. It is the fact that domestic demand was doing badly that causes growth to slow down.

This is why we observe what you observed: “The companies that went out of business last year will only appear as closed in 2009, 2010 maybe 2011 as their account with the Revenue Department cannot be closed and as such they cannot be close according to Thai law.” These companies, if you would look, are all SMEs that have not been able to adapt to slowdown in domestic demand and baht appreciation. You said that large exporters plan ahead and are more able to adapt. Maybe true, but the fact was that the Thai exporters were very vocal in demanding some kinds of measures to tackle the baht appreciation. Many big export associations came out publicly and demanded that the govt do something. It was evident, therefore, that baht appreciation is a concern even to the big guys at least in the short run. And the 30% rule was designed to specially help the small firms. Without the measure, baht could have appreciated more and things could have been worse for the SMEs.

“Well, GDP growth is not everything - technically what is happening in your blog is getting very biased talking around one big fact: that you are trying to sell 'huge damage to the capital markets' as sound or justifiable macro-economic policy. That in my opinion is a philistine attempt to say 'the objective justifies all means”.

Now, when domestic demand was doing badly, export became the only engine of growth. And growth, Max, is not everything but is of extreme importance. Certainly important to the Thai people and the capital markets.

I’m not trying to sell ‘huge damage to the capital markets’ as sound or justifiable macro-economic policy because 1) the damage to the capital markets was exaggerated as I explained above and 2) macro performance especially growth is very important to the capital market itself. If there is anything that would erode foreign investors’ confidence and capital influx, it’s a recession or a decline in economic growth! And let me again stress the importance of maintaining growth in times of political instability and low domestic demand. Preventing recession is the top priority last year. But let me be clear that I also think that the initial damage to the stock market should have been avoided had the BOT made its move more wisely. But that initial damage doesn’t invalidate the basis of the measure.

And lastly, I get my inflation data from the BOT which in turn gets it from the Ministry of Commerce. CPI data is the most straightforward and reliable data because it is very difficult to manipulate. They just look at the prices in the markets for a bunch of goods – it’s just impossible for the officials to manipulate the price data in Carrefour or Lotus or Fresh Market.

I feel like I haven’t tackled on every point you made, but I’m too tired to go on right now.
comment 6
MaxHeadroom date : 03/03/2008 time : 18.44
http://blog.nationmultimedia.com/maxheadroom

So where do you get your figures from? The official reports of practically all major banks stated just that: that the Baht outperformed other currencies in the region significantly - and that since late 2005.

Here an extract from FOREX December 2006: 'In the year-to-date, the Thai Baht has appreciated by almost 20% against the USD, making it one the world’s strongest performing currencies. This becomes especially impressive when you consider that it has taken place against the backdrop of a military coup...'

Of course that made headlines.

You say stock markets / capital markets are not everything. Well, GDP growth is not everything - technically what is happening in your blog is getting very biased talking around one big fact: that you are trying to sell 'huge damage to the capital markets' as sound or justifiable macro-economic policy. That in my opinion is a philistine attempt to say 'the objective justifies all means'. And believe me: those that do act without remorse or second thoughts about collateral damages always firmly belief in their own superiority and that of their cause over all others.

It is in short one of the oldest known components of miserable governance - a text book example of fascist ideology. And what worries me is that many people that should know better in our countries elite still make use of such ideology or believe in such doctrine.

Where please do you get a credible 1% core inflation for last year?

Apart from not commenting on my main points: erosion of investor confidence and capital influx to sustain our countries exports - may I draw an old analogy here: do you know what a Phyrrus victory means. Surely, you can try to squeeze out a few point of GDP or export cost - much at the detriment of the years to come.

Again you are not really getting the point: so I make it clearer: to claim that GDP or export growth is a result of the 30% rule is absolute nonsense and pure invention lacking any understanding of how these figures got there as well as any proof by data. It's like beating a drum in the raining season and pretending that the next downpour was a direct result. It's poor propaganda. What is more true is that the BoT cost us 1-2% points of GDP growth - we could have easily been there.

Exports are the domain of the Japanese - they don't plan for a day - get it? So after the Baht appreciated to < 33 on the USD they won't just panic and run out screaming through the front gates of their factories.

The capital control measures was only part of the misery. The whole coup thing was bought at a very high price for the tax payer who had lost a lot of tax income from a crash in domestic spending which is of primordial importance for Thailand. And you can't be real if you think that torpedoing confidence at all level is much a benefit to anyone.

A country's attractiveness for investors is much based on stability for which neither your 30% nor any other measure taken by the BoT was a good example.

This left aside you cannot have the kind of mismanagement and destruction of public and private capital without accountability - that my friend is not beside the point.
comment 5
Ginola date : 02/03/2008 time : 12.40
http://blog.nationmultimedia.com/ginola
ginola

Dalmasian,

Your comment, while may be true, does not invalidate what I wrote at all. You seemed to be very concerned, and rightly so, about the losses of innocent investors from the stock market crash. And for this, I agree with you that the way the capital control measure was initially implemented was harmful to the capital market. The BOT should have done better and should have hinted the market about its policy beforehand. If done properly, the capital control would not have produced such a crash in the stock market. (but also remember that had the BOT consulted with other parties before implementing the policy, it would also be bad as more people would be aware of the plausible measure and might take advantage of that knowledge)

Yet, the stock market is not everything that matters. My argument is that the measure has allowed the export sector to do well which was very important to preventing economic recession in the politically unstable period. The policy itself was good in achieving this. Your comment, although true, doesn’t offer a counter-argument to my argument.

Even taking into account the losses innocent investors made as a result of the implementation of the capital control, I still think the benefits of delivering a 4.6% growth outweigh the costs. Stock market crash may hurt some thousands of people, but a recession would have hurt millions. Looking from the big picture, thus, I think the BOT has done a good job in managing the macroeconomy.

Lastly, while there might have been a few people who benefited from knowing about the measure in advance, that is something rather normal in Thailand and it should not invalidate the benefits of the policy itself.

Max,

With all due respect, I think your arguments based on your “good insight in the numbers” do not sound very convincing.

2007 export growth same as what the industry forecasted? Well, this is certainly the case for the capital control. The policy has prevented the baht from over-appreciating and allowed the export sector to reach its target growth. And mind you, 60-70% of GDP is very important.

1.2-1.5% of the 4.6% GDP growth as “cosmetics for the balance sheets”? Very nice language but with little relevance here. Even if the data is not entirely accurate, even if the manipulation of the data is real, this is something that has been happening all along and it does affect the reported growth rate every year alike. Thus, growth figures every year already reflect this “cosmetics for the balance sheets”. A 4.6% growth in 2007 thus has the same magnitude as an equal growth any other year.

Inflation? What inflation? Core inflation was a very low 1% last year while headline inflation was 2.3%. Hardly alarming, hardly hurts export competitiveness. If anything, the fact that the baht has been appreciating has helped keep oil prices from rising too fast, and thereby preventing the economy from potential recession.

Money doesn’t care about dictators? Well, during the days after the coup even before the introduction of the capital control, I heard businesspeople talking about delaying/canceling their investment plans. If there is a culprit for the sluggish investment growth, it’s the coup and the resulting political vacuum.

If there is something I may agree with you, then it’s the damage done to the capital markets by the capital control. But I still hold the view that the capital market is not everything that matters for the Thai economy. People from the capital market, predictably, tend to put over-emphasis on capital market development. Yet, in an unstable period of time like last year, capital market development is of second importance to maintaining GDP growth and macro stability. The damage would have been greater had the economy entered a recession. Yes, the BOT should have done better before implementing the policy to avoid huge damage to the capital markets, but that does not take away the justified rationale of the policy.

Lastly, the Thai baht has been appreciating more than other regional currencies for several years? Well according to my figures, that is not accurate. And not to mention that the NEER and REER should be taken into account when considering whether the exchange rate is “competitive” or not.
comment 4
Dalmasian date : 01/03/2008 time : 21.48

What kind of bull shit are we having here in these blogs. As a peron who is very much involved in the financial and capital markets in Thailand, i agree 100% with what MaxHeadroom said in his comments. Just answer his last paragraph about the strange blip in volume of the SET 50 Index Futures contracts (shorts) before the 30% reserve policy was announced and you can see very clearly that there are people who profited immensely from the actions of the 2 monkeys (Pridyathorn and Tarisa), while innocent investors like us suffered millions in losses. Ask the government to come clean on how much much damage Pridyathorn and Tarisa caused the Thai treasury with their artificial suppression of the value of the Thai Baht and you will be overwhelmed.

Thai exporters are no dummies. They know how to adjust to different situations by themselves. Most of them report little or no profits every year anyway because it is normal practice for businesses in this country to keep two separate sets of "books' -- one for themselves and one for the Revenue Department.
comment 3
MaxHeadroom date : 01/03/2008 time : 17.28
http://blog.nationmultimedia.com/maxheadroom

As someone who has lost a lot more than a Ferrari on nonsensical policies closer to insanity than to macro-economic policy making I cannot agree to your simplified picture of how economics work or your presentation of numbers as proof for the efficiency of a policy not directly related to that number. What you say might appear plausible to people thinking that a fiscal cycle is as real time reactive as your daily news. In fact apart from immediate effects such as stock exchange crashes there are other effect you may only have in those numbers 6, 12 or even 36 months afterwards. Your presentation of the export figures are such a number while you pleasantly and 'in defense of the BoT' leave out others, such as domestic sales, competitiveness, capitalization etc.

As someone with good insight in those numbers and with a direct involvement in both import and export business I'd just say that growth in export 2007 is what had been planned by large industry in 2005 / 2006. And what GDP growth you have seen is just depending 60-70% on that. And form the 4.6% you have mentioned maybe 1.2-1.5% are cosmetics for the balance sheets.

The companies that went out of business last year will only appear as closed in 2009, 2010 maybe 2011 as their account with the Revenue Department cannot be closed and as such they cannot be close according to Thai law.

The destruction of capital at an unprecedented scale on the introduction of the 30% rule and FBA changes makes your classification as 'mistake' appear like a euphemism of the worst kind. May I say that THB 800 Bn is not a joke.

Factory relocations caused by the coup will lead to further erosion of capital and one has to say that whilst you are opposing to it that the capital control measures are just that - totally ineffective. Why? Simply since you have put slower appreciation and shuffled it to the other side: inflation. Other than that the side effects by far outweigh any benefits.

And most of all: you failed to explain why the Baht has been appreciating for several year so much in excess of any other currency in the region: mismanagement and vested interests. I would go so far as to say that the trio Pridyathorn, Krik krai and Tarissa managed to manipulate the currency and stock markets in a totally unacceptable way and certainly not without vested interests. Their role model was 1997 and just as then the perpetrators get away unpunished.
Be fair to the laymen: if I steal something worth 100 Baht I will be charged and if I steal 1000 Baht maybe spend some time in a jail. But in Thailand if you steal a billion Baht you will be playing golf and be cheered and you can be sure that most people would just frown at the idea that such a theft could happened simply because it is too unbelievable, too crazy to be true. And if you are lucky you may even have scores of uninformed people to defend you against such 'vicious accusations' - that kind that is so naive that they wouldn't ask for money to so as lawyers would.

You never see the bond markets, stock markets and currency markets move up in line outperforming the regional average without at least some sort of manipulation. If that is your definition of capital control measures well than I guess Dagobert Duck should be our next Finance Minister.

A last think: the investors didn't run away when the coup happened - you just fabricate your numbers here by leaving out over 3 months on the time line here: the investors panicked after the introduction of the 30% rule and the announcement of the FBA revision. Money doesn't care about dictators but about interest and appreciation.

And guess what number went up 200 - 300% before that news came out crashing the stock exchange? Futures. Explain that or if you like tell us another fairy tale - may I suggest: Pinoccio and the money tree.
comment 2
redandwhitestripes date : 01/03/2008 time : 06.12
http://blog.nationmultimedia.com/reallifethailand

It wasn't Dr Tarisa for the most part though was it? It was Piyathorn, right?
comment 1
Pomjuk date : 29/02/2008 time : 23.44
http://blog.nationmultimedia.com/pomjuk

I agree. I personally think that BoT did well. I think BoT might have just prevented the influx of indirect investment in 2007 and the exodus of the outflow in early January 2008.
I could be wrong, since the investors may not be interested in parking their money in an unstable political country anyway.

Anyway, I think without the policy the currency might have been overly strong in 2007, while investors in the US were looking for a place to harbor their money waiting for the episode of the subprime loan to be subsided.
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