Tuesday, July 31, 2007

0:10 AM: Oh, no, it is already a new day.  Let's read some hot stuff.

Published on July 31, 2007

By Thanong Khanthong

If the Bank of Thailand had intervened in the foreign exchange market sufficiently, it would not only have gained profits but would also have succeeded in arresting the baht's rise, said Dr Olarn Chaipravat, one of the country's top economists.

In an interview with The Nation, Olarn said: "The problem with the central bank is that it is facing foreign exchange losses not because of the intervention but because of its failure to intervene in the foreign exchange markets sufficiently."

Two weeks ago, Olarn was the first well-known economist to lash out at the central bank over its mismanagement of its foreign exchange policy. Without a specific target for the baht exchange rate, the central bank has allowed the currency to slip out of control, which has resulted in a sharp rise in its value that is hurting the overall Thai economy.

On Friday, the baht closed at 33.70 to the US dollar. Now honorary adviser to the Fiscal Policy Research Institute, Olarn calls for the central bank to keep the baht at 34 to the dollar in order to support the competitiveness of Thai exports.

He has come up with the Bt34 figure through his economic model, which compares the competitiveness of the Thai exchange rate with those of China, Vietnam and other neighbouring countries such as Ma-laysia and Singapore.

MR Pridiyathorn Devakula, the former central bank governor and finance minister, earlier called for the central bank to keep the baht at 34-35/dollar, compared with Dr Virabongsa Ramang-kura's 36/dollar.

Olarn and his research team have been closely following the capital flows and the central bank's foreign exchange operations. They have tracked the central bank's balance sheets in minute details.

To his dismay, Olarn has found that the central bank does not seem to have any foreign ex-change strategy at all to deal with the rise of the baht. Its daily foreign exchange intervention also seems to lack direction in influencing the movements of the baht to the desired levels, he said.

To illustrate his point, Olarn and his research team studied the baht situation between July 2 and July 27. The currency reached a 10-year high of 33.24 on July 16. Coincidentally, the period marked the 10th anniversary of the baht's devaluation, which triggered the full-blown financial crisis.

The baht's movements depend on supply and demand. Whenever there is more dollar supply than demand, the value of the baht will rise. When there is less dollar supply than demand, the baht's value will weaken.

Overall, capital moves into and out of the country through five channels: the current account, foreign direct investment, equity, debts and bank loans. Olarn cited the first week of July as an example. Between July 2 and July 6, Thailand posted $155 million in the current account surplus, $125 million in net foreign direct investment, $598 million in net equities, $40 million in net debt and $200 million in net loans. The total amount was around $1.11 billion.

But forward foreign exchange contracts helped reduce the exchange risks, of $2 billion, bringing the total net capital inflow of $3.118 billion in the first week of July, which exerted pressure on the baht's rise.

But the central bank bought $578 million in the spot market and the forward market to stabilise the baht in the first week of July, at an average of $106 million a day, compared with $70 million a day in the last week of June.

By doing so, it issued bonds worth Bt18.03 billion ($578 million multiplied by the exchange rate of Bt34) in order to raise the baht from the financial system to purchase the dollar, in case that its intervention took place with 100 per cent in the spot market.

If its intervention was 50 per cent in the spot market and the other 50 per cent in the forward market, then it would only need to issue bonds worth about Bt9 billion because it could delay the bond issue for the forward market.

The Bt18 billion of bonds issued by the central bank that week to buy dollars came at a cost of 3.5 per cent based on its repurchase rate. It then deposited this amount at Chase Bank in New York at 5 per cent. The central bank earned around Bt700,000 a week in interest rate differential.

Without adequate foreign exchange intervention from the central bank, the burden naturally fell on the shoulders of the commercial banks, which were obliged to spend less in baht to buy dollars.

With this half-hearted intervention, the central bank allowed the baht exchange rate to rise from 34.52/dollar on June 29 to 34/dollar on July 6, or an exchange rate appreciation of Bt0.52.

With the exchange rate appreciation of Bt0.52 that week, the central bank had to post book losses from its foreign reserves holdings of $83.048 billion (including forward positions) by another Bt42.911 billion when marked to market. Since it earned Bt700,000 a week from its dollar deposits in Chase New York, the central bank still ended up with a book loss of Bt42.910 billion that week.

Olarn argued that in the first week of July, if the central bank had intervened by buying up at least $2.45 billion in dollar supply both in the spot and forward markets, it would have succeeded in halting the baht's appreciation and also made profits.

The baht, he said, would have been able to stabilise exactly at 34.52 if intervention amounted to $431 million on July 2, $632 million on July 3, $556 million on July 4, $445 million on July 5 and $390 million on July 6.

In that particular case, the central bank would have issued bonds worth Bt84.65 billion to raise the baht from the financial system to buy dollars. This amount of bond issue would carry a cost of 3.50 per cent but the dollars earned would be deposited in Chase New York at 5.0 per cent.

In this instance, when marked to market, the central bank would have squared its position without any foreign exchange loss but would have gained Bt3.49 million in US dollar interest. Its foreign reserves would have increased to $84.974 billion (including the forward positions).

The central bank's book loss of Bt42.910 billion in that first week could have been prevented if it had intervened sufficiently and tactfully enough, Olarn said.

Since the beginning of this year, the central bank has posted about Bt160-Bt170 billion in book losses from its foreign exchange intervention. Without sound foreign exchange operations, it will continue to post foreign exchange losses, making it even more reluctant to intervene in the foreign exchange market.

Since the baht peaked at a 10-year record of 33.24/dollar on July 16, the central bank has increased its intervention, resulting in a downward drift of the baht to 33.70/dollar last Friday.

"Now they should target the exchange rate at Bt34 and try to work it out to that level," Olarn said.

###########

Monday, July 30, 2007

##################

Monday, July 30 , 2007

Rates should not fall excessively

10:15 PM:  I have  been away from Bangkok for two days. My kids took part  in a summer music camp in Wangree Resort,  Nakhon Nayok. It was very beautiful there. The resort was surrounded by mountains and green trees. The  weather was very pleasant, cool and lively.

Incidentally, another summer camp,  Arts for All, was also organised for the handicapped. So my kids had a chance to perform for the handicapped. It was nice.

DBS Group Research (July 30, 2007) just issued a brief economic report on Thailand. The June data are expected to show continued weak domestic demand. Customs data showed exports growth at 17.7% year on year, while imports grew only 5.2%.

Interestingly, DBS Research Group made a comment on Thailand's interest rate policy. "We continue to believe that the Bank of Thailand should not cut rates as they have already cut rates by 175 basis points. We also think that monetary policy should not be used excessively in the present scenario as the slower growth is the result of an exogenous political shock rather than cyclical weakness," it said.

#######################

Friday,  July 26, 2007

To fix, to float or to target the FX rate

11:00 PM: Should we fix our exchange rate, float it without any direction like what the Bank of Thailand is doing it now or to target it loosely at a certain level?

Ah...we are back to discuss this old issue again. Let me set the record straight.

Before July 2, 1997, the BOT fixed the exchange rate very tightly, allowing it to move one or two satang a day. The fixed exchange rate regime became the anchor of Thailand's macroeconomic stability.

But it was bound to create problems later when we started to liberalise the capital account. The fixed regime could not withstand the capital flows of modern-day globalisation. We went bankrupt with that experience (please read my series on the 1997 crisis).

The BOT floated the baht on July 2, 1997 after losing almost all of its foreign exchange reserves in the baht defence. The baht did float from Bt25-Bt26/US dollar to Bt56/US dollar in January 1998 at the height of the financial crisis.

Now the baht is still floating like a sponge in the stormy sea. At the end of 2005, it floated like Loy Krathong to Bt40-Bt41/US dollar before floating further to Bt35-Bt36/US dollar at the end of 2006. Now it is floating at Bt33/US dollar, prompting the Thai industrialists and businessmen to jump out and lambast the BOT. They do not want to see the future of their business floating without any destiny.

If you ask the Tarisa Watanagase, the Bank of Thailand governor, whether she has any exchange rate target in mind, she would not tell you. Probably, she does not know because the BOT might never have specifically targeted the exchange rate.

The BOT has been managing the exchange rate like Loy Krathong because the currency may move to any level it wishes according to the market force.

Dr Supavud Saicheua, the managing director of Phatra Securities, also wrote a lenthy article during this time to support a free floating exchange regime. He subscribed to the idea that if the exchange rate is freely floated, the industries will learn to adjust themselves. Those who can 't make it would have to die according to the law of Darwinism. He cited the Korean experience, whose industries have made the most progress in structural adjustment because of the free float won.

Dr Olarn Chaipravat, the economic guru, blasted the central bank almost two weeks ago for its lack of a foreign exchange strategy. He said the BOT should have set a target for the exchange rate, instead of allowing it to float without any direction.

He recommended that the baht be targeted at Bt34/US dollar in order to help keep the Thai currency competitive against the Chinese yuan and the currencies of Thailand's neighbours.

Dr Virabongsa Ramangkura, another conservative economist, followed up by suggesting that the BOT should try to fix the currency at Bt36/US dollar at least before the Thai industries went bankrupt.

He is a rather believer in the fixed exchange rate. In 1997 he called for the central bank to devalue the currency and refixed it somewhere at Bt30/US dollar.

Dr Chalongphob Susangkarn, the current finance minister, shrugged off Virabongsa's recommendation to refix the currency at Bt36. He said fixing the currency was an old-fashioned practice.

Virabongsa told The Nation's Suthichai Yoon rather annoyingly that nothing in economics was old fashioned if it worked.

MR Pridiyathorn Devakula, Tarisa's predecessor, could not remain quiet. He might never have targeted the exchange rate very specifically either during his tenure.

But earlier this week, he disclosed for the first time that he preferred the exchange rate to move at Bt34-Bt35/US dollar, a level that supports the competitiveness of the Thai exports.

Well, Mom Oui is no longer  BOT governor.

So who is right?

In this world, Hong Kong is the only country which is fixing its currency tightly through a currency board regime. At the other extreme is the euro, which is floating freely. We do not count the US dollar because it is the world's de facto supreme currency.

The rest of the world are embracing exchangerate targeting. China is also targeting its exchange rate, so is Japan.

Don't forget that Japan, one of the world's economic powerhouses, is still targeting and fighting to keep the yen at Y120!!!

So it won't hurt much if the BOT is to have a specific target of the baht exchange rates. Since the government targets the GDP growth, targets its expenditures and revenues. Businesses normally target their growth and expansion. The BOT is also targeting the inflation.

Then why can't the BOT set the exchange rate target at Bt34 as recommended by Olarn and Bt34-Bt35 subsequently Mom Oui this year to keep the Thai economy going?

Now we have to let the FX free-floaters sing Loy Krathong to themselves alone.

####################################

Friday, July 26, 2007

Dr Bandid is waiting for his turn

6:00 PM: If Tarisa Watanagase, the Bank of Thailand governor, does not survive this baht episode, who will succeed her? The most likely candidate is Dr Bandid Nijathaworn, the deputy governor.

Bandid is not part of the Tarisa's all-women team of angels running the central bank at the moment. He has been left largely in the cold. However, he is now the senior-most official of the central bank.

During the Thaksin government, there was a general understanding that once MR Pridiyathorn Devakula, the then governor, left office, Thirachai Phuvanat-naranubala, the secretary-general of the Securities and Exchange Commission, would return to his old home to become governor.

But after the September coup, the name of the game has changed completely.

While he was BOT governor, Mom Oui worked closely with both Tarisa and Bandid. When he resigned to join the Surayud government in September 2006 as deputy prime minister and finance minister, he handpicked Tarisa to succeed him because she had served him so well during all those years.

I have heard that there was a secret agreement between Mom Oui, Tarisa and Bandid. The secret agreement was that Tarisa would serve as governor first probably for a year or so, then Bandid would succeed her.

If this secret agreement is true, Tarisa would end her rocky governorship in September 2007. Would we have Dr Bandid as a new governor then?

But don't ask Dr Bandid now. He likes to remain low profile as much as possible.

If there is no such secret agreement, then Tarisa's governorship will be far from smooth. She will be subject to a real test in August when the National Legislative Assembly grills the government over its management of the baht policy.

If Tarisa survives the grilling, then she has to face another biggest test with the arrival of a newly elected government, which should be formed in January 2007. The unofficial signal from the Democrat Party, which now has a 70-80 per cent chance of forming a coalition government, is that it would like to have a new governor.

By that time, it will be a totally new ball game.

Ummmmmmmmmmmmmmmmmmmmm........   

Friday, July 26, 2007

Baht grilling in the National Legislative Assembly

5:15 PM: Sorry that I have been away for a while. But I am back to update you further about the baht story. The issue will be with us for a while. Stay tuned. There will be further exciting development.

More than 130 members of the National Legislative Assembly have signed their names to call for a motion to grill the finance and banking authorities over their management of the baht. The debate will take place on August 1.

Prime Minister Surayud Chulnanont has indicated that his government is ready to answer any queries. But I am not sure whether Dr Chalongphob Susangkarn, the finance minister, is ready to defend the baht policy, which has been mishandled.

He has to be able to explain why the Bank of Thailand has suffered from a book loss of Bt160 billion from its foreign exchange intervention since December 2006. The BOT may lose money in its foreign exchange operation. But the point is: can it do better?

Tarisa Watanagase, the BOT governor, will have to stand by to help Chalongphob during the parliamentary debate.

Are they going to become pork sa-te after the grilling?

From what I have heard, some members of the National Legislative Assembly are planning ask the government why the central bank does not seem to have any exchange rate target in its baht management. Why does the BOT allow the baht to strengthen too quickly without any proper management to help support the competitiveness of the Thai economy as a whole?

Most important of all, what kind of law the BOT has in hand in its management of the floating exchange rate regime.

As you know, the central bank changed the foreign exchange system from a fixed exchange rate regime to a floating exchange rate regime on July 2, 1997. Rerngchai Marakanond, the then BOT governor, submitted the proposal to Dr Thanong Bidaya, the then finance minister, for approval.

Thanong simply signed the document, and all in a sudden the central bank, based on this ministerial announcement, ever since has been operating the floating exchange rate regime.

The question is whether the ministerial announcement on the change from the fixed exchange rate regime to the floating exchange rate regime is supported by any legislation or any law.

As I understand, the ministerial announcement only authorises the central bank to employ the floating exchange rate regime in case of emergency or special circumstances. It also requires the central bank to announce its target rate periodically for the general public to anticipate the value of the baht.

The Bank of Thailand has been managing its foreign exchange policy based on two laws: the Exchange Equalisation Fund Act and the Currency Act. But these two laws have not been amended through the legislative process yet to support the BOT's adoption of the floating exchange regime.

The two laws have been introduced to the National Legislative Assembly and the BOT people are anxiously waiting for their passage.

Does this mean that over the past 10 years the central bank has been operating its floating exchange regime illegally without any legislative or legal backing?

I don't know the answer. We need to find out. 

############################

Friday, July 27, 2007

My Overdrive Column

If you ask Tarisa Watanagase, the central bank governor, about the appropriate level of the baht, she won't tell you. But you can get a clue by reading a lengthy article "Who did what to curb the baht", written by MR Pridiyathorn Devakula, Tarisa's former boss, earlier this week.

Pridiyathorn spelled out clearly that he did not agree with Dr Virabongsa Ramangkura's suggestion that the baht be kept at Bt36 to the US dollar or weaker to prop up Thai exports. Pridiyathorn said exporters would enjoy it too much if the baht were to be kept at Bt36 to the US dollar. In his opinion, an appropriate range would be Bt34-Bt35 to the US dollar. Then he also said that an exchange rate of Bt32 to the US dollar would be damaging to Thailand.

So you can bet that the central bank will put up a big fight by buying up the dollar heavily to prevent the baht from surging beyond Bt33.

But will it be able to do so as financial markets expect that the baht will continue to strengthen to Bt30? Can the central bank resist the market forces of a strong baht brought about by the huge trade surplus and also by capital inflow into Thai equities? What kind of foreign-exchange policy should the central bank pursue when most of Thailand's competitors are also intervening heavily in the foreign-exchange markets to keep their currencies competitive?

These are difficult questions and there is not a single magic answer. Pridiyathorn blamed the exporters for staying complacent in 2005 when the baht was rather weak, trading at more than Bt40 to the US dollar. The exporters did not plan for their futures. They had known all along that the US economy was facing a drastic adjustment incurred from its twin deficits. Capital was flowing out of US dollar assets to other parts of the world, particularly Asia, in search of higher yields.

Since exporters have done little to buy new equipment and upgrade their productivity, they are vulnerable to the exchange-rate appreciation. Imports have remained far below exports, reflecting the reluctance of Thai industry to kick off new investments in a grand way to jumpstart the economy. As the US dollar gets weaker, the baht becomes stronger, undermining the competitiveness of Thai exports.

Now that the baht is trading in the Bt33 to the US dollar range, the leaders of Thai industry have come out to make a noise. They have sent out a clear signal that if the central bank can't keep the baht weaker, Thai industries will soon have to close their shops. Thai Silp South East Asia Import and Export Co Ltd is a case in point. The textile company went bankrupt and laid off 5,000 to 6,000 workers, partly due to the strong baht though mostly due to mismanagement.

The Surayud government responded with a knee-jerk reaction. No government can sit still when a huge number of workers are laid off like this. If a dozen factories went out of business like this, the government would not survive. It has finally agreed to go along with the recommendations of business leaders and push out a package of foreign-exchange liberalisation measures. This would allow Thai residents and companies greater flexibility to manage their foreign currencies. The package will not have a short-term impact, but it should help to reduce the pressure on the baht over the medium term.

In the meantime, the central bank has been cautioned to manage its foreign-exchange policy with greater balance to save Thai industry.

Some economists, such as Dr Supavud Saicheua of Phatra Securities and Dr Teerana Bhongmakapat of Chulalongkorn University, would prefer central bank authorities not to mess too much with foreign-exchange intervention. Market forces should be allowed to play a greater role in the management of the Thai economy, they argue.

Besides, buying up the dollar to add to the country's foreign-exchange reserves comes with a cost. Teerana has calculated that between 2002 and 2006, the social cost to the country of the central bank's foreign-exchange intervention was more than Bt100 billion. The other day, Finance Minister Chalongphob Sussangkarn cited the figure of Bt160 billion as the total cost of the intervention.

Yes, it is about time that Thai industries make the transition to higher-value production so that they can survive in an increasingly competitive world. They may need to go abroad to diversify risk and look for new opportunities, as Taiwanese and Japanese firms have successfully blazed the trails. Not many Thai companies have a strong track record of foreign direct investment.

But in the immediate short term, the central bank still can't brush off its responsibility to come up with the right policy mix to support a competitive currency. It just can't allow the baht to be dragged up quickly, from Bt40 to Bt33 in one-and-a-half years just like that.

The Thai central bank must manage the foreign exchange with flair, like the Singaporeans or the Japanese.

I am not a total believer in market forces because the Japanese have been keeping the yen at 120 to the dollar to support their exports. They do not seem to believe totally in market forces.

Still, the Thai central bank should send out a loud and clear signal to Thai exporters that they must adjust or die.

 ####################

Thursday, July 26, 2007

A Business Model for Reserves Management?

9:00 AM:  The Bank of Thailand (BOT) is looking at independent management for some portion of the country's US$73-billion foreign-exchange holdings to maximise investment returns. Is this good idea? Yes, definitely.                                    

"We might set up a fund management unit to look after the reserves. Or we can also separate the reserves and manage the money independently," BOT Governor Tarisa Watanagase told  Suthichai Yoon in his blog talk.

Tarisa said she would consult with experts and the Finance Ministry on how to make use of and get the best yields from the foreign-exchange reserves, which have swollen since the 1997 financial crisis to the equivalent of Bt2.46 trillion.

In Asia, China and Singapore are two countries that have turned to a business model to run their international reserve operations.

But here, it's long been taboo to touch the international savings, which are considered the country's last resort in case of a crisis. The reserves also serve to back the baht in circulation and to facilitate financial and international trade transactions.

Managing the foreign reserves with a business model is a way to shift capital out of the country and reduce the surplus.

Earlier, Dr Supavud Saicheua, managing director of Phatra Securities, argued that if the central bank accumulates foreign exchange indefinitely to stabilise the baht, it might need to set up an investment unit to manage the excess reserves.

"This would, however, require Thailand to make legislative changes for excess reserves to be set aside under, say, a government investment corporation of Thailand (GICT) to spend/invest these excess dollars. The legislative changes will be a challenge, especially accepting the possibility that some of GICT's investments could face losses," he said.

"This option is not ideal for two main reasons. First, persistent balance-of-payments surpluses arising from a policy of undervalued exchange rates would only force the GICT to get bigger, pushing it to eventually make risky investments. If it does not, and returns are low, then the opportunity cost to the Thai economy and people would be large.

"Second, excess reserves can be seen as a tax on imports. In other words, if the baht were allowed to appreciate, Thai consumers and investors could have enjoyed cheaper imports."

But Tarisa said if the reserves are to be designated for active management, it must be done with a legal backup or with clear rules and regulations.

"It's a risky venture, so we need somebody who is an expert to look after it," she said.

The Government Investment Corporation of Singapore, which is managing the city-state's glut in foreign reserves, has been investing aggressively in foreign assets. 

Thailand's reserves are mainly kept in low-risk offshore sovereign bonds.

Tarisa also hinted that the central bank is quite satisfied with the current level of US$73 billion. "We have enough of foreign reserves," she said, adding that the  central bank might not want  to build up more dollar to its reserves.                                 

This implies that the central bank is afraid of more losses from the build-up in reserves because the value of the US dollar is falling -- and will be falling more down the road as the US economy is adjusting its overspending mode  --  against the Thai currency.

Last year alone, the  central bank posted a loss of almost Bt100 billion from intervention in the forex market to calm the baht.

In 1997, Thailand was forced to seek a $17.2-billion support programme from the International Monetary Fund because it depleted its reserves trying to defend the baht.

Now it has replenished financial resources and is not sure how to deal with the pile.

I still don't understand Tarisa's comment that the central bank can't go against the market force -- with daily trading volume of US$3 trillion -- to stabilise the baht because the central bank's reserves  are limited.

Now is not 1997. We are buying up the dollar and selling the baht to stem the Thai currency's rise. This is much easier to manage than in 1997 when we had to              sell the dollar to prop up the value of the baht. And the problem then was that we did not print the dollar.

In 1997 our reserves were depleting from the baht intervention. Now our reserves are rising without limit at least in the medium term, insofar as we continue to buy the dollar, at a cost though.                               

Commerce Minister Krirk-krai Jirapaet also said that his ministry would join with the Industry and Energy ministries in making a proposal for local companies across industries to invest overseas.

The incentives would help the companies reduce exchange risks and diversify.

Tuesday, July 24, 2007

Capital  controls vs FX liberalisation

10:20 PM: On December 18, 2006, the Bank of Thailand introduced draconian capital controls by separating the onshore from the offshore baht markets. The move was aimed at curbing speculation against the baht. Essentially, the capital controls were designed to prevent foreign traders or investors from having access to the onshore baht.

Now, the central bank and the Finance Ministry have pushed out,  and got approval from the Cabinet, a package of foreign exchange liberalisation. The package would allow more flexibility for the Thai residents and companies to hold foreign currencies or to take the dollar out of the contrary.

What a stark contrast between the 30% withholding tax measures and the foreign exchange liberalisation package!

The financial markets have anticipated the foreign exchange liberalisation package all along. So there has been little  impact on the baht or on the SET index. The baht was traded unchanged today at Bt33.60 to the US dollar.

However, the baht level is significantly weaker than the 10-year record high of Bt33.0-Bt33.3 a weak ago.

"Nonetheless, the measures do have a significant effect in that the BOT is using available instruments to tamper the level of the baht if it deems the level to be misaligned vis-a-vis the regional currencies as well as to the current state of the economy, but importantly without the draconian measures like those we experienced late last year," said UOB Economics-Treasury Research (July 24, 2007).

UOB does not think that the Thai central bank would remove the capital controls any time soon.

Probably, there are two main reasons to remove the capital controls. First, the onshore baht will have to depreciate by at least 10 per cent to Bt38/US dollar. Second, the trade surplus must narrow more significantly.

"We also think that BOT needs the assurance that speculative activities on the baht will not return once the measure is removed (which is the most difficult condition to fulfill)," said UOB.

"At present, we think the measure will only be removed after the transition to the new government."

Tuesday, July 24, 2007

Foreign Exchange Liberalisation Package

3:30 PM: The Cabinet has just approved the foreign exchange liberalisation package aimed at stabilising the baht in the longer term. The package takes immediate effect.

Let's take a look at the details:

1. Listed companies on the Stock Exchange of Thailand are  allowed to buy foreign currency worth US$100 million a year for their direct investment in the overseas. But the listed companies must post positive shareholders' equity in the previous accounting year, and they must not going through the process of financial rehabilitation.

2. Thai individuals and companies incorporated in Thailand will be allowed to deposit foreign currency with the local banks.

A. Earners of foreign exchange or other foreign exchange receitps such as export payment or foreign borrowings are entitlted to deposit foreign currency with the financial institutions in Thailand.

But upon having the foreign currency obligations, depositors must show proff of foreign currency obligation within 12 months. The total amount of deposits must not exceed US$1 million for individuals and US$100 million for companies.

When having no foreign currency obligations, the total amount of deposits must not exceed US$100,000 for individuals and US$5 million for companies.

B. Earners of foreign currencies can use Thai baht from sources in Thailand to purchase foreign currencies or borrow from the financial institutions in Thailand, then deposit with financial institutions in Thailand with the following conditions:

a. When having foreign currency obligations, deposits must show proof of foreign currency obligations withn 12 months of the transaction. The total amount of deposits for all accounts and currencies must not exceed US$500,000 for individuals and US$50 million for companies.

b. When having no foreign currency obligations, total amount of deposits for all accounts and currencies must not exceed US$50,000 for individuals and US$200,000 for companies.

3. Thai individuals are allowed to transfer money to the overseas at US$1 million per year per person. The purposes are for handing out to relatives living permanently in the overseas, donating money in the overseas and buying real estate in the overseas.

4. Thai residents or companies which have foreign currency earnings must bring the procees into Thailand within 360 days -- an extension from 120 days.

5. Thai residents no longer are required to sell or deposit foreign currency proceeds with the local banks within 15 days. This will allow them greater flexibility to manage their foreign currency portfolio.

6. Institutional investors can now invest in deposits with foreign financial institutions without having to get approval from the foreign exchange control supervisor.

###########################

Tuesday, July 24, 2007

Bt4-gap between the onshore and offshore baht rates. 

9:30 AM: We now are seeing a widening gap between the onshore and offshore baht rate of about Bt4 -- more than Bt29/US dollar in Singapore and more than Bt33/US dollar in Bangkok. Something abnormal is going on.

However, Tarisa Watanagase, the Bank of Thailand governor, has  insisted that the   wide gap between the onshore and offshore rate might have "some psychological impact" on the investors. But in reality, both markets have been completely cut off.

She  admitted that the exporters might feel nervous if the off shore rates have become too high,  prompting them to sell the dollar which further puts upward presure on the baht.

Offshore baht rates have jumped extraordinary because of the liquidity squeeze arising from the Bank of Thailand's imposition of the capital controls. Traders or investors in Singapore do not have access to the baht in Bangkok, so they scramble  for the limited baht supply.

Tarisa has tried to sooth the concern by arguing that the central bank, since July 15, has eased the rules by allowing the foreign investors to hedge their foreign exchange risks with the local banks. In the long term, the gap between the two markets should converge, she  said.

How long is the long term then?

The Thai government's attempt to stem the baht rise by introducing all kinds of measures appear to go no where in bringing the situation under control.

"The fact that the onshore/offshore gap widened instead of narrowings despite news of the imminent measures suggtest that the government is only addressing the symptom and not the cause of the problem -- which is the liquidity squeeze in the offshore market from the capital controls," said DBS Research Group in its      report issued today.

"Offshore players are also sending another message to Thai policymakers not to fight the baht appreciation, whose appreciation is supported by the fundamentals. Apart from robust trade surpluses, the currency is also supported by capital inflows into Thai equities in anticipation of the recovery in the economy." 

Cabinet measures to ease forex rules

We are waiting for the Cabinet to introduce measures to further liberalise the foreign exchange regulations. This would help ease the presure on the baht rise.

Now the money flow is almost a one-way street. It is easier to bring the dollar into the country than to take it out. That's why we have the baht appreciation.

Some of the Cabinet measures include:

1. Allowing Thais to hold foreign currency accounts (US$100,000 for individuals and US$300,000 for companies).

2. Encouraging Thai companies to invest abroad.

3. Allowing the exporters to hold the dollar in their offshore accounts longer than the present regulation of 120 days.

4. Allowing the exporters more flexibility to hold the dollar without having to convert it into the baht within 15 days after they have brought the dollar into the country.

5. Allowing Thais to transfer money to their relatives living abroad.

6. Allowing individuals to buy foreign currencies in the local market for specific obligations.

But there will be more details than this in the Cabinet measures. Officials at the  Government House will also provide English translation of the whole package.

Let's wait a bit more.

In the meantime, there are all kinds of committees being formed to address the baht issue. The Finance Ministry and the Bank of Thailand will form a committee to work out a programme on how to stabilise the baht in the medium term.

The Government Pension Fund, with a war chest of Bt353 billion, has targeted to raise its foreign investment to 25 per cent of its entire investment portfolio.

The Economic Steering Committee will meet with the capital market regulators on August 6 to explore the means to allow greater flexibilities for Thai companies or funds to invest abroad.

Well oh well...The baht has still refused to weaken.

################################                                                          

Monday, July 23, 2007

Dollarisation of the Thai economy?

9:30  PM: Both the business people and the government officials are working hard on various measures to deal with the baht appreciation.

One of the proposals discussed today at the Joint Public Private Committee meeting at the Government House was whether companies, which had dollar earnings,  should settle their financial transactions in US dollar. Dr Kosit Pampiemraj chaired this meeting.

This sounds rather interesting. Instead of converting the currencies back and forth, companies should be allowed to make payments or settle their transactions in US dollar. This would deter further demand for the baht.

For instance, could the freight cost be paid in US dollar? Or when a subsidiary produces or buy goods fromits parent company, could it conduct transactions in US dollar?

But the Bank of Thailand was not feeling so good about this proposal. Too much use of the US dollar for transactions could lead to a "dollarisation" of the Thai economy -- something the Thai banking authorities would not like to see. However, Malaysia has done this.

The meeting finally agreed that the Bank of Thailand should be given one week to study this proposal before coming back with a solution.

SME funds

They also discussed the SME funds to help the small- and medium-scale companies during this hard time. Two SME funds would be set up, with a size of Bt4.5 billion and Bt500 million each.

The Bank of Thailand will pitch in 50% per cent for the Bt4.5 billion fund, while the commercial banks will contribue the other half.

The Bt500 million SME  fund will go to supporting companies facing bad debt problem yet having good prospects of business opportunities. Since it is a risky venture, the central bank will contribute 90 per cent to this fund, compared with 10 per cent for the commercial banks.

The case of the Thai Silp South East Asia Import Export Co Ltd was raised at the     meeting over the social welfare of Thai workers losing their jobs from the economic woes. The textile company has laid off 5,000 workers because of     mismanagement and its inability to compete again.

Thai textile companies, food companies and other labour intensive firms are vulnerable to the strong baht and competition from other emerging economies. 

There is no conclusion yet as to how they will be assisted  or how they will have to adjust themselves. A committee will be formed to study this issue.

Yesterday, the baht closed weaker at Bt33.69-Bt33.73, after peaking at a 10-year  high of Bt33.22 early this month. Now the trend of the baht should become weaker in this short term as the financial markets realise that the Thai authorities are mounting on a campaign to bring the currency down to Bt34-Bt35 range.

This is interesting time, isn't it?

Monday, July 23, 2007

Prepaying the state enterprises' debts

6:30 PM: Big state enterprises are making their moves to prepay their foreign currency debt.

PTT plans to refinance $1.5 billion in debt and cancel its planned foreign currency-denominated bonds. This followed the Finance Ministry's announcement last week that the state enterprises would work out a programme to refinance the foreign debts worth more than US$3 billion (Bt100 billion) combined.

The ministry’s move aims to increase demand for dollars and reduce pressure on the baht.

Energy Minister Piyasvasti Amranand would discuss with PTT and the Electricity Generating Authority of Thailand (Egat) about their plans to handle foreign debts.

Piyasvasti also ordered Egat to change its powerpurchase contracts with independent power producers, in order to reduce dependence on the dollar. The policy will also apply to new contracts.

Monday, July 23, 2007

Chalongphob can't sit still now

2.40 PM: Now that MR Pridiyathorn Devakula has shifted the blame from the Bank of Thailand to the Finance Ministry, what do you think Dr Chalongphob Susangkarn should respond?

Pridiyathorn has given the impressinon that the central bank has done its best to tackle the baht appreciation. He blames Chalongphob for failing to follow through by ordering the state enterprises to repay their foreign currency debt before schedules so as to reduce the pressure on the baht rise.

Chalongphob can't remain quiet in his office now. We have to wait and see how he would respond.

Incidentally, a columist of Matichon by the name of "Garton" hinted that Bank of Thailand Governor Tarisa Watanagase's days at the top job are numbered.

The columnist suggested that Tarisa would become a scapegoat for the failure to manage the baht crisis.

The politicians would not assume the responsibility themselves but would shift the blame to the central bank instead, the columnist said.

Rerngchai Marakanond, the central bank governor between 1996 and 1997, also believed that he was a scapegoat in the waning days of his governorship as the politicians would not take any responsibility for the financial crisis.

Let's wait and see.....................

Monday, July 23, 2007

Pridiyathorn strikes back

0:47 AM:  MR Pridiyathorn Devakula has finally decided to break his silence. Probably he has found it necessary to defend Tarisa Watanagase,the Bank of Thailandgovernor. Tarisa is in deep trouble over her management of the baht crisis.

Pridiyathorn resigned in March this year from the Surayud government as deputy prime minister and finance minister. Since then he has kept largely quiet, without making clear about his political future. He has recently celebrated his 60th birthday party the Four Seasons Hotel.

Pridiyathorn has writen a seven-page article with a strange title - "Who Did What to Curb Strengthening Baht?".  It is clear from the tone of his writing that he is trying to defend the Bank of Thailand he once served as governor.

By doing so, he is also implicitly defending Tarisa, whom he hand-picked as his successor.

So what are his main points of argument?

First, he disagrees with Dr Virabongsa Ramangkura that the baht should be pushed down to Bt36 to the US dollar to keep the Thai exports competitive on the global markets. In fact,Virabongsa would like the baht to fall even steeper than that.

On Friday, the baht closed at Bt33.60 to the US dollar.

But Pridiyathorn says the baht level of Bt34-Bt35 is good enough to support the competitiveness of the Thai exports. If the baht were to weaken to Bt36, the exporters would enjoy too much and would not try to improve their competitiveness.

This is rather interesting. Pridiyathorn has come forward to go against Virabongsa or Dr Krong, who is his friend and, to a certain extent, his mentor. While he was serving as BOT governbor, he was in favour of the export sector all along. 

In 2001, Thaksin Shinawatra, the then prime minister, asked whether  Dr Krong was interested to serve as central bank governor as he planned to sack MR Chatu Mongol Sonakul. Dr Krong declined the offer and proposed that Thaksin pick Pridiyathorn instead.

So Pridiyathorn became governor and served on this job until September 2006 when he joined the military-appointed government of Gen Surayud Chulnanont.

Bt32 must not see the light of day

Second, he hints that if the baht were to strengthen to Bt32, Thailand would be badly hurt. This would be the last defensive line of the central bank then. The baht should not be allowed to break the Bt32 level as Bt33 is already painful to the Thai industries.

Without the capital controls, the baht should have moved up to Bt32 by now, Pridiyathorn argued. (He was deputy prime minister and finance minister when the capital control measures were introduced in December 2006). Pridiyathorn has paid a dear political price for the capital controls, of which he was a party.

Third, he shows his sympathy toward the central bank's foreign exchange management. There is a limit to what the central bank can do to curb the baht appreciation.

At the moment, the baht is moving upward because of the trade surplus and also because of the net capital inflow. There is more money flowing into Thailand than the other way around, so that baht can only go up.

The Thai industrialists and the traders have proposed a package of foreign exchange liberalisation measures to the government, such as allowing the exporters freedom to hold the dollar as long as they want and also to allow Thais to open foreign currency accounts in the local banks.  They hope that this would help ease the baht rise.

Business operators prefer Bt35.50

However, most of the local businessmen prefer the baht at Bt35.50, according to a recent survey of the University of Thai Chamber of Commerce. 

Pridiyathorn does not believe that the financial liberalisation package, which the Cabinet will approve tomorrow, will help ease the baht appreciation in the short term. The inflow, both from the trade surplus and portfolio investment, has been too overwhelming.

He also defends the central bank as doing its best to buy the excessive dollar to stem the baht rise. But that is not good enough.

The difficulties lie in the sentiment of both the Thai exporters and importers too. Whenever there is a strong upward trend of the baht, the exporters would sell the dollar for the baht, while the importers also delay their purchase of the dollar.

With only dollar selling, the onlyway for the baht is up.

Fourth, the baht is not strong; the problem has more to do with the weak dollar. Capital has moved out of US assets in search of higher yields in Asia. Thailand is one of the beneficiary countries that absorb the global capital.

Baht vs regional currencies

Is the baht strong relative to the regional currencies?

Since the beginning of 2006 the baht has risen by 22 per cent. But Pridiyathorn argued that dollar capital started to move to Asia since the beginning of 2005. Since Thailand was then facing the tsunami disaster, it did not get much of the inflow. As a  result, the baht remained weaker than other regional currencies, which faced the inflow.

 Then the Thai exporters enjoyed the competitiveness of the Thai currency. So they did nothing to improve their competitiveness.

When 2006 came along, Thailand began to get more of the inflow, resulting in the appreciation of the baht.

Between the beginning of 2005 and June 2006, the baht rose only 2.21 per cent. And between the beginning of 2006 and the end of 2006, the baht soared 8.38 per cent, much less than Korea, the Philippines but slightly higher than China, Singapore and Malaysia.

Events in March -- when Pridiyathorn left the Surayud government and when people expected a removal of the capital controls by the new finance minister -- and the capital inflow in July resulted in a rush to a sale of the US dollar.

Exporters preach what they don't do

The exporters were the ones who were most active in selling the dollar for the baht.

You might recall that Tarisa recently blamed the exporters for feeling so nervous about the baht up trend that they rushed to sell the dollar for the baht.

This is the most irony of all. The exporters would like the Bank of Thailand keep the baht weak to support their business, but they are the culprits or part of the problem for their dollar sale.

Pridiyathorn suggests that the way out to slow down the pace of the baht appreciation is for the state enterprises to repay their foreign currency loans in advance. Besides, the importers should also make their import payment at sight or to take credit of up to 180 days under the trust arrangement with the banks. This would help delay the payment of US dollar.

Ummmmmm....Have I written about Charlie's Angels before?

 #########################################

Sunday, July 22,  2007

Policymakers vs the Market

10:30 AM: I am back to tell you about the widening gap between the offshore and onshore baht rates. Nobody knows about this matter better than the Singaporeans. DBS  Group Research (July 20, 2007) reports: 

"Thailand's attempt to narrow the offshore and onshore baht rates achieved the opposite results. The offshore baht was last traded almost 12% stronger than the onshore rate, exceeding the high 10.50% premium seen in March.

The gap essentially refect the disconnect between the policymakers and the market, made worse by the inability of the offshore market to access baht liquidity.

The former wants to stem appreciation but with less market unfriendly measures that encourage outflows, extending holding period of dollar by exporters and interest rate cuts.

On the other hand, the latter is focusing on a strong baht from inflow into Thai equities in anticipation of a recovery on expansionary monetary and fiscal policies, as well as a return to democracy by the end of the year."                                                      

Saturday July 21, 2007

Will Tarisa keep her job?

11:30AM: I am back to discuss with you on the hot issue surrounding the Bank of Thailand. Tarisa Watanagase, the Bank of Thailand governor, is indeed in hot water.

I feel sorry for her because she is such a nice person. But our real world is not so nice.

People in the financial markets no longer respect her after all the mishaps over her management of the baht.

The criticism she got from Dr Olarn Chaipravat and Dr Virabongsa Ramangkura was rather severe. Most other people would rather stay quiet. But they are not happy with her performance at all.

The central bank has once again awefully mismanaged the baht exchange rate policy.

"The central bank just don't know what it is doing," one foreign exchange dealer told me.

Obviously, Olarn and Virabongsa have sent out a strong signal that Tarisa should go because she just can't handle the situation. When these two guys came out strongly like this against the BOT, it means that something really messy is going on.

I am not sure whether Dr Chalongphob Susangkarn, the finance minister, still has his confidence in her. For she can also hurt him politically if the baht debacle drags on.

 Yet Tarisa has got some relief when Gen Surayud Chulnanont, the prime minister, came out to support her. He said she should be given the encouragement tackle the problems.

Surayud also refused a call by both Olarn and Virabongsa to revalue the baht at a certain level. He said the authorities could manage to curb the baht volatility to some extent, but they would not fix the baht at a certain level.  

Ummmmmmmmmmmm....Will Surayud's intervention complicate the situation further?

One thing for sure, Tarisa will fight for her job. She has already sent an e-mail message to communicate with her people at the central bank that she would continue to fight on.                              

But remember our astrologer that I have earlier posted. He forecast that Tarisa would not be able to keep her job beyond August 2007.

I am no believer in astrology.  But I do believe that from now on there will be growing pressure on the BOT until the government will have to decide to do something about it.

I have heard a story from the financial markets that the central bank had instructed the banks not to lend money to some telecom firms in view of their risk profiles. So the telecom firms had to borrow the loans from abroad instead.

The dollar loans they had brought in sent the baht up from  Bt36 to Bt35-Bt34 to the dollar.

Distortions in the FX markets

11:55 AM:  The separation of the onshore and offshore baht markets has created distortions to the foreign exchange trading.

The bid/offer rate for the baht in the offshore market now is Bt29.80-Bt30.00 to the US dollar, with the one-year swap premium of Bt1.50. This means that the outright exchange rate of the baht in the offshore market is Bt31.50.

In the onshore market, the baht is quoted at Bt33.60 to the US dollar. Its one-year swap premium is minus 50 satang. So the outright rate of the baht is Bt33.10. Since the Thai policy rate is 3.25 per cent, lower than the Fed rate of 5.25 per cent, we have a minus swap premium.

The baht rate is higher in Singapore than in Thailand because of the scarcity of the baht over there. And there is little baht supply there because of the Thai central bank's imposition of the two-tier foreign exchange markets.

So the tendency of the traders is to sell the dollar and buy the baht. Once the two-tier foreign exchange markets is abolished, the traders will be buying the dollar more, thereby rendering less pressure on the upward movements of the baht.                                                                                                               

 The 1997 financial crisis is still haunting the top Thai central bankers. They won't remove the capital controls easily for fears of the fierce baht speculation, which can hurt the central bank and the management team badly. 

##############################

My Overdrive Column

In case you have missed my Overdrive column published on July 20, 2007.

Here we go:

History has a funny way of repeating itself. The key players who are now handling the baht debacle are very similar to the characters who dealt with the 1997 financial crisis. They almost seem to be following the same script.

 In 1997, General Chavalit Yongchaiyudh was prime minister. Now we also have a general, Surayud Chulanont, serving in that position. The military careers of both generals were focused on combating communism and Chavalit was seen as a keen strategist and a not-so-good communicator, traits that Surayud shares.

With the crisis looming, Chavalit showed strong support for Dr Amnuay Viravan, his finance minister. Amnuay was a technocrat by temperament, although he moved from Bangkok Bank to take over the finance portfolio. Amnuay led an economic "dream team", but he did not have technical knowledge of the foreign-exchange markets. The Bank of Thailand was fiercely defending the baht against hedge funds and currency speculators behind Amnuay's back, but he had a good image.

General Surayud also handpicked his finance minister, Chalongphob Sussangkarn. Chalongphob is also a technocrat like Amnuay. He is well versed in international economics and has a solid knowledge in macroeconomics, however, like Amnuay before him, he does not have a good grasp on foreign-exchange markets.

Amnuay trusted Rerngchai Marakanond, the governor of the Bank of Thailand at the time, and respected the central bank's turf, giving Rerngchai the freedom to manage both the crisis facing financial institutions and the baht crisis. He thought that Rerngchai knew what he was doing.

Rerngchai had spent most of his career supervising financial institutions. He got the top job because he was the senior-most official at that time, however foreign-exchange management was not his trade. During the 1997 crisis he had to manage the dual tasks of rescuing failing finance companies and banks, and defending the fixed exchange-rate regime. He failed on both fronts, leading Thailand to seek a bailout package from the International Monetary Fund.

Tarisa Watanagase, the current governor, also spent most of her career supervising financial institutions. Pridiyathorn picked her as governor because they got along well and she was also the senior-most official at the central bank.

Tarisa might be very knowledgeable concerning the supervision of financial institutions, however her knowledge is limited when it comes to managing the foreign-exchange system. Like Rerngchai she is now facing a baht crisis, although in a reverse gear.

During Rerngchai's time, capital was flowing out of Thailand like crazy. Investors were afraid that authorities might devalue the baht and they did not have confidence in the financial sector. Rerngchai had to spend the dollars from the international reserves to defend the baht until he ran out of reserves.

Tarisa is facing the opposite situation. Foreign money is flowing into Thailand like crazy. The baht has been appreciating so rapidly that it threatens the competitiveness of Thai exports. Tarisa is under pressure to stabilise the baht by keeping it competitive vis-a-vis regional currencies. She can't cope with the massive influx of foreign capital, which has been driving up the value of the baht.

In May 1997, Rerngchai separated the onshore and offshore foreign-exchange markets to prevent hedge funds and currency speculators from getting their hands on the baht. The move was intended to make the baht too expensive for speculators to speculate against.

In December of last year, Tarisa also created a two-tier foreign-exchange market, cutting off the onshore baht market from the offshore baht market. The tactic was aimed at preventing foreign money-managers from profiting by speculating against the baht.

During Rerngchai's reign leaflets were spread inside the central bank calling for his resignation. Yesterday, a group calling themselves Pirabkhao2006 also staged a small demonstration calling for Tarisa to resign over her failure to ensure the baht's stability.

Rerngchai was not comfortable with deputy governor Dr Chaiyawat Wibulswasdi, so he worked more closely with assistant governor Dr Siri Garnjaroendee. If the central bank were run by a merit system, Dr Chaiyawat would have been promoted to the position of governor instead. With this disunity it was difficult for Rerngchai to manage the financial system during the time of crisis. Chaiyawat was kept off the crisis-management team but would join later on. He was against any attempt to change Thailand's fixed foreign-exchange regime.

Tarisa is not very comfortable with Dr Bandid Nijathaworn, the deputy governor, either. Since Bandid is Tarisa's rival, the governor relies on Atchana Waiquamdee and others to help her to manage the baht crisis. Bandid has been left largely in the cold, although he is one of senior-most officials at the central bank.

Before the devaluation of the baht on July 2, 1997, there was a great debate inside the country as to whether the currency should be devalued or floated or what kind of foreign-exchange regime was suitable for Thailand.

Dr Olarn Chaipravat, the president of Siam Commercial Bank, came out to defend the Bank of Thailand. He put forward a strong argument against any attempt to devalue the currency.

Noted economist Dr Virabongsa Ramangkura was the staunchest proponent of the baht devaluation. He saw it as the only way to save Thailand from the crisis. In the end, he was proven correct.

Dr Ammar Siamwalla, the top economist at the Thailand Development Research Institute, also came out to urge the banking authorities to devalue the baht because it had lost most of its foreign-exchange reserves through currency-swap operations. He, too, was proven correct.

A group of Thammasat academics also held a seminar urging banking authorities to adopt a more flexible foreign-exchange regime to do away with all the uncertainties around the fixed baht.

Now these characters have re-appeared. Dr Olarn came out first on Sunday to criticise the central bank's mismanagement of the foreign-exchange policy, followed by Virabongsa, Ammar and, yesterday, the Thammasat University academics led by Dr Nipon Puapongsathorn. The Thai crisis has come full cycle in 10 years, with similar players and the old characters springing back to life. Never underestimate the power of history.

################################

Saturday July 21, 2007

FX  liberalisation won't halt baht rise                                                 

1:40AM:  Jun Trinidad of  Citigroup Global Market does not believe that the FX liberalisation by the Thai authorities would help ease the baht rise that much. The underlying trend is still upward baht movements.

Under the new rules, the exporters will have a longer period of time to hold on to their dollar receipts. Also, individuals Thais and Thai companies will be allowed to open foreign currency accounts. These measures might help moderate the baht rise in the near term.

But Thailand will continue to enjoy a trade surplus. This is one of the key factors that has kept the baht strong.

"We remain confident about a current account surplus equivalent to 1.7  per cent of the GDP this year. More offshore portfolio flows enticed by the policy rate cut effects on domestic demand and resulting gains in corporate earnings will reinforce the currency effect of the trade surplus," Jun said in his Thailand Economics (July 20, 2007) report.

Jun argued that the lasting remedy to halt the baht rise is to increase the import demand. Although the rate cut may help speed up the economic recovery, the fiscal spending should spark an increase in private demand and imports subsequently. Hopefully, private investment will follow suit.

"Faster import growth is a key channel in which domestic demand gains can effectively lower the trade surplus and offset much of the export and portfolio flows currently crowding the spot market," Jun argued.

#####################################

0:30AM: Hello, I am back. Sorry that I couldn't update my web blog earlier in the day.

 But you must be wondering as to whether the new round of foreign exchange liberalisation help arrest the rise of the baht.

 Not necessarily so.

The stock market index has reached new highs as the foreign investors are pouring their money into Thailand. Besides, they are buoyed by the improved political sentiment.

Abhisit Vejjajiva, the leader of the Democrat Party, has been selling himself so well that the foreign investors are under his spell. They believe that somehow the new Democrat-led coaltion government would be able to put its act together to push for further economic programme to jump-start the Thai economy.

In the mean time, the baht remained the hottest issue of the day.

Yesterday morning,  Dr Kosit Pampiemraj, the deputy prime minister, took Dr Chalongphob Susangkarn,the finance minister, and Tarisa Watanagase, the Bank of Thailand governor, to meet with Gen Surayud Chulnanont, the prime minister, at the Government House. They were discussing the financial package designed to alleviate the plight of the Thai businesses hard hit by the baht rise. The financial package had been proposed by the Joint Public-Private Commmittee.

The measures are as follows:

1. Allowing the exporters to hold the US dollar for an indefinite period of time.  Now they are required to convert the dollar into the baht after 14 days of holding the dollar.

2. Individuals will be allowed to open foreign currency accounts at the commercial banks.

3. Allowing the exporters to pay for shipment costs or for the purchase of raw materials inside the country by the US dollar without having to convert it into the baht later on.

4. Speeding up the tax rebate process for the exporters.

5. Encouraging the state enterprises to repay their debt before the due dates. They might also use the baht to buy the dollar and deposit the dollar in the overseas bank accounts.

6. Building up the stockpiles of some goods such as oil during the time of a strong baht.

7. Set up an SME fund to help the small- and medium-scale business operators. The amount of the fund approved is Bt5billion, Bt2.5 billion of which will come from the central bank and the other half from the commercial banks.

After the meeting, Kosit came out to announce that the government would have no problem accepting the package, saving for the No 6 proposal, which calls for a build-up of oil stockpile to prevent the energy crisis. The government is not ready in this matter yet.

It took a day before Dr Chalongphob could take a hard look at the Bank of Thailand's package proposed to help ease the strong baht. Some of the measures of   thecentralbank's package are incorporated from the Joint Public-Private Sector Committee.

Let's compare it with the previous package.

1. After selling their goods in the overseas markets, Thai companies can bring the     money into the country within 365 days -- an extension from 120 days as is now the case.

2.  Upon taking the money into the country, they can hold the dollar for an indefinite period of time. Now they have to convert the dollar into the baht within 15 days.

3. Individuals or companies, who have incomes in foreign currencies, can open foreign currency bank accounts in the local banks without any limit. If they don't have the foreign currency incomes, they can open foreign currency accounts at thelocalbanks at  not more than $100,000 each for individuals and $300,000 each for companies.

4. Thais will be allowed to buy gold in the futures market. This will help them to pay for the gold future contracts in US dollar.

5. Allowing Thais to transfer their money to their relatives to buy real estate in the overseas  at not more than US$1 million per person per year.

6. Listed companies in the stock exchange, which is profitable, will be allowed to invest in the overseas without any limit.

7. Institutional investors can maintain foreign currency accounts in the overseas in order to give them flexibility and speed for their investment decisions. But the central bank will set a limit.

8. Commercial banks will be allowed greater freedom to conduct foreign exchange transactions.

Next Tuesday (July 24), Chalongphob will submit all the packages to the Cabinet for approval. He, however, remains cautions on the proposal to allow Thais to invest in gold future contracts and to make transactions in US dollar. 

#################################################

Friday, July 20, 2007

We can't consume our way to prosperity

11:30 AM: Dr. Pongsak Hoontrakul has just written me an e-mail. Let's see what he has to say about the current debate on the state of the Thai economy and the foreign exchange. Here we go:

"We can not consume our way to prosperity since we can not print US dollar. Our country is a low value added export structure. Most of our export goods are re-processing and labour intensive industries.

Garment, jewelery, and electronics industry are, for example, our main export industries with high import content. In some countries like Singapore, the export value can go well beyong 100% of GDP since they do mainly trading and re-processing.

Thus, the export number seems to be large, so does the import numbers. Like the reverse of the 1997 crisis, the piling up dollar is a FALSE sense of security and strength. Most of all these dollars are borrowed reserves and short term portfolio in stock market. Many investments are driven partly by cross border private equity funds (or other forms of hedge funds) to invest speculatively in Thai assets (e.g. real estate, deep discounted NPL/NPA). Some reserves are from mergers and acquisitions, which normally are good in increasing our productivity and competitiveness if you do not mind foreigner ownership issues.

The main problem which we have is the collaspe of private investment and somewhat public investment for higher productivity to move into higher value goods and services supply chain in medium to long run. But in short run, it is the way we handle these massive capital inflows. This management would involve unpleasant tradeoffs because there is no easy way out as we are small and open economy facing high US dollar tide.

One more thing regarding to high trade surplus (as part of current account} is the direct result of running down our capital stock and inventory. In other words, we are running our factories to the ground becuase we do not invest to keep up with the depreciation and maintainance.

How long do you think we can do this ?"

##########################################

Friday, July 20, 2007

Thammasat academics speak out

5:40 AM: I wake up early this morning. The birds are singing on my trees. But the debate on the foreign exchange issue is still hovering above Bangkok.

A group of academics from Thammasat University's Faculty of Economics, led by Dean Dr Nibhon Puapongsakorn, Dr Plaipol Khumsap and Dr Pranee Thinakorn, came out yesterday to question the Bank of Thailand's foreign exchange policy. Their argument is quite interesting.

The academics focused on two main points -- the central bank's monetary policy management and its foreign exchange intervention policy.

In the monetary policy management, the Thammasat academics viewed that the central bank has been too much preoccupied with inflation targeting.

They said Thailand is a small and open economy, with huge volume of international trade. With a rather free movement of capital and fluctuations of the foreign exchange, it is not sufficient for the central bank to rely on its monetary policy to manage inflation targeting, they added.

The central bank needs also to manage its monetary policy in such a way that also guards foreign exchange stability.

Earlier Dr Ammar Siamwalla, the noted economist, also expressed a similar opinion that the central bank cannot limit its focus on inflation targeting alone. Monetary policy management must equally take into account foreign exchange management.

In the foreign exchange operation, the Thammasat academics also believed that the central bank officials have been handling it rather clumsily. The central bank introduced capital controls in December 2006 only to reverse a chunk of it on the following day. It should have cut the policy rate steeper on Wednesday July 18, 2007, but it opted to bring down the rate at only 25 basis points.

The Thammasat academics also questioned the meeting schedules of the central bank's Monetary Policy Committee. In view of the foreign exchange crisis, the MPC should rather hold an urgent meeting to deal with the situation rather than waiting for the exact schedule. In short, the decision making process of the MPC is very conservative.

Dr Pranee made an interesting point. She said the central bank can keep on printing money to assist it in the foreign exchange intervention because the baht is strong and besides we have enough international reserves.

Thursday July 19, 2007

Turning to domestic demand 

11:00 PM: I am back with you after the long day. My very good friend Dr Supavud Saicheua, the managing director of Phatra Securities, wrote an interesting article today in the Bangkok Post.

He argued that we should not worry much about the strong baht. Also, he asked whether it is time for Thailand to shift away from its heavy dependence on exports to drive the economic growth. Is it time for Thailand to rely more on domestic demand?

Here is Supavud's full article (I hope the Bangkok Post does not send me the bill for re-running this article):

Shift the spotlight from exports

I am surprised that the recent baht appreciation is now referred to as a crisis in the making. I recall numerous occasions in the past in which the United States' Treasury Secretary saw a strengthening US dollar as a reflection of US economic strength and wellbeing. A baht appreciation raises Thailand's purchasing power, enabling us to buy more of anything we want from the rest of the world. Yet, the Bank of Thailand (BoT) is being criticised for incompetently allowing the baht to appreciate. It has also been suggested that the BoT intervene more heavily and immediately cut rates by 1.0-1.5% in order to reverse the baht's appreciation, thus enabling exporters to survive.

I am sure that the Thai public is worried because the prime minister and top ministers are worried. Exporters, who account for 70% of Thailand's GDP, have made it clear that they want the baht weakened. Industry sources point out that thousands of Thai SMEs have already closed down. If the baht strengthens to Bt32/US$1, they said that half of Thailand's SMEs would have to close down and 2.5 million jobs would be immediately threatened.

Indeed, exports have been Thailand's sole engine of growth for the past 18 months. For example, in the first quarter of this year, if net exports were to be zero, then our GDP would have shown no growth at all.

I would argue that the crux of the ''baht problem'' is Thailand's persistent current account surplus that is now no longer needed. This surplus was essential during 1997-2004 when Thailand had to generate excess dollars to repay foreign debt, repay the IMF and build up international reserves lost during the 1997 economic crisis.

Once all the excessive debts had been repaid, Thailand began to attract a moderate level of capital inflow which began since 2004. We suddenly faced a situation in which we had surpluses in both the current and capital accounts _ except for 2005, when misguided diesel subsidies helped incur a current account deficit of $8 billion (267 billion baht).

It is likely that Thailand will see a current account surplus of $10 billion (333.3 billion baht) and capital inflows worth $5-6 billion (200 billion baht).

The point is, we are generating a surplus of dollars, possibly with no end in sight as the dollar itself is also expected to depreciate vis-a-vis all currencies, not just the baht. This is because the US continues to run a current account deficit of about $2 billion (67 billion baht) a day.

Thailand's options

Faced with an unending stream of surpluses, either the BoT absorbs this excess or the baht appreciates in order for the market to clear.

Thailand has been doing a bit of both in recent years. Note that a typical developing country attracts a moderate level of capital inflow which means that it simultaneously runs an offsetting current account deficit which would enable its currency to stabilise.

Looked at another way, a developing country should not have net capital outflows (which means that it is investing in the rest of the world rather than investing in itself) which would have meant an offsetting current account surplus.

It would now appear that the BoT is tiring of accumulating more reserves than it needs, for obvious reasons. First, given the consensus that the dollar would depreciate further, such accumulation can only lead to more forex losses. Second, the need to sterilise the intervention has increased the BoT's baht-denominated debt in excess of one trillion baht versus Thailand's base money of only 800 billion baht. In addition, the $10.5 billion (350 billion baht) in forward dollar position is also a growing burden requiring continuing rollover and added losses to the BoT as the dollar depreciates further.

Option 1: Accumulate dollars

One option (apparently supported by many) is to force the BoT to continue this reserve accumulation indefinitely as a way of stabilising the baht. This would, however, require Thailand to make the legislative changes for excess reserves to be set aside under, say, a government investment corporation of Thailand (GICT) to spend/invest these excess dollars.

The legislative changes will be a challenge, especially accepting the possibility that some of GICT's investments could face losses.

This option is not ideal for two main reasons. First, persistent balance of payments surpluses arising from a policy of undervalued exchange rates would only force the GICT to get bigger, pushing it to eventually make risky investments. If it does not, and returns are low, then the opportunity cost to the Thai economy and people would be large. Second, excess reserves can be seen as a tax on imports. In other words, if the baht was allowed to appreciate, Thai consumers and investors would have enjoyed cheaper imports.

Option 2: Let baht appreciate and reallocate resources

The second choice is to let the baht appreciate and intervene only when the volatility is considered excessive. Here, the idea is to err on the side of caution and intervene modestly, given the already excess reserves and sterilisation burdens.

This option is hardest on exporters and faces the most serious political resistance. Yet, it is likely to be the best solution for the long run since, at the end of the day, there is a need to reallocate resources away from the export sector into the domestic economy.

Thailand's export was 35% of GDP in 1996. It is now twice that because of the need to generate excess dollars as mentioned above. Now that such is no longer needed, an equilibrium can only be restored by a contraction of exports and an expansion of imports, which can be achieved by a nominal baht appreciation. This means that the government and the BoT cannot afford to send out ''false'' signals that it is committed to keeping the baht weak. To do so would only incentivise exporters to stay put. Current criticisms of the BoT (and the Minister of Finance) for inaction are sending such signals to exporters who would be waiting for the baht to be ''defended'' at the level that allows exports to grow, continuing current account surpluses.

This does not mean, however, that the government and BoT should do nothing more. First of all, it is a lesson that too much dependence on exports and too little overall growth is risky. The government seemed contented with 4% growth but this leaves little room for economic shocks such as the baht appreciation. It would be much better to make it a policy target for growth to be around 6%, allowing a cushion to absorb unforeseen shocks.

Second, the BoT has been multi-tasking and this may have come at the expense of core policy objectives. It was keen to prevent property bubbles and set a ceiling on credit-card interest rates. These can be eased to create domestic spending opportunities.

In 2004, the BoT raised fears that mega-projects could have caused excessive current account deficits (which would ironically be much welcomed at the moment).

Third, the government needs to quickly come up with a set of policies and measures that would facilitate the reallocation of resources out of the export sector. This means looking to liberalise domestic sectors in order to create growth and investment opportunities. Of course, the notion that mega-projects are a priority must be more than just talk.

The appreciation of the baht must be seen for what it is: an increase in Thailand's purchasing power which presents us with the opportunity buy the many things we need from the world market.

Option 3: Create domestic inflation

I am afraid that this may be the most enticing option because it minimises the pains of adjustment and may even create euphoria, but there will be payback several years down the road. Calling for massive interest rate cuts would be classified as option 3.

Large interest rate cuts would necessarily mean significant easing of monetary policy since it is necessary to inject more liquidity to bring down interest rates. This monetary easing is likely to induce asset price inflation.

The stock market may be the first to react. Ironically, this could lead to more capital inflows in the short run, requiring even more monetary easing in the hope of dampening the rise of the baht. Subsequently, real estate prices would rise together with an air of exuberance, as positive wealth effect and inflationary expectations take hold. By then (say a year or two from now), headline and core inflation will be rising, bringing up production costs and wages.

Once this occurs, there will be no more worries about a strong baht. Rising domestic production costs will make exports difficult. Indeed, exporters will voluntarily turn inward to supply the domestic market because prices are rising faster here than world markets. Imports will likely surge for the same reason. Thus, Thailand would be able to cut back on its current account deficit through the creation of domestic inflation. For obvious reasons, those on fixed income (the majority in Thailand) will suffer the most from this option. They will see their cost of living go up and eventually a sharp rise in nominal interest rates in order to keep real interest rates positive. Income tax burdens will rise as inflated wages creep up towards higher tax rates. Entrepreneurs, bankers and stock brokers are likely to fare much better in times of inflation.

Conclusion

Thailand is at an important crossroads. Reducing the country's dependency on exports as the sole engine of growth is necessary and inevitable. Procrastination can only further damage the balance sheet of the BoT, making monetary policy management more difficult.

Taking the easy way out by inflating the domestic economy risks diluting Thailand's monetary policy credibility and is likely to hurt the majority through greater inflation risks. The baht's appreciation should be seen for what it is _ an increase in Thailand's purchasing power which needs to be put to good use. The challenge for the government is to create growth opportunities in the domestic economy to facilitate the reallocation of manpower and resources away from the export sector.

Friday, July 20, 2007

Thaksin's dual track did not work

0:15 AM: During the Thaksin's era, the ex-prime minister announced that he would like to shift Thailand away from its heavy reliance on exports to drive growth. Thaksin would like to balance the economy so that about 50 per cent of the growth would be generated from domestic demand, the other half from exports.

But he could not do it. The figures showed that during the Thaksin years, Thailand continued to grow on the engine of exports. His demand creation resulted in heavy debt burden for the poor instead.

I am not sure that I can agree with Dr Supavud's argument. If you look at all the past experience, Thailand always faced the economic crisis that got started from the foreign exchange. Then we ran into a balance of payment crisis.

I am afraid if we depend too much on domestic consumption, we might face a crisis somewhere along the line once imports get out of control and the public get hooked to consumption.

Besides, the Thai people are not that rich. Only five million Thais out of 65 million people are salary workers, who pay tax directly. About 40 million Thais depend their livelihood on agriculture and cheap labour.

We also have two million civil servants, including the military and the police, who earn their money from the budget. If you add the Or Bor Tor and Or Bor Jor local headsmen, we have another million people to add on the burden of the budget, a very small amount of which goes into investment projects.

Most of the savings in the Thai banks belong to the big companies and rich families. Thai household debt is now about Bt150,000. Total farmers's debt stands at around Bt200 billion. The teachers' debt is also equally huge.

That's why you can see that domestic consumption has been dropping because the consumers' debt is up to their throats.

I am not sure with this kind of income structure, Thailand can in due time shift its economy to become domestic-oriented like the United States. Investment can only take place when there is demand from the consumers. Since the Thai consumers do not have a high purchasing power, the demand must come from somewhere else.

I still believe that at this point Thailand has to export or die.

#######################################

####################

Charlie's Angels

2:00 AM: As Charlie has gone, his Angels are thrown into a disarray. An astrologer of the Bank of Thailand has made several correct forecasts. He can see into the future from the stars.

When MR Pridiyathorn Devakula, the then Bank of Thailand governor, was dressing up to move on to take over as deputy prime minister and finance minister last year, the astrologer foresaw a financial crisis. Nobody believed him then.

In December Tarisa Watanagase, the governor, introduced the draconian capital control measures to halt the one-way-street baht rise. Bingo!

The astrologer also foresaw a difficult time for Mom Oui, predicting that he would not last beyond February 2007. Bingo!

For reasons beyond the understanding of natural science, Mom Oui's reign at the Bangkhunphrom Palace coincided with the rise of the all-woman team. It was the era of Charlie's Angels.

The angels, who are now ruling over the Bank of Thailand, are Tarisa Watanagase, the governor, Atchana Waiquamdee, the deputy governor, Suchada Kirakul, the assistant governor in charge of Monetary Policy Group, Nitaya Pibulratanagit, assistant governor of the Financial Markets Operations Group, Pongpen Ruengvirayudh, senior director of the Financial Markets Operations Group.

Dr Bandid Nijathaworn, the deputy governor and a full man from head to toe, has been left in the cold. He can't break into the circle of this all-woman team.

This morning, a dozen of protesters, who called themselves Pirabkhao 2006, picketed in front of the Bank of Thailand. The posters demanded that Tarisa resign over her failure to manage the baht stability.

 The group, which is also the anti-coup campaigner, said they want Tarisa to resign because she failed to oversee baht crisis which has already affected the Thai business and the general public.

The Pirabkhao 2006 group will make their demand known to Finance Minister Chalongphob Sussangkarn tomorrow and also to Prime Minister Surayud Chulanont later on.

The astrologer has foreseen that Tarisa's star is similar to that of Rerngchai Marakanond, the former governor, who left office in 1997 after the central bank lost all of its foreign exchange reserves from the fierce baht defence.

The astrologer predicts that Tarisa might not survive the governorship beyond August 2007.

#############################################

Thursday July 19, 2007

Private Banking to Mushroom

10:00 AM:  Hello, I am back. After this round of easing the foreign exchange rules, you'll be allowed to open foreign currency accounts in the local commercial banks. That sounds nice, doesn't it?

The implication for the banks will be immense opportunity to start private banking in a big way.  If you are rich, the private bankers will go after you in earnest. They will recommend you all kinds of options to open the foreign currency accounts, with hedging risks.

 I wonder whether you will also be allowed to buy the OECD bonds through mutual funds.

You might not want to open your account in the US dollar, which is getting weaker,  because you may lose money in a hurry.

Less room for big rate cuts

10:05 AM: I just read a report of DBS Group Research, issued this morning. Like most other research houses, it expressed a surprise at the Bank of Thailand's decision to cut its policy rate by 25 basis points yesterday.

For in the May 23 meeting, Suchada Kirakul, the assistant governor of the Bank of Thailand, came out to to say that the central bank would be keeping its monetary stance "neutral". The rate cuts had gone far enough.

Now the statement of the Suchada yesterday suggested that the central bank is not done yet with its rate cut.

As we all know, the central bank has been very reluctant with cutting its policy rate from the outset. It has been preoccuping with price stability.

Instead of cutting the rates drastically late last year, the central bank opted to impose capital controls to rein in the baht appreciation, with disastrous consequence.

MR Pridiyathorn Devakula, the deputy prime minister and finance minister, paid a big political price for the capital controls.

If the central bank had cut the rates more aggressively earlier and intervened with efficiently and a credible manner in the foreign exchange markets, it should have succeeded in maintaining baht stability.

In one year and a half the baht has moved from Bt40 to Bt33. I don't think the central bank has a foreign exchange target in mind. A floating exchange regime does not mean that it will allow the baht to drift up strongly while our main competitors are holding their grounds more firmly.

What the central bank may do at this moment is to target the baht at a certain level, say a magic figure of Bt36 to the dollar as suggested by Dr Virabongsa Ramangkura. Then it can intervene in the foreign exchange market to force the value of the Thai currency down.

When demand for baht is weak or face a downward correction, it may try to hold the rate there. When the currency strengthens with forceful buy, it might need to reduce its intervention. In this manner, the central bank will eventually be able to pull the currency down gradually to the level it likes to see.

The central bank does not have to declare to the whole world that it is re-fixing the currency. Under this floating exchange rate regime, the target can be changed.

Now we are defending the Thai currency by buying up the dollar. It is much an easier job than defending the baht by selling the US dollar like in the case in the 1997 crisis.

If the central bank manages it foreign exchange operation more efficiently, it will have less pressure to cut the interest rate.

DBS Research Group has expressed concern about the return of price pressure in the second quarter of 2008. Oil prices remain high. Investment and consumption can be back after the election. By that time, the central bank's accommodative monetary stance will have to be reversed.

Going forward, the central bank would come under political pressure to cut its rate for another time by 25 basis points before stopping there at 3.0 per cent, DBS Research Group said. It bets that the central bank can't slash the rate deeper than that given the inflationary threat looming in the horizon.

#############################

Thursday July 19, 2007

Chalongphob receives the BOT's package

0:15 AM: It's a new day already. We have to watch what Finance Minister Dr Chalongphob Susangkarn will do with the financial package sent over to him yesterday by the Bank of Thailand's courier service.

The financial package contains measures to ease the baht rise. At the moment Thailand is like a baht tub where water from the tap is flowing in but the drain does not work.

This has been going on for some time but the central bank does not seem to know. Now the water almost spills over the bath tub to flood the bath room.

The financial package proposed by Tarisa Watanagase and her all-women team is aimed at relaxing the forex regulations so that Thai individuals and companies can take the money out of the country more easily or even open foreign currency accounts in the local commercial banks.

But the measures in the package seem to be too little too late. The package does not have any tax measures at all. So I am rather surprise why the central bank people have treated it like a top secret file.

Some of the measures from the central bank's package include:

1. Allowing Thai companies or Thai individuals to open foreign currency accounts in the local commercial banks. If you have foreign currency incomes, you won't face a limit in depositing your foreign currencies in a bank account.

If you don't have any foreign currency income, you can't deposit more than US$100,000 in your account. In the case of companies, the limit is US$300,000 per account.

2. You can invest or buy a piece of real estate in the overseas at not more than US$1 million (ummm. ..ask the ex-prime minister). You can also transfer money more freely to your relatives living in the overseas.

3. Listed companies in the Stock Exchange of Thaila