August 9, 2007

Only debate, no grilling

6:45 PM: Members of the National Legislative Assembly are debating on the government's, if not the Bank of Thailand's, mismanagement of the baht policy. The debate started out in the afternoon and sounded like a pat in the back rather than any serious attempt to grill Dr Chalongphob Susangkarn, the finance minister, and Tarisa Watanagase, the Bank of Thailand governor.

I have found Dr Ammar Siamwalla's address in the NLA most interesting. He suggested, in his typical polite way, that the government must come up with a foreign exchange policy framework instead of allowing the Bank of Thailand to run the whole show by itself.

At present, the central bank does not seem to have any foreign exchange policy framework to pursue, he said. It is simply managing the baht in an ad hoc way through its foreign exchange operations on a daily basis, he added. Therefore, the government must introduce a clear-cut strategy or policy framework on the foreign exchange so that the central bank can follow.

Ammar does not agree either with the central bank's move on December 18, 2006 to introduce draconian capital controls. He said the measures were too sudden and drastic, causing turmoil among the local and foreign investors.

The capital controls require foreign investors to put aside 30 per cent of their capital as reserve in non-interest bearing account for one year. This was aimed at curbing the intense speculation on the Thai baht and which had been causing the Thai baht to rise in value rapidly.

 Now the Bank of Thailand is obliged to issue a reply. We all love to know what kind of foreign exchange strategy it is pursuing or whether it is indeed simply running its foreign exchange operations in a routine fashion. If that is the case, the overall Thai economy is ill served by the absence of the foreign exchange policy strategy.

China, Singapore, Malaysia all have a very clear foreign exchange policy strategy. They have also been managing their foreign exchange operations so well that their economies do not get hurt as much as the Thai economy. The baht, which was a liquidity currency before the imposition of the capital controls, became the target of the speculators, who sought to profit from its appreciation.

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We have the fx strategy, but we won't tell you about it

Dr Chalongphob Susangkarn, the finance minister, rose to defend the authorities' management of the foreign exchange policy, which had come under a hurl of attack. He said the baht exchange rate policy is a sensitive matter, with all the countries facing problems over how to manage currency volatility.

The currency volatility is rooted in the global economic imbalances and also from the US deficits, which have caused capital to flow out of the US financial centre to other parts of the world.

He was rather sympathetic with the Bank of Thailand. From the tone of his presentation, he in fact defended the central bank over its handling of the baht policy.

Chalongphob admitted that as a small open economy, Thailand will continue to face the foreign exchange volatility because it does not have enough tools to manage the baht. Besides, the size of the Thai economy is too small to look after the currency volatility adequately.

Over the past two months the baht has risen quite sharply compared with other regional currencies. In May the baht was trded at around Bt34.5 to the US dollar. But in July, the situation changed drastically with the huge foreign capital inflow. In the first two months of July, there was some Bt35 billion of foreign money flowing into Thailand, hence driving up the value of the baht to Bt34.7/US dollar and then to a 10-year record high of Bt33.40.

Chalongphob admitted that this sharp and rapid rise of the baht by Bt1/US dollar within this short period is a cause of concern. He said it would not be fair to let the central bank manage this problem alone. So far he has accompanied the central bank governor to meet with Prime Minister Gen Surayud Chulnanont.

Chalongphob has resisted any temptation to intervene in the central bank's affair as he honours its independence.

"Normally, a central bank of a country will have independence in its operation. But it won't have independence in the policy objective. In time of emergency, the Finance Ministry can step in to help in adjusting the policy objective," he indicated.

"It is not anything stragey if the government consults with the central bank when the foreign exchange faces severe volatility. We should not adjust the policy objective too drastically. The policy objective must reflect the reality. We can do this by allowing people to hold the dollar more," he said.

"The developed countries all have stronger currencies than Thailand's but they can move on because they have other economic sectors to rely on. Thailand only relies on the export sector so when we compare Thailand we have to compare it with the developing countries, not the developed countries."

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Exit tax to curb baht speculation

7:00 PM: Khunying Jada Wattanasiritham, the former head of the Thai Bankers' Association and antoher member of the NLA, also voiced a similar suggestion by calling for the authorities to come up with a clear foreign exchange policy strategy to deal with the baht volatility.

She recommended that the government rely on tax measures -- rather than the wholesale capital controls -- to deal with the hot money shifted into the country by the international money managers to speculate on the baht. If the exit tax were to be imposed on funds repatriated out of the country, then it would help deter the baht speculation.

"Baht appreciation is not totally bad. But the problem is that it has become too volatile and lacked stability," she said.

Actually, before introducing the capital controls on December 18, 2006, the banking authorities had been discussing widely over the possibility of introducing the tax measures. In the end, they were afraid that the tax measures might not be timely enough to deal with the hot money. Besides, tax regime belongs to the domain of the Finance Ministry.

If the banking authorities were to asked the Finance Ministry to introduce the exit tax, they would also have to ask it again to revoke the tax when they found that the situation had return to normal. By that time, the Finance Ministry might not want to revoke it.

In the end, the banking authorities agreed on imposing the Chilean-style of capital controls because this measure came under its jursidiction without having to ask for approval from the Finance Ministry. But in the practical term, Tarisa Watanagase, the central bank governor, had been consulting the capital controls measures closely with MR Pridiyathorn Devakula, the then deputy prime minister and finance minister.

The outcome was rather disastrous because they were forced to backtrack on the capital controls on equity investment. However, now both Dr Chalongphob Susangkarn, the finance minister, and Tarisa appear to be comfortable with the capital controls, which would not be lifted off easily in the face of uncertainties over the baht outlook.

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30% reserve requirement shoud be removed

7:15 PM: During the debate on the baht in the National Legislative Assembly, Phatreeya Benjapholchai, the president of the Stock Exchange of Thailand, proposed that the authorities remove the 30 per cent reserve requirement altogether. She felt that the measure was very unpopular and damaged the sentiment on Thailand as a whole.

The baht appreciation has not been driven by the capital inflow into Thai equities alone because the foreign money also goes into other financial instruments such as property funds or mutual funds, she argued.

She gave two recommendations to the government to consider.

First, the authorities must facilitate the private sector's investment in the overseas.

Second, if Thailand were to liberalise other economic sectors, the foreign capital will flow into these liberalised sectors too instead of heading into the stock market alone.

On the price/earnings ratio basis, the Thai stock market has become one of the region's most attractive bourses. Phatreeya said that the P/E ratio of the SET is standing at 13 times compared to 16-20 times for the regional bourses.

The foreign inflow into the stock market reflects growing confidence in the direction of the Thai economy and the prospects of greater political stability, she said.