Thanong

Thanong Khanthong
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Friday , February 8 , 2008

The looming war on capital controls

Posted by Thanong , Reader : 638 , 17:45:46

February 8, 2008 If Tarisa Watanagase, the Bank of Thailand, were a patient, she must have been staying in an intensive care unit by now. What would be her reaction if the surgeon were to emerge into the operating and he turns out to be Dr Surapong Suebwonglee holding his sharp knives? Tarisa is now on the defensive. Dr Surapong, the finance minister, will be holding talks with her next week to discuss the possibility of removing the capital controls altogether. Surapong spoke during the political campaign that if elected as government, he would like to remove the capital controls. Tarisa: on the operating table Samak Sundaravej, the prime minister, has also indicated that the government is considering to move capital controls, although it will have to discuss with the central bank first. He understands that it is a delicate issue because the government may be trampling on the turb of the central bank. Tarisa and her central bank officials are facing a dilemma. If they were forced to remove the capital controls, they would bear the consequence in case that the baht shoots through the roof again. There has been steady pressure on the baht, which is on the upward trend. If the baht gets stronger, the export sector and several other industries would get hurt. The central bank would be solely to blame. What is the real situation then? Surapong looks determined to remove the capital controls. He might introduce tax measures to impose on short-term capital instead of giving the central bank a blank cheque to curb the short-term money. Tarisa and her team are ready to fight back. Next week they will be arming themselves with documents and data to support a need to maintain the capital controls, although most of the administrative measures under the capital controls have been relaxed. They are confident that once Surapong has digest the central bank's report, he should think twice before moving to abolish the capital controls altogether. Another problem with Tarisa's central bank is that the supervisors of the banking institutions have been very tough with the commercial banks. Rules on banking supervision have been tightened, forcing the commercial banks to set aside reserves to account for doubtful loans. The definition of the doubtful loans differs significantly between the central bank supervisors and the commercial bankers. Smaller banks, in particular, have been hard hit by the supervision tightening since they need to scramble for capital to set aside as reserves. The bankers have been grumbling about this. You have to understand that imposing or removing capital controls lies in the jurisdication of the central bank. With this strong wind of political change, you can feel that it is a matter of time when the politicians will step in to clean up the central bank. The Surapong's team of advisors does not seem to have high regard for the central bank at this point. The capital controls, introduced in December 2006, have dealt a serious blow to the financial markets. Tarisa's handling of the baht operation had run into trouble before the situation has improved since the last part of 2007. We have to keep an eye on this story next week. Still, if in the end, the central bank is forced to abolish the capital controls, what would be other support measures to cushion the baht in the event that short-term capital flows in massively to speculate against the baht? The central bank would be challenging the Finance Ministry to come up with further recommendations.

February 8, 2008

If Tarisa Watanagase, the Bank of Thailand, were a patient, she must have been staying in an intensive care unit by now. What would be her reaction if the surgeon were to emerge into the operating and he turns out to be Dr Surapong Suebwonglee holding his sharp knives?

Tarisa is now on the defensive. Dr Surapong, the finance minister, will be holding talks with her next week to discuss the possibility of removing the capital controls altogether. Surapong spoke during the political campaign that if elected as government, he would like to remove the capital controls.

Tarisa: on the operating table

Samak Sundaravej, the prime minister, has also indicated that the government is considering to move capital controls, although it will have to discuss with the central bank first. He understands that it is a delicate issue because the government may be trampling on the turb of the central bank.

Tarisa and her central bank officials are facing a dilemma. If they were forced to remove the capital controls, they would bear the consequence in case that the baht shoots through the roof again. There has been steady pressure on the baht, which is on the upward trend. If the baht gets stronger, the export sector and several other industries would get hurt. The central bank would be solely to blame.

What is the real situation then?

Surapong looks determined to remove the capital controls. He might introduce tax measures to impose on short-term capital instead of giving the central bank a blank cheque to curb the short-term money.

Tarisa and her team are ready to fight back. Next week they will be arming themselves with documents and data to support a need to maintain the capital controls, although most of the administrative measures under the capital controls have been relaxed. They are confident that once Surapong has digest the central bank's report, he should think twice before moving to abolish the capital controls altogether.

Another problem with Tarisa's central bank is that the supervisors of the banking institutions have been very tough with the commercial banks. Rules on banking supervision have been tightened, forcing the commercial banks to set aside reserves to account for doubtful loans.

The definition of the doubtful loans differs significantly between the central bank supervisors and the commercial bankers. Smaller banks, in particular, have been hard hit by the supervision tightening since they need to scramble for capital to set aside as reserves. The bankers have been grumbling about this.

You have to understand that imposing or removing capital controls lies in the jurisdication of the central bank. With this strong wind of political change, you can feel that it is a matter of time when the politicians will step in to clean up the central bank.

The Surapong's team of advisors does not seem to have high regard for the central bank at this point. The capital controls, introduced in December 2006, have dealt a serious blow to the financial markets. Tarisa's handling of the baht operation had run into trouble before the situation has improved since the last part of 2007.

We have to keep an eye on this story next week.

Still, if in the end, the central bank is forced to abolish the capital controls, what would be other support measures to cushion the baht in the event that short-term capital flows in massively to speculate against the baht? The central bank would be challenging the Finance Ministry to come up with further recommendations.

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comment 5
Pomjuk date : 09/02/2008 time : 19.00
http://blog.nationmultimedia.com/pomjuk

I'd rather us the world "Setting the currency POLICY" than "setting the VALUE of the currency".

comment 4
Pomjuk date : 09/02/2008 time : 18.58
http://blog.nationmultimedia.com/pomjuk

I agree with Dalmasian that setting the value of the currency should be under the jurisdiction of the Ministry of Finance not BoT. However, I still believe that capital control might have been the very thing that prevented another episode of 1997 style crash to happen again in 2007.

I’m not sure how accurate the BoT reported inflation rate is; if it is accurate I seems to me that we still have some room for the interbank overnight rate to go lower. That should counter the effect of the removing the capital control a bit and it should also be the very thing we need stimulate the slow growing economy. Moreover, US’s real interest rate (interest rate – inflation rate) is going toward zero this year, this will increase the chance of Thai baht being overly strong. For the past two and a half years US dollar has been depreciated more against Thai baht than Euro, Pound, Yuan, Yen and Rupee. Stronger baht is not going help Thai products to compete with these US’s trading partners in the US market.

comment 3
korbsak date : 09/02/2008 time : 12.23
http://blog.nationmultimedia.com/korbsak

We need central bank governor that has extensive experiences and understanding of the money market. Unfortunately, we seem to think that only the inside is more suitable for the job. . The law even stipulated that the governor candidate's age must be under 60, further limited the pool of would be " good choice ".
Trying to be guardian of currency is not realistic with the current world environment, especially for small country like ours. Need to have enough courage to allow free flow of fund, both in and out to help solving the imbalance.

comment 2
Dalmasian date : 08/02/2008 time : 22.35

Khun Thanong, it appears to me that you are very supportive of Tarisa's imposition of capital controls to artificially supress the value of the Thai Baht in foreign exchange markets. I strongly disagree with this manipulation of the Thai currency by the BOT.
The BOT's main job is to monitor "true" inflation in the country and use it's monetary and interest policy to either cool down the economy if inflation is excessive or stimulate economic activities if there is a slowdown in the economy. I say "true" inflation because so far I have not seen any government-published inflation data to be realistic, honest and accurate and to truly reflect what the average Thai person sees as "inflation" when they go about their daily life.
In this connexion the BOT has already failed miserably in its main job. It is not the central bank's job to manipulate the value of the currency because what they are doing is to favor certain sectors of the economy at the expense of other sectors. The currency should be allowed to seek its fair value in the foreign exchange market freely through market forces.
If any sector of the economy needs assistance then let the Ministry of Finance introduce fiscal policies and measures to assist these sectors on a temporary basis. In the long run, the agricultural and manufacturing sectors that makes up the bulk of the exporters must be "encoraged" by fiscal measures to upgrade and improve their products and services if they are going to be able to compete successfuly in the international markets. If the government continues to "baby sit" them and "cuddle" them like poodles they will never grow up, and the problem of their dependence on a cheap currency will never be solved because they will always fall back on using cheap prices to sell their cheap products overseas.
These are my 2 cents for the day.

comment 1
MaxHeadroom date : 08/02/2008 time : 17.56
http://blog.nationmultimedia.com/maxheadroom

I am not sure if the prospect of Mr. Bean trying to operate a tumor not knowing a spoon from a surgical knife would make me feel comfortable

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