February 13, 2008

Finance Minister Dr Surapong Suebwonglee and Tarisa Watanagase differ over how to deal with the capital controls. While Surapong tries to introduce market-based approach to tackle the baht appreciation, Tarisa seems to believe that the 30 per cent capital controls are still a necessary weapon to deal with the baht speculation.

The Finance Ministry has suggested that a combination of measures can be introduced to handle the baht once the 30 per cent reserve requirement is lifted.

Showdown on capital controls between Surapong and Tarisa

First, the central bank may need to cut interest rate before it lifts off the capital control. The US has already cut its rates like crazy. It's time the Thai central bank follows a similar suit to not only promote economic growth but also narrow the gap between the US and the Thai rates. This will make the baht less attractive to hold vis-a-vis the US dollar.

Second, the financial markets have expected that the baht will jump quickly once the capital controls are removed. CitiGroup believes that the baht could climb to Bt31.90/US dollar in the near term as a result. In that case, the Finance Ministry believes that the central bank is obliged to intervene effectively -- massively if necessary -- to keep the baht steady or prevent it from shooting through the roof.

Those are the short-term measures.

Third, in the medium term outlook, the Finance Ministry will be introducing Vayuphak II Fund to support the government's investment in the mega-projects. Prime Minister Samak Sundarvej has already announced that he would like to invest Bt500 billion over the next four to five years to invest in the mass transit systems and in the water transmission system in the Northeast.

The Vayuphak II Fund will raise money by issuing bonds. This will help absorb liquidity once the the 30 per cent reserve requirement is lifted. But it needs foreign investors' participation to improve the demand for the Vayuphak II bonds. Without foreign investors' demand, the cost of borrowing will unnecessarily increase.

Surapong plans to make a road show to the overseas markets some time in March and April in order to restore investors' confidence. One of his messages is likely to cover measures to stimulate the domestic demand. Mega-projects will highlight the government's investment programme. He won't do the road show without the removal of the capital controls because the investment programme requires foreign investors' participation.

Fourth, for the longer term outlook, once confidence returns to Thailand, private investment will kick off. It will stimulate imports, which will automatically help reduce pressure on the baht.

Fifth, baht appreciation so far is also caused by the current account surplus. There is more money flowing into Thailand than the other way around. Private investment and consumption have yet to recovered. So the direction of the baht can only go up.

The Bank of Thailand has argued that it is still necessary to keep the capital controls to rein in the baht speculation.

There are two tranches of foreign money -- one being locked up by the 30 per cent reserve requirement and the other being 100 per cent hedged -- that might flood the foreign exchange market to drive up the baht if the capital controls are to be removed. The two tranches of foreign money are believed to stand at a combined US$5 billion.

There are other sensitive figures and data that Surapong has requested the central bank to supply him next time in order to help him decide on the capital controls. We don't know yet what these figures or data are all about.

The capital inflow and outflow have yet to balance out, making baht appreciation still an immediate threat. Although the central bank has introduced a series of measures to relax the foreign exchange controls, the outflow is still small compared to the inflow.

The current account surplus, which stood at around US$5-US$6 billion last year, is the the main cause that drives up the baht value. If that were to be the case, the central bank's intervention to keep the baht stable would not have resulted in a dramatic increase of its reserves by US$20-US$30 billion in the last four to five months of last year. This evidence shows that there is indeed a huge inflow of money into Thailand aside from the current account surplus.

Hold on for round two of a showdown on capital controls between the Finance Ministry and the Bank of Thailand. You can guess the outcome by now.

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February 12, 2008

Finance Minister Surapong Suebwonglee has backed off from his earlier pledge to remove the country’s capital controls -- at least for now. 

He would like to get all the information and decides this issue once and for all before embarking on his international road show in March and April.

This followed his a high profile meeting between the top Finance Ministry policy-makers and the Bank of Thailand's team. The meeting lasted almost two hours.

Governor Tarisa Watanagase and her team armed themselves up to their teeth with crucial information and data to justify a need to continue to keep the capital controls in place.

Tarisa appeared to have won the battle in this first round. But she should not rush to declare victory or central bank's independence.

Surapong is determined to remove the capital controls. The only question is the appropriate timing and the necessary support measures once the controls are scrapped.

The financial markets have speculated that the baht would jump sharply, probably to Bt31/US dollar once the capital controls are removed.

“The central bank governor will report to me as soon as possible when she gets the information that I have requested,” said Surapong.

He did not elaborate what kind of information he wants from Tarisa.

Accompanying Tarisa to the Finance Ministry meeting were Achana Waikuamdee, the deputy governor, Dr Bandid Nijthaworn, the deputy governor, and Suchada Kirakul, the assistant governor. After the meeting, they all sealed their lips tightly.

Thanong Bidaya, the top key advisors to Surapong and a close aide of ousted prime minister Thaksin Shinawatra, is expected to make a trip back from Japan over the next one week to help Surapong make the final decision.

It looks as if the Finance Ministry is zeroing into the central bank's turf by applying polical pressure over it to remove the capital controls. The Finance Ministry also has a hidden agenda to sack the governor.