October 7, 2009

Deputy Prime Minister Korbsak Sabhavasu has expressed grave concern over a lack of balance in the monetary-policy management of the Bank of Thailand.

He said the BOT had encouraged a free flow of capital into the country while failing to allow capital to flow out in an equally free manner.

"This practice has brought about an imbalance of the BOT's monetary-policy management. That's why we have witnessed a rise in the baht against the US dollar," he said.

A Government House source said the central bank appeared to have been caught in a similar trap to that experienced in 1997, when it tried to prop up the baht by selling the dollar in order to avoid a devaluation.

It ended up losing most of its US$39 billion in foreign-exchange reserves, forcing the country to seek a bail-out from the International Monetary Fund.

The source said the situation was currently equally grave but also a reverse of the 1997 situation.

"The BOT has been buying up dollars to weaken the baht and keep it competitive. This foreign-exchange intervention also includes its forex swap operations. But since the dollar's value is going down, the central bank is suffering huge losses in baht terms in its accounting book," the source added.

The BOT now holds about $130 billion (Bt4.35 trillion) in foreign-exchange reserves, much of which is in US dollars. The continuing fall of the dollar because of growing deficits and huge damage to the US financial system will result in losses of Thailand's wealth, and also losses on the central bank's balance sheet.

As of July, the BOT held about $31.4 billion in US Treasury securities, compared with a peak of $39.7 billion in February.

Many countries, particularly China, are looking at ways to reduce their dollar holdings, because of the impending fall, if not collapse, of the greenback.

BOT Governor Tarisa Watanagase has been saying the central bank has diversified its dollar holdings of |foreign-exchange reserves. |But she also recently said the dollar would continue to be |the major global currency for the foreseeable future.

Amporn Saengmanee, director of the central bank's Monetary Policy Department, echoed the BOT's confidence in the dollar.

He said the greenback would continue to be a strong currency with credibility among the world's trading nations.

"It would be difficult for other currencies to replace the dollar even though the dollar might be fluctuating sharply in some periods," he said.

Meanwhile, Korbsak said the US would not experience a V-shaped economic recovery.

"I think the US will be recovering in a U shape or W shape. However, purchasing power in the US will be not the same as previously, and the financial system and its currency are still facing problems. The unemployment rate is still high," he added.

The deputy premier said the problems faced by Thailand's export sector would be prolonged. The country should therefore rely more on domestic consumption.

"However, we have seen a good sign for local business people, as both the government and the opposition have agreed for the first time to amend the Constitution. The move will help promote higher confidence in the local political situation," he said.

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Move to wean world off US$

Persian Gulf Arab states are planning – along with China, Russia, Japan and France – to end US dollar dealings for oil, signalling a start of a new world order, according to Britain’s The Independent.

In a report called “The Demise of the Dollar”, pub ฌlished yesterday, the newspaper said these countries were instead moving to adopt a basket of currencies, including the yen and yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Cooperation Council (GCC).

The GCC consists of Saudi Arabia, the United Arab Emirates, Kuwait and Qatar.

“Secret meetings have already been held by finance ministers and centralbank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars,” the report said.

“The plans may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transi ฌtion from dollar markets within nine years. ”

The Independent added that the Americans were like ฌly to fight this international cabal, which would include hithertoloyal allies Japan and the Gulf Arabs.

“Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concen ฌtrate on the extraordinary implications of the transition from the dollar in nine years ’ time. The current deadline for the currency transition is 2018,” The Independent said.

In Thailand, reaction to the newspaper’s story on a move away from the dollar for oil trading or settlement remained cautious.

Thai Oil CEO Surong Bulakul said: “It will be rather difficult to use other currencies to replace the dollar in oil trading within this century. All of the countries in the Middle East still use the dollar 100 per cent for oil set ฌtlements. The US dollar is still the currency of choice. ”

However, Surong acknowledged it might be possible to rely on other currencies to help in the risk manage ฌment in oil trading, but this would be on a casebycase basis.

Amporn Saengmanee, a director of Bank of Thailand ’s Monetary Policy Department, also said it would be difficult to move away from the dollar in oil trading, because for the foreseeable future the greenback remained the chief medium of international transactions.

“In the long term, there might be attempts to rely on other currencies for oil trading. But that does not mean that the dollar will be completely abandoned,” he said.

Chodechai Suwanaporn, director of the Fiscal Policy Office’s financialsystem section at the Finance Ministry, said he doubted whether the basket of currencies to be applied by the GCC and other countries would be able to replace the dollar.

There are several tough questions they need to answer, he said. For example, how these countries would set the basket for oil settlement and whether they would accept the currencies that they use for settlement in the event that these currencies depreciated.

“How much the impact would be on the US dollar, if successful, would depend on how much oil traded under this scheme. I believe the impact would initially be low. It’s only the beginning,” he said.

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