Thailand's Tarisa Says Baht Controls To Stay For Now

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By Beth Jinks

Jan. 16 (Bloomberg) -- The Bank of Thailand deliberately

created ``uncertainty'' in the foreign exchange market to drive

out speculators from Japan and the U.S. when it imposed curbs on

investment, Governor Tarisa Watanagase said.

``It was important and necessary for us to put a brake on

the sentiment, to create some uncertainty,'' Tarisa said in an

interview in Bangkok yesterday. Investors had signaled that

earlier measures ``were nothing'' to them, she said.

The Bank of Thailand triggered a slump in Thai stocks,

bonds and the currency when it imposed penalties on early

withdrawals by investors in Thai assets. Its reversal of some of

the measures a day later raised concerns about its handling of

the economy and the currency market.

``What the Bank of Thailand has done is create uncertainty

and volatility,'' said Nizam Idris, a currency strategist at UBS

AG in Singapore. ``What they have done is to really put

questions over their ability to manage the economy.''

Credit-default swaps based on $10 million of Thai bonds

trade at about $37,500, according to BNP Paribas. That's up from

about $24,000 on Dec. 15, according to prices supplied CMA

Datavision in London. The contracts allow traders to bet on the

government's ability to repay its debt. An increase suggests

declining credit quality.

`Had to Act'

Tarisa said the bank had to act when the baht came

``precariously close to breaking the 35 mark'' against the

dollar, and that controls will stay as long as speculators

threaten to drive the currency higher.

``The restrictions continue to undermine the baht and it's

probably the case the central bank actually wants the baht to

weaken a bit more,'' said Steven Chang, global markets vice

president in Hong Kong at State Street Bank & Trust Co. ``There

could even be some more measures aimed at curbing baht

strength.''

Investors in bonds, real-estate mutual funds and foreign-

currency borrowings have 30 percent of their funds locked up,

interest-free, for a year under the capital controls. Similar

restrictions on stock investments were dropped on Dec. 19, after

a 15 percent plunge in Thailand's benchmark SET Index.

With ``one-way momentum'' the baht surged as much as 17

percent last year, prompting calls for central bank action by

companies including Thai Union Frozen Products Pcl, the world's

second-biggest tuna canner, for the central bank to stem gains

that were undermining their competitiveness.

Unconventional

Buying of the baht came mainly from Japan and the U.S.,

Tarisa said. There was no fundamental economic reason to justify

the increase, she said.

``I've been criticized for taking the market by surprise by

taking unconventional methods, especially capital controls,''

Tarisa said. ``Conventional wisdom works only when you are in a

conventional environment.''

Speculators had shrugged off earlier measures designed to

ward off ``hot money'', including a Nov. 27 rule change allowing

Thai stock brokers to invest abroad directly, and a Dec. 4

request that local financial institutions stop trading debt

repurchase agreements with non-residents, she said.

``On certain days all currencies in the market were

depreciated but the Thai baht kept going up,'' Tarisa said,

adding that comparable regional currencies gained between 7

percent and 8 percent last year. ``Now investors see more

uncertainty, I think we'll see less volatility in the

currency.''

`Slap in the Face'

The central bank had considered introducing a withholding

tax and even an unexpected, sharp cut in the benchmark interest

rate to deter speculators, before finally opting for the capital

controls, she said.

Regardless of the messages the bank sent to investors, the

baht continued to rise.

``It was like a slap in the face,'' Tarisa said.

Tarisa became central bank governor on Nov. 15, replacing

Pridiyathorn Devakula, who accepted an appointment as finance

minister in Thailand's junta-installed cabinet. The military

seized power in a Sept. 19 coup.

The capital controls were ``my idea,'' Tarisa said

yesterday. ``It's not the job of the Bank of Thailand to talk to

the government, so whether it's a military government or not it

doesn't matter.''

Independence

She has never spoken to junta-installed Prime Minister

Surayud Chulanont, and dismissed perceptions she and former boss

Pridiyathorn ``may have a too dependent relationship,'' saying

the minister knows ``the independence of the central bank is the

most important thing.''

Protocol demanded she report the 30 percent reserve

requirement to the minister ahead of announcing it, Tarisa said.

``But it was the Bank of Thailand's decision, in fact it

was my decision,'' she said. ``I pushed for the staff to come up

with a measure that should be more effective than what we did

before.''

When the Thai currency closed at 35.09 on Friday Dec. 15,

Tarisa instructed her team to keep working all weekend so she

could announce an effective policy on Monday Dec. 18. She would

have preferred to unveil details ahead of a weekend to give

investors time to digest the measures, but the baht had moved to

a ``precarious'' level.

``We did not have the luxury of waiting for another

weekend,'' she said.

Relaxing Curbs

The capital controls are ``not a long-term solution,''

Tarisa said. The curbs will stay ``up to a point when we see

that the baht has really stabilized, then we'll lift'' them.

To ease some of the unintended effects of the controls, the

central bank is in talks with local commercial banks on how it

may relax requirements for local subsidiaries borrowing money

from overseas parents to fund expansion, and on some foreign

borrowings used to finance direct investments in Southeast

Asia's second-largest economy, Tarisa said.

``If there are certain activities that are bona fide, that

won't cause ripples to the exchange rate, then we are willing to

take some exceptions,'' she said.

The central bank won't accommodate companies speculating on

the currency by transferring funds to and from their Thai

subsidiaries, as detected in December and November, Tarisa said.

``Company loans that came in for a day left the next, came

back again the next day,'' she said. ``Certainly it looks like

speculation on the exchange rate.''

Nor is the Bank of Thailand ready to ease controls for Thai

companies borrowing money overseas. Liquidity generated by

investors' recent stock sales that remains in Thailand could

finance domestic companies funding needs, Tarisa said.

not quite sure what to make of all this...right hand left hand springs to mind tho

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Frankly I find it extremely worrying that she is so blase about her "unconventional" measures.

If you run a company, fine be as unconventional as you want but when your decisions affect an entire nation the last thing needed is a maverick at the controls.. (and Im being generous!)