Pegged Currency

[Japhrodisiac]

With Thailand dependent on both exports and tourism as a healthy part of GDP, I wonder why they simply don't peg the baht to the dollar, the euro, or a weighted basket of currencies such as the DXY index? Pegged currencies have some disadvantages, such as the potential for inflation, but imo it is easier to manage that through interest rates and other fiscal policies than to manage the baht itself, unless one engages in US and EU style depreciation via massive bond selling and debt creation, which I believe is not the way to go for Thailand. I don't see much of a downside to doing this, other than a very short term market disruption. Thoughts?

[Firefan]

They tried that. Did not work so well for them, and they trickered the Asian crisis back in 96-98 when having to get out of the peg. Cheers!

[fletchsmile]

The biggest downside is the cost of maintaining the peg in volatile times when markets are moving against where you want to be.

 

The financial clout of global financial players, hedge funds, currency traders, speculators, investors, etc dwarfs Thailand's limited resources to defend it. 

 

As Firefan says, that's what they learnt to their detriment last time round. These days, Thailand is much stronger financially, with solid foreign currency reserves. But those reserve could easily and quickly be wiped out at the wrong time trying to artificially and vainly maintain a pegged exchange.

[kevin612]

No more pegged after the late 90s crisis.

[Bob12345]

Agree with the three above.

 

The key to having a succesful peg is to have it at pegged at the correct rate (otherwise you will have inflation or bleed foreign currency).

 

The correct rate changes day to day depending on supply and demand. And the only way to know what the correct value is, is by letting the currency float and not intervene.

 

But with the currency floating and not intervening you dont have a pegged currency.

[StevenAsian]

Just lower interest rates, the world is slowing down.  Baht needs to depreciate in line with China.  Exports earns 57 Billion USD  per year. Leave the currency  high, people are already discovering Cambodia and Vietnam.  Once they get there and discover their unspoiled beauty,  they will forget Thailand for good. High currency  is the impediment to recession,  then the export businesses will also collapse, giving more ammunition to exports from China and Vietnam.

 

[Fex Bluse]

It's not pegged.

It might be manipulated, however.

 

Thailand escaped the US Currency Manipulator designation recently but is being watched closely.

https://kasikornresearch.com/en/analysis/k-econ/business/Pages/z2998.aspx

 

Check out the below at 14:40 where they make some brief commentary about Thailand manipulating the currency for the elite during the last financial crisis.

 

Of course, there is high likelihood the elite are doing this again.

 

[cocopops]

Once you peg your currency you cannot manage your own interest rates - you have to go with the central bank and market that control the currency you have pegged to. That's the lion's share of the great <deleted> of 1997 - they tried to peg the currency and control the interest rates.

[EricTh]

On 9/13/2019 at 7:12 PM, Bob12345 said:

 

 

The key to having a succesful peg is to have it at pegged at the correct rate (otherwise you will have inflation or bleed foreign currency).

 

 

 

Mind giving some examples?

 

If we peg too high, what happens? If we peg too low, what happens?

 

 

 

[Bob12345]

Pegging it too low or too high is like under- or overvaluing your currency.

 

If your currency is overvalued your exports will drop and imports will increase (foreign products get relatively cheap). That means you will run out of foreign currency to keep the peg in place and you will be forced to repeg or let the currency float at some point (see George Soros and the British pound).

 

This is not what is going in in Thailand though as foreigners keep putting money in the economy offsetting the low exports. The Thai central bank is not intervening as far as i know and their levels of FX seem not to be depleted. Obvious downside of an "overvalued" baht will be low exports resulting in lower production, less employment, and low economic growth.

 

If you undervalue your currency the opposite will happen. While this situation is easy to maintain (you can print zillions of your own currency to keep it cheap) it will lead to inflation and other countries will get mad at you for exporting so much while barely importing. This is what China was doing some time ago, now the Yuan is allowed to flow a little. The USA is complaining though.

 

To avoid all of this you can just let your currency float. In some cases, especially with smaller currencies, the central bank will still intervene a bit to lower volatility ( = uncertainty and therefore bad for business), but they wont try to fight the markets too much.

[Bob12345]

There are also some middle-american countries i believe that pegged to the dollar at a completely wrong value meaning the whole economy basically switched to the USD. Maybe it was Cuba or something.