Will The New Direction The Bot Is Taking Work?

[ray23]

Like most things about economics I don't have a clue. But, it really sounds as if they are finally getting concerned about the cost of exports from Thailand. A good move I think, but I don't really know.

Thai central bank encourages overseas investment to contain baht rise

BANGKOK, Aug 6 (TNA) – Bank of Thailand (BoT) Deputy Governor Suchada Kirakul on Wednesday said the central bank now allows a corporate entity with total assets of Bt5 billion or more to invest in securities and acquire a stake overseas as part of efforts to contain the baht appreciation.

At present, there are 503 companies whose asset size meets the required amount. They are permitted to invest in securities overseas in an amount of no more than US$50 million and to acquire a stake in overseas business of no more than 10 per cent of the registered capital.

The central bank gave institutional investors a green light to enhance the scope of their investment in local and overseas derivatives -- from investment with a purpose to hedge against risks to investment to get returns on derivatives.

In addition, the central bank gave exporters and importers approval to make derivative deals to hedge against currency exchange risks with commercial banks for product and service payment.

The BoT is confident the relaxation of the rule would help contain the strengthening of the baht and keep the capital inflow and outflow in balance, she said.

Currently, foreign capital has flowed into Thailand unilaterally as a consequence of the current account surplus of up to $10 billion. It made the baht hover around 33.80 baht to the US dollar.

Mrs Suchada affirmed the baht had moved more steadily than other currencies in the region. The currency is not stronger than those of rival countries.

Since early this year, the baht has appreciated by 2.4 per cent while the US dollar has weakened by 4 per cent. The Indonesian rupiah rose by 9.8 per cent and South Korean won by 3.5 per cent.

“We are unable to peg the baht. Adopting a flexible system looks better,” the deputy governor said.

“We cannot predict whether the baht will depreciate to 37-38 to the dollar because the currency exchange rate always changes. The weakening or strengthening of the baht depends on the macro-economic policy and the US dollar movement,” she said. (TNA)

Business News : Last Update : 08:13:58 6 August 2009 (GMT+7:00)

[inthepink]

The BOT, like any central bank, cannot fight market forces for any length of time. You only have to look at the recent efforts of the SNB in Switzerland for proof of that

This:

We cannot predict whether the baht will depreciate to 37-38 to the dollar because the currency exchange rate always changes. The weakening or strengthening of the baht depends on the macro-economic policy and the US dollar movement,” she said

is completely true.

I think they have always been concerned about the cost of exports. In fact the one thing they did that had an immediate effect on the exchange rate was that strange foreign investors rule that they ended up repealing, but everybody laughed at that, which shows how little people know.

Edited August 6, 2009 by inthepink

[ray23]

Well I sure don't know but I don't try you to act like I do. I've gotten a lot of help from guys here on TV that do know.

[inthepink]

Well I sure don't know but I don't try you to act like I do. I've gotten a lot of help from guys here on TV that do know.

Sorry, I don't really understand your answer. I make a living in the foreign exchange markets, I'm not trying to "act" like I know anything?

[ray23]

I'm sorry I was referring to me not you in anyway. It's good to receive thoughts from people such as yourself when you need to understand.

[Time Traveller]

The problem in Thailand that I see is that too much of the economy relies on exports (approx 65+% of gdp). All of the exporters want to have a weak currency, but at the same time they all repatriate their income into baht thus leading to strong demand for baht, hence the currency strengthens. So they are all shooting themselves in the foot. Almost no one in fx markets believe that there is any significant level of speculation in dollar/baht trade at the moment. But since exporters are hurting some dimwitted politician has to appear to be doing something and point the finger of blame at someone, even if they don't exist.

[ray23]

It seemed to me they are going to make it possible for Thai's to invest outside the country and the cash reserves in the country.

Wouldn't spending the money here accomplish the same thing, turn the cash into roads, instead of borrowing the money?

[monty]

The biggest problem Thailand has is the massive inflow of foreign currencies.

Tourism might be down, so less FC comes in here.

Exports are down, but imports are much more down, leaving a massive surplus of foreign currencies, far surpassing the lost inflow from tourism.

Spending it on local infrastructure wouldn't work as they would need to convert a massive amount of their foreign currency into Thai Baht, which would strengthen it even further. Which is why they choose to borrow funds for that.

One of the reasons the imports dropped much sharper then the exports resulted from most industries reducing their stock levels by a huge margin. Hardly any raw materials were imported.

Big example was the automotive industry almost completely halting production (they are one of the biggest consumers of steel), while they kept on exporting vehicles out of their massively overstocked supplies.

One can assume when the world economic sentiment improves, exports will pick up and the industry will have to start importing raw materials at a very high pace as they will both have to satisfy the new demand along with bringing their stock levels up again.

Which assumably is why the BoT is very reluctant to do anything at the moment, rather letting market forces decide the value of the Thai Baht.

[ray23]

Thanks Monty a very clear and logical answer that a laymen such as myself can easily understand. I guess the question that remains to be seen is will Thai's invest outside the country. I suppose time will tell us that.

[Heng]

Some already have been for some time now. But it's hard to beat investing here, where there is virtually no tax enforcement for non-corporate entities.

[khunjake]

Which assumably is why the BoT is very reluctant to do anything at the moment, rather letting market forces decide the value of the Thai Baht.

If market forces were allowed to ensue, then the baht would already be in the 32-33 range today. There has been clear intervention in the USB/THB for the past 2 months already to keep it from going under 33.90.

[thaihome]

Which assumably is why the BoT is very reluctant to do anything at the moment, rather letting market forces decide the value of the Thai Baht.

If market forces were allowed to ensue, then the baht would already be in the 32-33 range today. There has been clear intervention in the USB/THB for the past 2 months already to keep it from going under 33.90.

Ah, don’t tell them that the BOT has been keeping it weak, that goes against every urban legend.

TH

[inthepink]

The problem in Thailand that I see is that too much of the economy relies on exports (approx 65+% of gdp). All of the exporters want to have a weak currency, but at the same time they all repatriate their income into baht thus leading to strong demand for baht, hence the currency strengthens. So they are all shooting themselves in the foot. Almost no one in fx markets believe that there is any significant level of speculation in dollar/baht trade at the moment. But since exporters are hurting some dimwitted politician has to appear to be doing something and point the finger of blame at someone, even if they don't exist.

I don't see any mention of speculation being to blame in the quote from the original post?? Also, unless exporters in Thailand are different to those in other countries, it would be more normal for them to be paid in their local currency - not be paid in a foreign currency and "repatriate their income" afterwards. This is why balance of trade figures drive currency fluctuations - the purchasers of local goods have to buy local currency in order to settle their accounts, which creates a demand for the local currency and pushes up its value.

Whichever way round it happens, they really don't have any other choice but to convert payments into baht - they can't pay their staff and any outstanding loans off in dollars, and they aren't in the business of currency speculation.

Edited August 7, 2009 by inthepink

[chiang mai]

The problem in Thailand that I see is that too much of the economy relies on exports (approx 65+% of gdp). All of the exporters want to have a weak currency, but at the same time they all repatriate their income into baht thus leading to strong demand for baht, hence the currency strengthens. So they are all shooting themselves in the foot. Almost no one in fx markets believe that there is any significant level of speculation in dollar/baht trade at the moment. But since exporters are hurting some dimwitted politician has to appear to be doing something and point the finger of blame at someone, even if they don't exist.

I don't see any mention of speculation being to blame in the quote from the original post?? Also, unless exporters in Thailand are different to those in other countries, it would be more normal for them to be paid in their local currency - not be paid in a foreign currency and "repatriate their income" afterwards. This is why balance of trade figures drive currency fluctuations - the purchasers of local goods have to buy local currency in order to settle their accounts, which creates a demand for the local currency and pushes up its value.

Whichever way round it happens, they really don't have any other choice but to convert payments into baht - they can't pay their staff and any outstanding loans off in dollars, and they aren't in the business of currency speculation.

All export bills in Thailand are settled in USD and all foreign reserves are held in the same currency.

[inthepink]

All export bills in Thailand are settled in USD and all foreign reserves are held in the same currency.

You are saying that every single exporter in Thailand is paid in USD?

I find that quite hard to believe - can you quote your source? In any case, as I said above, they still have no other option than to convert the money into baht.

As far as foreign reserves go, yes it's quite normal for them to be held in USD. The majority of reserves around the world are.

EDIT: According to the BOT, 81 % of Thai exports are paid in USD, which is certainly the majority, but by no means all, as you stated. And they do hold foreign reserves in other currencies.

I am happy to be corrected, but I do get annoyed with the number of posters on expat forums who state things as if they are facts, without actually knowing.

Edited August 7, 2009 by inthepink

[monty]

Obviously most exporters are paid in US$.

Whatever happens next with those dollars depends on the line of business.

If the raw materials used in the exported product have to be imported in the first place, a big chunk of the US$ will stay in a foreign currency account, ready to be used to pay for those raw materials. Part of the US$ will have to be converted in Thai Baht to settle the local expenses, such as labour, taxes, etc...

However there are also products exported which will see all of the foreign currency converted into Thai Baht. For example the biggest export product of Thailand, rice...

[chiang mai]

All export bills in Thailand are settled in USD and all foreign reserves are held in the same currency.

You are saying that every single exporter in Thailand is paid in USD?

I find that quite hard to believe - can you quote your source? In any case, as I said above, they still have no other option than to convert the money into baht.

As far as foreign reserves go, yes it's quite normal for them to be held in USD. The majority of reserves around the world are.

EDIT: According to the BOT, 81 % of Thai exports are paid in USD, which is certainly the majority, but by no means all, as you stated. And they do hold foreign reserves in other currencies.

I am happy to be corrected, but I do get annoyed with the number of posters on expat forums who state things as if they are facts, without actually knowing.

Yes indeed, the BOT site refers to 81% and I should have said the vast majority and not all. But no need to get excited and that generalization, without checking I strongly suspect that a large percentage of the remaining 19% are paid in Euro, GBP and Yuan and are still non-Baht settlements since BOT is diversifying its reserve holdings away from strictly USD and into a basket of currencies. Remember, Thailand remains somewhat xenophobic about its currency and whilst it is fully convertible, BOT even recently implemented (temporarily) controls to make sure that THB remained in Thai hands, thus the idea of foreign companies buying Baht to pay Thai exporters is not as desirable as it may seem.

As far as not having any other choice but to convert into Baht, that is not strictly true any more. Thai's are allowed to hold foreign currency accounts and that change was made fairly recently as I recall. It would therefore follow that businesses would want to hold at least some of their receipts in USD.

Edited August 8, 2009 by chiang mai