Thai Baht Faces Risks If BOT Takes Over FIDF Debt, US Lender Says

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Baht faces risks if BOT takes over FIDF debt, US lender says

SEETALAVAJIT SABAYJAI

THE NATION

Bank of America Merrill Lynch (BAML) sees risks in the Thai currency and capital controls if the Bank of Thailand is assigned to take total responsibility for the Bt1.14-trillion legacy of debts incurred during bank bail-outs in 1997.

"It is a concern," said Ashok Bhundia, a strategist for Asia-Pacific foreign exchange and currencies at BAML.

In the next five years, the baht could underperform other regional currencies if the BOT has to be responsible for the Financial Institutions Development Fund (FIDF) debt, he noted.

Structurally, Asian currencies are expected to appreciate in the long term with short-term caution on volatility tracking from the West, he said.

BAML expects the baht to weaken to Bt32-Bt32.50 per US dollar by the end of March and to Bt30.8 by year-end. The FIDF issue is not included in these estimates.

If the BOT is required only to service the FIDF debt, it would likely be less negative for the baht, Bhundia said. But if it has also to pay the principal and roll over the debt that is due this year, that will hurt the currency.

However, the draft executive decree, which is currently pending royal endorsement, has not been disclosed yet. "Once we see the language in the emergency decree, we will see the Bank of Thailand's commitment on the legacy debt," he said.

According to the BOT, the draft executive decree shifts to the central bank responsibility for repaying the FIDF's Bt1.14-trillion debt. The FIDF amassed this huge debt in the rescue of several banks after the 1997 financial crisis.

According to a 2002 decree, the BOT is required to make a payment on the principal whenever it earns a yearly profit and returns on foreign-reserve management operations. The central bank has reported annual net income once since 2004 and in 2010 reported a net loss of Bt117 billion, mostly due to losses on foreign exchange.

"The Bank of Thailand could now be more determined to prevent the Thai baht's appreciation" if it has to earn on foreign exchange to pay down the principal, Bhundia said.

Given the likelihood of capital inflows to Asia, there could be an increase in risk for capital controls in Thailand, he noted, which could affect foreign investors. Capital control measures are commonly designed to manage and limit foreign capital coming into a country and prevent currency appreciation.

With the European and US economic problems, foreign capital is expected to flow into Asia this year, where economic fundamentals are stronger than in the West.

Quantitative easing is expected in the European Union in the first half of this year and the third round of QE is likely in the United States around the second half, said Victoria Ip, managing director for Merrill Lynch (Asia Pacific).

CAPITAL FLIGHT

Such an increase in money supply could lead to capital seeking higher-return assets outside the United States, where growth is fragile and interest rates are low, and the EU, which seems set to enter a recession this year.

"Risky assets will do well," said Ip, who expressed positive views on emerging-market assets, including both equities and bonds. "Emerging-market countries are expected to grow two to three times faster than the G-3," she added, referring to the Group of Three - the US, the EU and Japan.

However, given the European debt crisis and anticipated recession, Ip expects 2012 to see a backdrop of slow growth and a soft landing in Asia.

Asean central banks and governments have room to respond aggressively via both monetary and fiscal policies if the downturn worsens. In Thailand, however, there is uncertainty over where the BOT's policy rate will go, Bhundia said.

The Thai economy has started rebounding and growth will be supported by government spending on post-flood reconstruction.

This week, "we could see a rate cut by 25 basis points, and the Bank of Thailand could keep the rate at 3 per cent" throughout the year, Bhundia said. The central bank's Monetary Policy Committee is scheduled to convene on Wednesday.

In its last meeting last year, the MPC slashed the policy rate by 25 basis points, citing a relatively accommodative stance to help restore the flood-hit economy.

-- The Nation 2012-01-23

[pomchop]

And meantime the baht/usd has been bouncing along at about 31.5 for a month or more.

A few months ago many of the "experts" were absolutely sure it would be 25 ....so much for experts.

[Pib]

However, the draft executive decree, which is currently pending royal endorsement, has not been disclosed yet. "Once we see the language in the emergency decree, we will see the Bank of Thailand's commitment on the legacy debt," he said.

Don't you just love an open government where the exact wording (a.k.a., devil-in-the-details) of the executive decree is withheld from the public until passed into law.

[lovelomsak]

And meantime the baht/usd has been bouncing along at about 31.5 for a month or more.

A few months ago many of the "experts" were absolutely sure it would be 25 ....so much for experts.

I did better in my predictions if you read past posts of mine I predicted 28 baht to the Us dollar I was out only out by 10%.

Always remember the experts got the world in this financial crises not by being right but by people believing they were right.

[TallGuyJohninBKK]

I'm not a currency guy, so I always get confused when they get into these "appreciate" vs "depreciate" discussions... Can someone please set me straight...

When they talk about the baht appreciating against the dollar, I'm assuming they mean getting stronger, meaning fewer baht/lower numbers per $.

But when they talk about the baht depreciating against the dollar, I'm assuming they mean getting weaker, meaning more baht/higher numbers per $.

Or do I have it back-ass-wards????

Lately, the dollar has been getting stronger, meaning it's taking more baht to equal one dollar.... And we get more baht for our dollars. So is the baht depreciating in that situation?

Oyyyy.... I have a headache...

[mikecwm]

I'm not a currency guy, so I always get confused when they get into these "appreciate" vs "depreciate" discussions... Can someone please set me straight...

When they talk about the baht appreciating against the dollar, I'm assuming they mean getting stronger, meaning fewer baht/lower numbers per $.

But when they talk about the baht depreciating against the dollar, I'm assuming they mean getting weaker, meaning more baht/higher numbers per $.

Or do I have it back-ass-wards????

Lately, the dollar has been getting stronger, meaning it's taking more baht to equal one dollar.... And we get more baht for our dollars. So is the baht depreciating in that situation?

Oyyyy.... I have a headache...

Sounds like you got it figured out just fine. Now if you'd like to take over from Bernie Madoff, I have a great job for you.

[TallGuyJohninBKK]

OK... then I vote for DEPRECIATING!!! Back to $1 equals to 40 or so baht, please...

[lucjoker]

The banks ,privat institutes,make 1.14 trill of loss..................

Why the state (the common people) has to pay for it?

Can someone explain ?

[anterian]

The banks ,privat institutes,make 1.14 trill of loss..................

Why the state (the common people) has to pay for it?

Can someone explain ?

well if the banks fail, businesses that depend on them fail, which means most businesses. Think, cheques, ATM cards, loans, savings accounts, over drafts, money transfers.

If businesses fail people lose jobs the country goes into a tailspin and governments get the blame.

[swillowbee]

... jeez, these are the losses incurred by Thailand from their brilliant world-class handling of the baht, which preciptated the Asian Currency Crisis back in 1997?

... and the Thais have not paid off this debt after 15 years? ... (but, c'mon, I guess I should be unsurprised ... they are Thais, a culture of non-payment).

... has anyone any information on how other affected nations have done in cleaning-up their post-Asian Currency Crisis debts after 15 years? ... Korea? ... Taiwan? ... others?

[flying]

... jeez, these are the losses incurred by Thailand from their brilliant world-class handling of the baht, which preciptated the Asian Currency Crisis back in 1997?

... and the Thais have not paid off this debt after 15 years? ... (but, c'mon, I guess I should be unsurprised ... they are Thais, a culture of non-payment).

well...........This one makes a 1.4 trillion Thai debt look like chicken fee

The interest alone cannot be paid

So in 15 years you can expect a few more digits on this one

http://www.usdebtclock.org/

Warning link make cause dizziness

Edited January 23, 2012 by flying

[HerbalEd]

... jeez, these are the losses incurred by Thailand from their brilliant world-class handling of the baht, which preciptated the Asian Currency Crisis back in 1997?

... and the Thais have not paid off this debt after 15 years? ... (but, c'mon, I guess I should be unsurprised ... they are Thais, a culture of non-payment).

... has anyone any information on how other affected nations have done in cleaning-up their post-Asian Currency Crisis debts after 15 years? ... Korea? ... Taiwan? ... others?

Don't be so hard on the Thais. Greece, Spain, Portugal, et all are doing terribly also. It's not just a Thai thing ... it's also a European/American thing.