Central Bank In Danger From Thai Government Meddling

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OVERDRIVE

Central bank in danger from government meddling

Thanong Khanthong

The Nation

Dr Virabongsa

BANGKOK: -- The Bank of Thailand will be at further risk of losing its independent clout if Dr Virabongsa Ramangkura were to be appointed as its chairman.

On Wednesday, Dr Virabongsa announced his intention to stand for the central bank's chairmanship following the end of MR Chatu Mongol Sonakul's three-year tenure this month.

Dr Virabongsa, a former finance minister and now head of Prime Minister Yingluck Shinawatra's advisory team, is almost certain to get appointed as chairman of the BOT because it appears that the government wants to have complete control over the institution.

This spells bad news for Dr Prasarn Trairatvorakul, the current BOT governor. Dr Virabongsa has walked away from his usually conservative economic thinking by embracing a pro-growth and big-ticket spending strategy. He would like the central bank to cut interest rates substantially to boost growth, and he has openly expressed his disagreement with the central bank's foreign exchange management policy.

In short, Dr Virabongsa has almost nothing in common with Dr Prasarn's conduct of macro-ecnomic management. Even more so, Dr Prasarn is not enjoying a good working relationship with Kittiratt Na Ranong, the deputy prime minister and finance minister. Kittiratt has signalled to Dr Prasarn several times to cut the interest rate and make the baht cheaper in order to boost Thai exports, but to no avail. Dr Prasarn has steadily tried to maintain the current course amid the ongoing global economic turbulence and domestic political divide, although the Thai rate actually is negative on an inflation-adjusted basis.

Dr Prasarn will have a tough time running the central bank, with Kittiratt and Dr Virabongsa towering over the institution. They look at results. If the central bank's regulations stand in the way, the government will not hesitate to simply change the rules to get its own way.

So far Kittiratt and the government have won major battles against the BOT. First, they have succeeded in transferring the Bt1.4 trillion debt burden (from the 1997 financial meltdown) of the Financial Institutions Development Fund from the account of the Finance Ministry to the account of the BOT. This has left more room for the Finance Ministry to increase its spending and thus the nation's debt level.

Second, Kittiratt and the government have introduced legislation that will require the central bank to set aside Bt300 billion in soft loans to help out SMEs hard hit by the floods in the fourth quarter of last year.

Both measures have raised serious questions about Thailand's fiscal and monetary prudence.

More critical is Dr Virabongsa's view that the government should dig into the country's current account surplus to finance massive infrastructure projects such as high-speed trains, international airports, deep-sea ports and new industrial parks.

Dr Virabongsa was one of the sharp critics of the central bank's management of baht policy in 1997. He insisted that the central bank should have done its utmost to protect its foreign reserves. But now he is telling the government to make use of the current account surplus.

"Policy-makers must abandon old ideas. Thailand could lag behind others if we keep worrying about a reccurrence of the 1997 financial crisis," he said. "The situation is different. Now, we're sitting on huge amounts of cash, with US$100 billion in the current account surplus."

The current account surplus is retained in the central bank in the form of foreign exchange reserves, which back the baht's credibility and finance the country's international trade transactions.

If and when Dr Virabongsa steps onto the central bank's turf as chairman, several critical changes are likely to happen. Dr Virabongsa and Kittiratt will sing in a pro-growth chorus, whereas Dr Prasarn will find himself isolated.

First, the central bank will face further pressure to cut the rate to stimulate economic growth.

Second, the bank will be under more pressure to keep the baht weaker to promote growth and boost exports.

Third, the government will attempt to dig into the central bank's foreign exchange reserves and spend the money on big-ticket infrastructure projects and populist policies.

Fourth, the central bank's board will have the power to appoint key personnel up to the governor.

Finally, the central bank will lose its independence as it becomes a subjugated branch of the government.

-- The Nation 2012-04-27

[darrendsd]

Maybe happier times for the Exchange rate to come for all the expats?

[Pib]

Just a political way to rob a bank.

[laocowboy2]

Notwithstanding the hit to GDP from last year's floods, Thailnd's BBB+ credit rating has been pretty solid - up to now. While the populist policies do not make much economic sense, rating agencies rarely move on the basis of announcements - they wait for deeds and resulting numbrs. This is even more so the case with Thailand where (no matter who is in government) there is often a pretty wide gap between what is said/proposed/promised and what actually happns on the ground.

However central bank indpendence is something that they take pretty seriously. If the BoT does begin to be treated as a convenient piggy bank, expect ratings to fall - and borrowing costs to rise - unless these too are kept down artificially - something else that the government has been urging.

We would all like a weaker THB - but not if the reason is a sharp spike in inflation -which is what high spending, low interest rates policies will produce in a year or two

[farang000999]

pretty obvious what is happening now. they are just letting them do what they want and waiting for the right moment to throw a coup.

[farang000999]

Thaksin running the central bank is hilarious. The red shirts waste no time trying to steal, huh?

[12DrinkMore]

Whether this actually happens remains to be seen.

I wonder what they expect to spend the foreign reserves on? Can't use them in Thailand because they would have to be converted to THB first, essentially reversing the current policy of preventing the THB from rising by selling THB and buying forex. This would cause the THB to rise not fall. So that policy won't work.

The other policy of reducing the interest rates may cause a fall in the THB as investors move out of THB, but reducing the cost of capital will go very little to reducing business expenses compared to the opposite effect of the massive and sudden rise in minimum labour costs.

A major cost of all business is the cost of fuel. To artificially depress the THB would hit everybody immediately with increased fuel prices and transmit this increased cost directly to local market/shop prices.

These idiots should stop farting around with things they do not fully understand and concentrate government expenditure on infrastructure, allowing the private sector to operate more efficiently. IMO a decent rail system is badly needed to transport goods and people around cheaply and easily.

[Rancid]

I honestly don't know the situation in Thailand, but Central Banks worldwide are generally separate from the government and are in fact owned by the banking industry, and they operate on behalf of and entirely for their owners. As such every action they take is to benefit the banks or indirectly their board members, any benefits to the economy or the population occur only when interests converge. Conspiracy? Ah no, dig deep enough on searches you will find who actually owns the Federal Reserve, they don't advertise it but it can be dug out if you are persistent, certainly not entirely American interests (have a guess at what names come up and see if you are right). RBA, BoE, ECB, BIS, check them out, but again you really need to dig.

So let's not get confused about integrity of Central Banks, it is an oxymoron.

[allan michaud]

Let me think now, how did Thaksin become mega rich in the first place? oh yes he worked in the finance ministry prior to the 97 crash and was incredibly lucky to make some very astute foreign exchange deals just as the Baht went down the pan. The luck of some people?

If you live abroad and have your fortune in currencies other than Thai Baht another crash would work out quite nicely for you too.

[Asiantravel]

Notwithstanding the hit to GDP from last year's floods, Thailnd's BBB+ credit rating has been pretty solid - up to now. While the populist policies do not make much economic sense, rating agencies rarely move on the basis of announcements - they wait for deeds and resulting numbrs. This is even more so the case with Thailand where (no matter who is in government) there is often a pretty wide gap between what is said/proposed/promised and what actually happns on the ground.

However central bank indpendence is something that they take pretty seriously. If the BoT does begin to be treated as a convenient piggy bank, expect ratings to fall - and borrowing costs to rise - unless these too are kept down artificially - something else that the government has been urging.

We would all like a weaker THB - but not if the reason is a sharp spike in inflation -which is what high spending, low interest rates policies will produce in a year or two

there is already noticeable inflation regarding groceries and foodstuffs

[12DrinkMore]

Let me think now, how did Thaksin become mega rich in the first place? oh yes he worked in the finance ministry prior to the 97 crash and was incredibly lucky to make some very astute foreign exchange deals just as the Baht went down the pan. The luck of some people?

If you live abroad and have your fortune in currencies other than Thai Baht another crash would work out quite nicely for you too.

Actually he came from a very rich family.

And then he was a policeman.

And then he managed to get a contract to supply computers to the government.

And it is presumed he made a few THB by buying some USD prior to the THB devaluation.

And he then had the monopoly on the mobile telephone network

And the monopoly on the mobile telephones.

And a few insignificant deals in and around.

But most of his fortune came from AIS.

If I had had his connections and opportunities I would have done the same, and so would you. But he took huge risks and hit the big reward. Unfortunately he went into politics and then a few powerful people got upset.

I would have stopped at the unbelievably wealthy stage. Probably well before, enough is enough.

[CHANGOVER]

Stop at the 'unbelievably wealthy stage'...

Yes, how can a PM who said he is one of the 'people', and at one with them, have the audacity to label his company as AMPLE RICH whilst stealing from the Thai populus and then running away when convicted.

I think his red followers are now realising how he rubbed their noses in his meglomaniacal crap!

Edit to say - yes he was one of the BIB so he had a hand up the hiso ladder straightaway! Both with friends and 'handouts'.

Edited April 29, 2012 by CHANGOVER