Political Pressure, Not Economic Factors, Behind Weak Thai Baht: Academic

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Political pressure, not economic factors, behind weak baht: academic

Wichit Chaitrong

The Nation

Economists say bid to benefit exporters is at the expense of bank depositors

BANGKOK: -- The current relatively weak baht against the US dollar benefits exporters and bankers at the expense of savers, say economists, and at least one of them urges policy-makers to let the Thai currency move at a greater pace in line with economic fundamentals.

Over the past 15 years since the baht was floated, it has been relatively stable.

"The managed-float exchange rate has supported economic recovery from the crisis of 1997 and it is better than a fixed exchange-rate regime," said Somchai Sujjapongse, director-general of the Fiscal Policy Office.

The office predicts that the baht is likely to weaken to 31.25 per US dollar from an average of 30.5 last year, said Boonchai Charassangsomboon, executive director of macroeconomic policy bureau at the office, which is under the Finance Ministry.

The baht is expected to be affected by a loss of investor confidence in the global economy largely due to the European crisis. The outlook for the US economy is not bright either, but investors consider the dollar a safe haven, and they want to hold cash.

During the past 15 years, exporters and politicians have often complained about a strong baht making Thai products expensive relative to that of competitors. They argue that they lose market share to competitors from China, Indonesia or Vietnam.

The Bank of Thailand counters that the purchasing power of buyers is more important than currency value. When importers get rich, they buy more anyway. However, because of political pressure, the central bank has had to step in by selling baht and buying dollars to keep the Thai currency weaker.

This market operation has resulted in rising costs for the central bank. The latest BOT accounting loss is about Bt420 billion, due partly to market intervention and declining value of foreign assets held by the central bank when converted to baht.

Teerana Bhongmakapat, professor of economics at Chulalongkorn University, does not agree with heavy-handed intervention.

"Keeping the baht weak benefits exporters and bankers but it puts bank depositors at a disadvantage," he said.

He suggests that the baht should be allowed to move at a greater pace under the managed float regime to reflect the real value of the currency.

The weak baht has led to lower interest rates, and the current deposit rate is negative when compared with the inflation rate, he said.

To make the baht weak the central bank has to keep the policy rate low, currently 3 per cent per annum.

Bankers enjoy low deposit rates and they can seek a wider spread between deposit and lending rates.

"Low rates also encourage banks to lend more to risky businesses, which could lead to excessive lending, and these loans could turn into non-performing loans and hurt the banks later," Teerana warned.

"To make its fair for savers, the central bank should let the baht move at a greater pace, and private companies are likely to be able to manage their businesses in this new scenario."

Private enterprises over many years have pushed currency risk stemming from exchange-rate volatility back to the central bank. They must now learn to manage their own risks, he said.

On a global scale, every country obviously prefers a weak currency, including the United States and China, the world's two largest economies.

"This is because of worldwide industrial overproduction, so most countries are worried about not being able to sell their products," Teerana said.

The US government has accused China of keeping the value of the yuan artificially low. Many observers fear that the conflict between two giants could spark trade protectionism.

The Bank of Thailand has tried to manage the baht, letting it move along with other currencies in the region, which are influenced by yuan, central bank Governor Prasarn Trairatvorakul often tells the public.

Kobsak Pootrakool, executive vice president of Bangkok Bank and a former senior executive at the BOT, says the private sector has learned a lot from the floating exchange rate. The country is unlikely to go back to a fixed exchange rate.

"Looking into the future, the baht should be more volatile than in the past 15 years to reflect changing economic fundamentals," he said, adding that he was optimistic that private companies could cope. Firms in the United States are able to handle large changes in the dollar's value.

As more financial tools become available, corporations will be able to manage their risks caused by currency movements, Kobsak said.

The 15th anniversary of the baht's flotation coincides with the euro crisis.

Many say the European single currency is not suitable for less developed economies such as Greece. That country does not have the tools to recover its economy, since the euro does not weaken along with deteriorating economic fundamentals, said Sompop Manrungsan, president of the Panyapiwat Institute of Technology.

Meanwhile Asean leaders and economists are quite confident that monetary integration will not be on the Asean Economic Community's agenda.

[thenation]2012-07-02[/thenation

[MunterHunter]

Don't mess with the currency guys, you cant even figure out how to fulfil your 'tablets for every child" promise, if you start messing with something as complicated as exchange rates and currencies, your gunna screw it up and drag the country into its own finical crisis...

[ralphlsasser]

This just proves what I have been saying all along and got critized many times, the government controls the exchange rate, NOT the markets. It's all about the Thai government aking more money.

Edited July 2, 2012 by ralphlsasser

[asiawatcher]

The USD is artificially strong - it has no backing other than reputation which is presently sadly amiss. The Fed will ensure its demise as will the Euro - paper introduced to run parody with the USD - except it streaked past it, failing in its task to shore up the failing greenback. If there was a stop on the printing of paper, the world would hiccup and then settle and that is what is needed right now. In my thoughts, printing money to repay debt was counterfeit and still is. Can't wait for the hiccup to hit as the belch will be heard globally and soon.

[w11guy]

And here's a different article posted 44 mins before this one saying that the baht is strong --> http://www.thaivisa.com/forum/topic/566762-thai-baht-back-strong-but-challenges-remain/.

Sounds like TV are hedging their bets.

So what's the definition of a strong or weak currency? Are they comparing to yesterday, last week, last month, last year, ten years ago? This is just a way to make up any story even if it doesn't have any foundation in fact.

[el jefe]

The USD is artificially strong - it has no backing other than reputation which is presently sadly amiss. The Fed will ensure its demise as will the Euro - paper introduced to run parody with the USD - except it streaked past it, failing in its task to shore up the failing greenback. If there was a stop on the printing of paper, the world would hiccup and then settle and that is what is needed right now. In my thoughts, printing money to repay debt was counterfeit and still is. Can't wait for the hiccup to hit as the belch will be heard globally and soon.

I'm not sure which is funnier:

the Euro - failing in its task to shore up the failing greenback.

or

the Euro - paper introduced to run parody with the USD

A better definition of "fiat currency?

[lounger]

The baht has been relatively stable over the last 15 years!!!!!!!!!!!!!!!!!!!!

er it has moved between 72 and 47 per GBP since I got here in 2001 thats only 34% humph