CURRENCY AT 9-YR HIGH Chalongphob faces first test as baht jumps

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CURRENCY AT 9-YR HIGH

Chalongphob faces first test as baht jumps

 

BOT intervenes in forex market; firms increase foreign debt as currency gains

 

 

The Bank of Thailand (BOT) reportedly intervened in the foreign-exchange market yesterday as the baht jumped to another nine-year high of 35.13 to the US dollar, following massive sales of dollars by exporters.

 

 

"Exporters are selling dollars on expectation the baht will strengthen further once the capital-control measure is lifted," said a dealer at a commercial bank.

 

 

The baht opened yesterday at 35.19/35.21 to the dollar before strengthening to a fresh nine-year high of 35.13 during intra-day trading. It closed at 35.20/35.21.

 

 

The BOT hinted its controversial 30-per-cent unremunerated reserve-requirement measure could be lifted, following huge pressure from a business community that has been hurt by a foreign-capital deterrent effect since the control was implemented last December 19. The exception has been the export sector, in whose interests the measure was introduced.

 

 

Expected cancellation of the measure has encouraged Thai companies to build up their foreign-debt positions, leading the central bank to monitor the country's foreign-debt position closely out of concern it may create higher economic risks. The reaction is a reverse of company behaviour after the 1997 economic crisis, when Thai debtors rushed to repay their foreign debts as the baht weakened dramatically.

 

 

Foreign debt climbed rapidly last year. At the end of December, the country's external debt totalled US$58.57 billion (Bt2 trillion), an increase of $6.5 billion, or 12.6 per cent, over the previous year. This compares with an increase of only $728 million, or 1.4 per cent, in 2005.

 

 

Short-term foreign debt was up 17.8 per cent to $18.86 billion at the end of last year, accounting for 32.2 per cent of total external debt. It accounted for only 30.8 per cent and 23.7 per cent in 2005 and 2004, respectively.

 

 

"It has not yet reached a critical level, because it is only half the level it reached during the economic crisis. We are not concerned, but we are staying alert," said BOT Governor Tarisa Watanagase.

 

 

Newly appointed Finance Minister Chalongphob Sussang-karn has voiced disagreement with the 30-per-cent withholding measure and is expected to revoke it.

 

 

Tarisa said yesterday that whether to revoke the measure would depend on two factors - whether banks' liquidity is adequate for full hedging, and whether there is any loophole in the full-hedging measure.

 

 

However, there are fears that once it is revoked, the baht will further appreciate.

 

 

Federation of Thai Industries (FTI) chairman Santi Vilassakdanont said exporters were selling dollars on the basis of those fears. While saying the FTI will rush to convince them to stall the dollar sale, he stressed that if the measure were revoked, the authorities should make sure the baht does not appreciate beyond the levels of other currencies in the region.

 

 

"We do not mind appreciation as long as the baht moves in line with other regional currencies. If it irregularly strengthens against the US dollar, that could diminish the export sector's competitiveness," he said.

 

 

Dow Jones Newswires quoted government officials yesterday as saying Chalongphob wanted to ease the country's harsh capital controls quickly.

 

 

"He's against the capital controls, and he made his position clear to the prime minister before he was chosen for the job. I expect some movement to remove the controls - or at least ease them - in the very near future," one official said.

 

 

Another official said Chalongphob would discuss the matter with Tarisa as early as this week "to find a way forward".

 

 

"The controls won't stay, because the finance minister is convinced they're hurting the country's reputation. But at the same time, he doesn't want to allow speculators to create too much volatility in the baht," the official said.

 

 

Thailand Development Research Institute director Somchai Jitsuchon said the central bank should maintain the 30-per-cent withholding measure for a while, in order to evaluate its effectiveness in the market.

 

 

He believes the fully hedged measure required by the BOT will benefit the business sector, because it helps cover foreign-exchange risks and will be worthwhile in the long term.

 

 

Meanwhile, the BOT governor said that besides Thailand's external debt, the central bank was closely watching six other economic factors: the property sector, household debt, corporate balance sheets, credit growth, the current account and government spending.

 

 

Tarisa said the central bank's job was to promote not only economic stability and growth, but also economic sustainability, by preventing any imbalances in the interplay of internal and external risk factors.

 

 

"While the economy remains volatile, we must evaluate the situation in the longer term and maintain efficient surveillance, to prevent problems in advance," she said.

 

 

Many emergency plans have been prepared as possible responses to various domestic and external scenarios. The domestic political situation, the global economy and even a "fear of China" are among the risk factors being taken into account by the BOT.

 

 

Deputy Governor Atchana Waiquamdee said a drastic appreciation of the dollar was regarded as the worst-case external scenario. This would jerk the baht upwards, largely due to a flood of inflowing capital.

 

 

However, a sharp weakness of the baht is posed as another scenario, as a result of some significant change in the Kingdom.

 

 

Referring to the expected depreciation of the US currency, Tarisa said the central bank had been diversifying its international reserves away from the dollar since 2002. Of Thailand's total reserves, its dollar holdings have fallen from more than 70 per cent to lower than the average of 66 per cent held by central banks in other countries.

 

 

Tarisa maintains that the central bank's 30-per-cent reserve requirement is also a foreign-exchange risk-management measure, one that ensures economic stability.

 

 

Anoma Srisukkasem

 

 

The Nation