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Published on July 19, 2007

Both Finance Minister Chalongphob Sussangkarn and Bank of Thailand (BOT) Governor Tarisa Watanagase looked as if they were punch drunk following a barrage of criticism concerning their mismanagement of the foreign-exchange policy, which has resulted in the sharp upward movement of the baht.

On Sunday macroeconomist Olarn Chaipra-vat sharply criticised the banking authorities for failing to put a damper on the rising baht. He suggested the BOT come up with a yearly target for the baht, which should not fluctuate too widely against regional currencies. In other words, he said, the central bank must have a clear strategy on how to deal with the baht.

The baht has surged from Bt41 in 2005 to Bt35 to Bt36 last year and is now hovering just above Bt33 to the US dollar. Although exports are enjoying an increase in growth in dollar terms, they are getting less once the dollar is converted into baht. If the trend goes unchecked, the baht will certainly jump to Bt30 to the US dollar, which would make it impossible for Thai exporters to survive. Exports account for 65 per cent of Thailand's GDP.

On Tuesday, Dr Virabongsa Ramangkura, another noted economist, urged Prime Minister Surayud Chulanont to adopt a hands-on approach to tackle the baht crisis. He suggested that banking authorities cut the policy rate by 1 to 1.5 percentage points in order to discourage investors from holding the baht. This would also make it cheaper for the BOT to issue bonds to absorb liquidity from the financial system.

Virabongsa also urged the BOT to do everything in its power to weaken the baht to around Bt36 to the US dollar. Virabongsa said that while most currencies in the region have been rising, they do so at a slower pace and that if the appreciating baht is not tackled urgently, it could trigger another economic crisis.

 Virabongsa was suggesting that Surayud sideline Chalongphob and Tarisa because of their poor performance.

 To add insult to injury, Dr Ammar Siamwalla, the honorary adviser to the Thailand Development Research Institute (TDRI), yesterday came out in support of Virabongsa's comment. He agreed that the central bank should cut its policy rate by at least one full percentage point to check the baht's rise as inflation is currently not much of a problem. It was a big embarrassment for Chalongphob to be lectured by his former TDRI colleague.

Under enormous pressure, the central bank's Monetary Policy Committee yesterday very reluctantly cut its policy rate by 0.25 of a percentage point to 3.25 per cent. In its last meeting, it indicated that it had arrived at a neutral stance over its monetary policy.

But the political pressure proved too strong for the central bank to risk being seen as sitting on its hands. At the same time, the central bank could not afford to lose face if it cut the interest rate by one full percentage point as recommended by critics.

The interest rate cut does not help much at this point. Capital is flooding into the country to buy up Thai stocks. International money managers have timed their investments perfectly by buying Thai equities at the bottom. Any one-or-two-percentage-point change in the interest rate would not mean much to them. But the capital inflow has driven up the baht like crazy.

The central bank should have cut its policy rates steeply late last year to deter speculation on the baht. If the central bank had nipped baht speculation in the bud with aggressive rate cuts, it could have avoided imposing the 30 per cent capital controls. Now everything the central bank does is too little too late.

Apart from other measures to help deter the baht's ascent, the central bank must revise its foreign-exchange policy strategy by intervening more actively to buy up US dollars. It should not be afraid of increasing its foreign exchange reserves. How about buying up the dollar to raise the country's foreign exchange reserves from US$73 billion (Bt2.4 trillion) to $100 billion, which would be within the central bank's medium-range target? That would weaken the baht to the level it would like to defend, without declaring to the whole world that it is trying to fix the baht again.