• 
• 

Published on July 24, 2007

Currently, Thailand seems to be doing worse than other countries in curbing the fast appreciation of the baht against the US dollar, raising fears of export markets lost to competitors like China, which can keep its currency at a very low level to the dollar.

The Cabinet is expected to approve a package of measures today proposed by the Bank of Thailand (BOT) and the Finance Ministry to stem the rise of the baht.

The measures consist mainly of an assistance fund for small and medium-sized firms, facilitation of capital outflows and debt refinancing for state enterprises.

Local economists had earlier cast doubt over former tentative measures. Virabongsa Ramangkura criticised the central bank for beating around the bush. Ammar Siamwalla, acting president of the Thailand Development Research Institute, wondered how small capital outflows by Thai investors could counter huge capital inflows from hedge funds in New York.

Dr Nipon Poapongsakorn, dean of Thammasat University's Faculty of Economics, blamed the BOT for ineffective measures and a weak decision mechanism.

They all share the same view and have asked the central bank to cut interest rates sharply and intervene heavily in the exchange-rate market.

Due to the weakening of the dollar, each country in Asia has become preoccupied with how to manage its exchange rate. In general, each currency in the region is rallying against the dollar. This should not be a problem if currencies strengthen in the same degree, but it has become serious problem for Thailand, because the baht has recently been appreciating at a faster pace than have other currencies, rising about 18 per cent so far this year.

As most economies are still anchored to an export-led growth policy, exchange-rate movements play a significant role in determining the well-being of these economies, because a stronger currency means fewer export goods and markets lost to competitors that have weaker currencies.

Noted economist Virabongsa said imports and exports were the life and death of Thailand's economy, due to its relatively small size, because it could not sustain itself by relying on domestic consumption.

Nipon also pointed out that as the value of combined exports and imports has exceeded 100 per cent of GDP, Thailand's exchange rate is subject to greater volatility. The debacle of the baht in 1997 and its current sharp appreciation obviously prove Nipon right about the highly volatile national currency.

Economists at the International Monetary Fund, the Asian Development Bank (ADB) and many other analysts have urged Thailand and other countries in the region to let their currencies appreciate against the dollar. They say this would correct the global imbalance caused by the weakening of the US economy and that country's twin current-account and government budget deficits.

Indeed, regional currencies have significantly appreciated since the Asian financial crisis of 1997-98. From then to January 2006, the baht gained 56 per cent, the rupiah 210 per cent, the South Korean won 83 per cent and the ringgit 19 per cent, said Yiping Huang, head of Asia-Pacific economic and market analyses for the Citibank Group in Hong Kong. China and Malaysia simultaneously abandoned the pegs and adopted a managed-float system in July 2005. Since then, the real effective exchange rate of the yuan has appreciated 1.3 per cent.

The US and economists often blame China for the small appreciation of its currency. Many Thais say it creates high pressure on the exchange rate of a small country like Thailand.

China and the rest of Asia have intervened in the exchange-rate market, resulting in official reserves rising to $3.7 trillion (Bt124 trillion) now, up from $500 billion in mid-1997, data gathered by Huang show.

Huang criticised the individual accumulation of dollars by central banks in Asia as an inefficient policy. Instead, he urged them to create a common policy that would let their currencies rise without negative effects on the competitiveness of each country. He warned that the region was facing a high risk of an asset bubble, due to capital inflows. Although some countries try to reinvest accumulated dollars, Huang predicts there is less room to make a profit from investments, due to high liquidity in the world market.

Meanwhile, Thammasat University economists Assoc Prof Dr Pranee Tinakorn and Dr Praipol Kommsup have urged the BOT to do the same as China. They say the BOT should print more baht to buy dollars with and then invest those dollars in foreign assets in the same way that China uses dollars to buy oil companies and other big firms.

Finance Minister Chalongphob Sussangkarn has tried to persuade his regional counterparts to exercise close coordination in exchange-rate policies, in order to protect everyone's interests collectively. He is optimistic, affirming that a dialogue has begun under the Chiang Mai Initiative: a swap arrangement and Asian bond-market initiative.

However, Lee Jong-wha, head of regional economic integration at the ADB, said each country had different priorities, due to the diverse economies, so closer financial integration was a long way off.

It is obvious that since East and Southeast Asian countries cannot cooperate closely on exchange rates, local economists prefer that the BOT intervene heavily in the market and sharply slash the policy rate.

Wichit Chaitrong

The Nation