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Published on July 29, 2007

The International Monetary Fund said yesterday the Bank of Thailand's financial loss did not show it was inefficient and its performance would be judged by its ability to keep inflation in check.

IMF managing director Rodrigo de Rato added that he did not believe Thailand and other Southeast Asian countries would experience a repeat of the 1997 regional financial crisis any time soon, even though currency volatility remained a challenge.

"Thailand has witnessed a slow period, but the pace will pick up with the return of democratic rule," he said.

"We expect consumer and business confidence to strengthen and support domestic de-mand once elections take place at the end of this year," he said.

During a press conference after an international central bankers' conference in Bangkok, he was asked about his view on the central bank's loss from a series of currency interventions to weaken the baht against the dollar.

He said the central bank was required to show its financial status regularly as it had a duty to Parliament and the public of transparency. The main benchmark to measure a central bank's efficiency is capacity to control inflation, he said.

Bank of Thailand Governor Tarisa Watanagase has been under attack since the central bank booked a loss of Bt170 billion from dipping into the foreign-exchange market.

De Rato said no country could survive in this volatile global economic environment by relying on just one measure. Economic and structural reform, monetary policy, strong private investment, liberalisation of the financial system and competitiveness of financial institutions were also requisite, he said, as well as currency intervention.

Forex intervention is an instrument to smooth fluctuations for the overall economy, he said.

Dropping the management-float regime for a fixed or targeted forex policy, as suggested by some academics, would restrict room to deal with evolving factors, he said.

"When you want to shift from a flexible system and enter a more rigid one, it might look attractive initially, but we're in a changing world, a world that keeps changing. With rigidity, you might not be able to adapt to the world as much as you should.

"Besides, the competitiveness of a country is not only the value of its foreign exchange. It also includes economic reform, flexibility in foreign exchange and boosting the efficiency of the financial sector," he said.

Thailand and Southeast Asia are not close to the crisis the region faced a decade ago, he said.

"No country, not Thailand nor any Southeast Asian country, has a problem that leads to crisis, but we know that volatility is the problem. Now the macroeconomy in the region is strong you have foreign-exchange flexibility, no inflation problem. The Asian economy is strong and much different from the time of crisis in the past," he said.

Thailand's economy is also basically sound, he said. "Recent economic activity has moderated, but Thailand's macroeconomic fundamentals remain strong."

He raised hopes that the dreaded controls on capital inflows imposed last December would be scrapped sooner or later.

"I heard from the authorities [today] that they remain committed to eliminating the capital controls eventually," he said without elaborating.

Earlier in the day Finance Minister Chalongphob Sussangkarn called on Asian countries to cooperate on international reserve management to tame the volatile capital flows caused by global imbalances.

He told the 42nd Southeast Asian Central Banks Research and Training Centre (SEACEN) governors' conference that Asian countries should play an active role in the global financial system as they had accumulated enough international reserves to shore it up.

For example, they could shift their investment into short-term financial instruments in order to lift up very low long-term interest rates that have caused problems in the real-estate sector in the United States.

"We have a lot of foreign reserves, but we don't use money power enough to tackle the problem. We could discuss this, because the strategy of international reserve management will affect the currencies of big countries," he said.

Cooperation at the regional level is imperative, he said, as the global imbalances caused by the US current-account deficit cannot be corrected by global financial architects. Capital will continue to seek pockets of investment, causing constant swings in the flow of funds, he said.

Developed countries can counteract volatile capital because they have risk-management skills, but emerging countries cannot face volatility alone so their stock markets and foreign exchange are bandied about by the financial tsunamis, he added.

Tarisa said emerging economies were more likely to experience volatile capital flows than developed ones due to their less-developed financial markets and weaker institutions.

Their underdeveloped markets and lack of financial instruments also constrain the capacity of market participants including central banks in managing the risks of capital flows in the markets, she said.

"The real question is whether the intensive reforms and institutional building during the past decade have been far-reaching enough for our financial markets to withstand external shocks and continue to serve as an effective impetus for growth and economic development in these countries," she added.

Anoma Srisukkasem,

Jiwamol Kanoksilp

The Nation