• 
• 

Published on August 10, 2007

Dr Ammar Siamwalla yesterday suggested that the government come up with a specific foreign exchange policy framework instead of letting the central bank run the day-to-day operation without any direction.

Speaking at a National Legis-lative Assembly session during which members grilled Finance Minister Chalongphob Sussang-karn over the government's baht policy, the noted economist said the central bank did not seem to have any foreign exchange policy framework and was simply managing the baht in an ad hoc way through its foreign exchange operations on a daily basis.

[Chalongphob speaks during the debate (in Thai). Visit Thanongs' blog to see the English transcript here]

Therefore, the government must introduce a clear-cut strategy or policy framework on foreign exchange so that the central bank can follow, he said.

In response to charges that the authorities have been mishandling the baht crisis, Cha-longphob said the monetary policy was a sensitive issue because of the growing volatility of currencies on the global market.

He also defended the government's policy towards the central bank. "So far, the government hasn't let the central bank handle the currency movement alone. The Finance Ministry at times brought in the central bank to meet with the premier. And so far the government hasn't intervened in the central bank's operation," he said.

"Normally each central bank has enjoyed independence. But it does not have the freedom to select the policy target. In emergencies the Finance Ministry will be able to step in to assist in policy adjustment," he said.

Chalongphob said that over the past two months the average rate of the baht against the dollar was Bt34.5. But in July the situation changed drastically. In the first two weeks of the month, a total of Bt35 billion in foreign capital flowed into the country and the baht rose instantly from Bt34.7 to Bt33.4 as a result.

Chalongphob, former president of the Thailand Develop-ment Research Institute, did not agree with Ammar, currently acting president of the institute, saying that a clear-cut policy on the exchange rate announced by the government could encourage money speculation.

"As I have tried to tell the market, the baht could move either way, up or down, so we have to maintain some degree of uncertainty. If we make a clear direction in our policy, someone will gain a lot from it," he said.

"The government or the central bank, however, could not determine what the baht to US dollar would be," he said. He assured the members that the authorities would keep in mind an optimum target for the exchange rate.

In a broader context, the exchange rate could move up or down but the central bank should have a target in mind, he said.

Around 20 NLA members yesterday questioned the Finance Ministry's handling of the baht, which has risen sharply in the past few months to the point where it has eroded Thai export competitiveness. But recently the baht has weakened slightly due to a series of intervention measures by the government.

Chalongphob defended the government policy on the exchange rate while NLA members raised concerns that the stronger baht had damaged the export sector and the whole economy.

Ammar said the Bank of Thailand should have raised the interest rate in December last year to ease the pressure on the baht. Instead, the central bank introduced draconian capital controls. He said the measures were too sudden and drastic, causing turmoil among local and foreign investors.

Ammar also urged the government to set the target exchange rate based on the objective of maintaining the current account deficit or surplus at no more than 2 per cent of gross domestic product.

Ammar noted that the recent baht appreciation had been caused by huge capital inflows, not by economic fundamentals.

Khunying Jada Wattanasiritham, the former head of the Thai Bankers' Association and a member of the NLA, made a similar suggestion by calling for the authorities to come up with a clear foreign exchange strategy to deal with the baht's volatility.

She recommended that the government rely on tax measures rather than wholesale capital controls to deal with money shifted into the country by international money managers to speculate on the baht. If an exit tax were to be imposed on funds repatriated out of the country, it would help deter baht speculation.

"The baht appreciation is not totally bad. But the problem is that it has become too volatile and lacks stability," she said.

Pramon Sutheewong urged the government to set up an investment fund in order to reinvest capital inflows. He said the private sector was satisfied with the government's latest measures but these were not adequate to deal with the baht's appreciation.

Phatreeya Benjapholchai, the president of the Stock Exchange of Thailand, proposed that the authorities remove the 30-per-cent reserve requirement altogether. She felt that the measure was very unpopular and damaged sentiment about Thailand as a whole.

The baht's appreciation has not been driven by capital inflow into Thai equities alone because foreign money also goes into other financial instruments such as property funds or mutual funds, she argued.

She offered two recommendations for the government to consider. First, the authorities must facilitate private-sector investment overseas. Second, if Thailand were to liberalise other economic sectors, foreign capital would flow into these liberalised sectors too instead of heading into the stock market alone.

On the price/earnings ratio basis, the Thai stock market has become one of the region's most attractive bourses. Phatreeya said that the SET's P/E ratio stood at 13 times compared to 16-20 times for the regional bourses.

The foreign inflow into the stock market reflects growing confidence in the direction of the Thai economy and the prospect of greater political stability, she said.

Chalongphob conceded that the stronger baht still caused problems for the economy. He said the Finance Ministry and the Bank of Thailand would hold a seminar on August 30 to brainstorm on how to manage the exchange rate.

"Previously we compared our currency with advanced economies, which also let their currencies appreciate at fast rates, but now we may need to look more closely at our competitors," Chalongphob said.

Vietnam's dong and Indonesia's rupiah were 8 per cent weaker than the baht over the past six months, and the Malaysian ringgit was 4.6 per cent weaker, he said.

Wichit Chaitrong

The Nation