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Published on August 22, 2007

Bankers have recommended that the Bank of Thailand (BOT) develop the country's options market to deal with fluctuations in foreign exchange, Siam Commercial Bank executive vice president Veerathai Santiprabhob said yesterday.

Options would be proper financial instruments for use in managing foreign-exchange risks, particularly in a situation of currency fluctuation such as Thailand has recently experienced, he said. However, the options market remains small and it is hard for smaller businesses to access because of the volumes required and fees.

An option is a contract, or provision of a contract, between one party - the option holder - and another, the option issuer. It gives the option holder the right, but not the obligation, to buy or sell a fixed quantity of a commodity, such as currency or securities, at a particular date and price. The contract is divided into a call option, or the buying right of the option holder, and a put option, or the selling right of the option holder.

Veerathai said the key players in the options market were mostly large firms that make contracts with commercial banks involving large volumes per transaction. They are easily able to pay the fees involved.

The proposal was raised on Monday at a meeting between government authorities, the private sector and academics. It was held to brainstorm a monetary-policy framework to prepare for volatility in the money market - particularly fluctuations in the value of the baht.

Yesterday, the baht closed at 34.52 to 34.53 on the onshore market. On the offshore market, it was trading at 32.75 to 32.95 at 5pm Bangkok time.

Veerathai said Monday's meeting also considered whether the BOT had enough tools to manage forex risks.

When the revised Bank of Thailand Act is implemented, there will be more instruments with which the bank can handle currency volatility, he said. Importantly, a deposit service will allow the central bank to receive deposits from individuals, similar to the central banks of other countries.

Siam Commercial Bank senior executive vice president Sirichai Sombatsiri said small- and medium-sized enterprise customers have been buying more forward contracts as a means of managing forex risks during the baht's volatility.

"Amid the baht's fluctuations, small-sized businesses have fully faced the impact from the volatility. Most of them haven't hedged against the risks because when their sales are around Bt200 million or Bt300 million, they haven't got the credit line to do it," he said.

Sirichai said the bank's non-performing SME loans continued to increase. They mainly involve small businesses in the export sector and related industries, and the main causes are the country's economic gloom, the baht's appreciation and a shortage of liquidity among customers.

However, he said the bad debts had not yet increased significantly.

The bank nevertheless expects its loans to SMEs to grow by 30 per cent this year, or Bt50 billion in new lending. It reached the halfway mark after the first six months by making new loans of Bt25 billion for 15-per-cent growth.

Sirichai said the bank's margin for its SME business had narrowed, in line with interest rate cuts and tougher market competition. Currently, its average margin stands at 3.5 per cent, down from last year's 3.7 per cent, but the bank expects this figure to remain unchanged until the end of the year.

Separately, Industry Minis-try permanent secretary Cha-kramon Phasukavanich said the BOT should consider lifting its capital reserve requirement by the end of the year to further raise investor confidence, if there is no baht speculation.

Chakramon, who is a member of the central bank's Monetary Policy Committee, said revocation of the requirement would give a boost to investor confidence, following up on the expectation that they will resume their halted investment plans in Thailand after approval of the new constitution.

Somruedi Banchongduang

The Nation