• 
• 

Published on October 4, 2007

The economists also suggested that the BOT's capital-control measures should not be maintained for too long, otherwise they will contribute to price distortions, worsening natural resource distribution and leading to less desirable capital inflows.

BOT senior economist Yunyong Thaicharoen said the country's net foreign liability position had gradually decreased, but the improvement was caused by significant increases in international reserves rather than assets of the private sector. Foreign reserves doubled to US$66.98 billion (Bt2.27 trillion) between 2001 and 2006.

However, foreign assets, owned mostly by the central bank, could be adversely affected by the appreciating baht.

Most liabilities are owned by non-bank companies, posted at $119.3 billion - 10 times higher than assets.

"It is the mismatch problem that we must address. The financial position has greater risk and has been fragile as a result of the existing diversification," said Yunyong, who also presented a paper along with other two other economists, Ashvin Ahuja and Sra Chuenchoksan, entitled "Big Elephants in Small Ponds: Risk Absorption, Risk Diversification, and Management of Capital Flows".

Moreover, 91 per cent of the Kingdom's foreign assets are debt instruments while only 8 per cent are equities. Most liabilities are also equities.

Yunyong said the figures reflected a lack of liquid management in the public sector and inefficient investment ability in the private sector.

Ashvin said financial openness gave strong evidence of supporting growth via equity markets and foreign direct investment by reducing capital costs and boosting investment growth. However, there is thin evidence that firms with an extra reduction in risk premiums invest more than during the pre-liberalisation period.

"Thus, it may be concluded that we (Thailand and emerging markets) still cannot use capital efficiently to boost growth," Ashvin said.

The paper also found that the global links had led to financial volatility, which required temporary capital-control measures. Many liberalised countries have struggled with short-term or tremendous capital inflows, which have resulted in bubble economies.

BOT Governor Tarisa Watanagase said it was difficult to introduce efficient long-term measures to tackle volatile capital movements. But she insisted that the withholding reserve requirement was a temporary measure.

"We must adopt this temporary measure because we cannot allow the free market mechanism," she said.

Thammasat University economist Praipol Koomsup said capital controls should be introduced only in an emergency, while interest-rate policy should increasingly address the capital-flow problem now rather than focusing on inflation.

SCB Securities chief economist Sethaput Suthiwart-Narueput said it was good that Thai authorities had recently allowed more private investment overseas. But he suggested the government issue infrastructure bonds to attract capital inflows.

In addition, to make equity market more attractive, the authorities should support more quality state enterprises to list on the stock market, while a national pension fund should be set up as soon as possible.

Meanwhile, Piti Disyatat and Chayawadee Chai-anant - also BOT economists - referred to their paper entitled "Challenges to Managing Risk and Volatility in the Emerging Market Context" and said that developing countries, including Thailand, were facing much more volatility of capital flows than developed markets.

OECD (Organisation of Economic Cooperation and Development) countries show almost no difference in capital flows in both good and bad economic times. However, emerging markets usually face capital inflows during good times and capital outflows during bad.

In addition, the fiscal policies of developing economies tend to worsen the situation rather than improve it. Piti said the governments of developing countries usually injected spending into the economy during a good economic situation, but spent less when their countries fell into a bad one. This made a bad situation even worse, he added.

Anoma Srisukkasem,

 Jiwamol Kanoksilp

 The Nation