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Published on December 5, 2007

For now, the Bank of Thailand's senior director Pongpen Ruengvirayudh is denying the central bank has quietly abandoned the managed float system in favour of a basket of currencies to curb the baht's rise.

"We're still using the managed float system," Pongpen told reporters.

However, by intervening in the foreign exchange market quite heavily to rein in the baht's appreciation, the central bank has, in practice, almost fixed the value of the baht at a certain level. This intervention resulted in a big jump of its foreign exchange reserves from US$80.9 billion (Bt2.7 trillion), including forward positions, in May to $100.3 billion in November.

"They have almost pegged the baht now. Then they will wait for the new government to decide how they should proceed further," said a well-informed financial source.

"But at the moment they are not afraid to do so because the trend of the baht is upward. They can always, unlike in 1997 when they had to sell the US dollar to support the baht from plummeting, use the baht to buy dollars to curb the baht's rise."

A former finance minister also confirmed the banking authorities were in practice adopting the foreign exchange policy that almost pegs the baht.

"They are doing the right thing, although this seems to be a temporary measure, otherwise the foreign exchange reserves would not have jumped by $20 billion over a short period of time," he said.

A former central banker also supports the central bank's move to target a narrow range of the baht's movements in view of the upward trend of the currency since Thailand has had to move in line with regional currencies. "They can always flexibly adjust the foreign exchange policy any time when circumstances change," he added.

The central bank might feel reluctant to make public how it is managing its foreign exchange policy. The problem of managing the managed float system is that there is no law that allows the central bank to do so, following the removal of the legal framework laid down by Dr Sommai Hoontrakul, the late finance minister.

In 1997, the central bank abandoned the fixed exchange rate system and also suspended the operation of the Exchange Equalisation Fund, in favour of a floating exchange regime. The banking authorities vowed never to return to embracing the fixed exchange rate system again.

But the baht's upward trend over the past few years has created complications for the central bank's foreign exchange management. If it allows the baht to move freely with market forces, the baht would have risen so high as to undermine the competitiveness of Thai industries and the country as a whole. The central bank has bought the US dollar heavily to stem the baht's rise, a practice that is opposite to the 1997 situation when the central bank desperately supported the baht by selling the dollar, which ended up with a loss of all foreign reserves.

The foreign exchange management cycle is complete now, with the central bank going back to the pre-crisis period to almost peg the baht.

Dr Chalongphob Sussangkarn, the finance minister, has failed miserably to win political support for the National Legislative Assembly to pass the Currency Act, which would have legitimised the central bank's management of its currency and monetary policies.

In the management of its foreign exchange reserves, banking authorities are holding 60 per cent in US dollars, 30 per cent in euros and 10 per cent in Japanese yen. The baht will be targeted on a weighted average in accordance with the movements of these three global currencies since Thailand is not only trading with the US alone but also with Europe and Japan. 

Thanong Khanthong

The Nation