The Finance Ministry is pointing a finger at commercial banks, accusing them of being behind the steady rise of the baht this year.
Somchai Sujjapongse, director-general of the ministry’s Fiscal Policy Office, said in the first quarter a number of commercial banks had raised US$2 billion (Bt59.6 billion), or about half of capital inflows into the local bond market. In the first quarter, global fund bond investments reached Bt140 billion, pushing foreign bond holdings to Bt850 billion or 12.6 per cent of the outstanding value.
“We often hear that the baht is strengthening because of foreign capital flowing into the bond market. But borrowing by financial institutions is also the cause,” said Somchai, who added that foreign direct investment worth US$165 million could also be attributed to the baht’s appreciation.
Somchai said that by raising overseas funds, Thai banks were able to take advantage of lower interest rates overseas. In addition to gaining a higher margin through re-lending the amount at a higher rate, they could also gain from a stronger baht.
“The Finance Ministry can do nothing about this, but a proper monetary policy could be put in place,” he said.
This accusation marks a new episode in the spat between the Finance Ministry and the Bank of Thailand – thought to have been settled following their meeting a week ago.
The Finance Ministry previously blamed the BOT for failing to rein in the currency’s appreciation by lowering the policy rate. But the central bank has been adamant that the baht appreciation is in line with market movements, except for a brief period in April when it spiked sharply – hitting Bt28.58 against the US dollar – the highest since the 1997 devaluation. Bank of Thailand governor Prasarn Trairatvorakul said at the time the baht had risen “too quickly”, a comment which seemed to stop the trend. The baht has since weakened to around Bt30 to the dollar.
Thai banks, including Bangkok Bank raised US$1.2 billion via the issuance of debentures, with Kasikorn Bank and Siam Commercial Bank each mobilising $500 million late last year. Krung Thai Bank also raised $500 million in the first quarter.
According to the central bank, capital inflows were worth $4.78 billion in the first quarter, $2.74 billion of which went to the central bank, plus $2.1 billion to banks and $1.86 billion to government coffers. Capital outflows in the same period were $1.9 billion.
However, a source at the central bank rebutted this accusation. On the condition of anonymity, the source said foreign funds were hedged against exchange rate risks. This limited a possible forex gain and also limited the exchange rate movement at home. Such fund raising is part of normal business operations, the source said.
“Banks brought in dollars to cope with dollar hedging demand and overseas investment by their clients. Such inflows have thus created almost zero impact on the exchange rate. There have been some speculative activities by banks or bank’s clients but such activities have not caused a large impact,” the source said.