The Finance Ministry and the Bank of Thailand have finally agreed on a policy mix to manage the exchange rate, apparently coming to terms after their conflict intensified in the past weeks as the baht climbed more than 7 per cent.
"There is no action now, but the measures are ready. At 29.5-29.6 against the US dollar, the baht has stabilised. The Bank of Thailand will be in charge of management, while the Finance Ministry will keep the Cabinet updated," Areepong Bhoocha-oom, permanent secretary for the ministry, said after the Cabinet meeting yesterday.
If the policy rate is lowered, supporting measures would be required to control lending, so a package has been prepared for implementation when necessary, he said.
The 4 options
1. Bar foreign purchases of BOT bonds or set minimum holding period
2. Bar foreign purchases of short-term government bonds or state enterprise bonds, with 3-6 months of maturity
3. Levy a charge on foreign bond purchases
4. Impose compulsory hedging to limit foreign investors' gain in exchange rate movement
The baht weakened sharply. At 8am, it was at 29.57 per dollar. Up 0.19 per cent from Friday, it was 0.76 per cent down from the end-March level. At 29.65 at 3pm, the year-to-date gain was narrowed to 3.1 per cent from 7 per cent when the baht hit 28.56 in April – the strongest level since July 1997.
The central bank has been under pressure from both the public and private sectors to cut the policy rate, also when the baht appreciated by more than 8 per cent against the yen.
MR Pridiyathorn Devakula, a former Bank of Thailand governor, said the central bank had been a bit slow in intervening in the forex market, but the situation was now under control thanks mainly to the BOT’s admission that the baht had risen "too fast". This had a psychological impact on the market, sending a signal that the authorities would not stand still.
Referring to his conversation with BOT Governor Prasarn Trairatvorakul, he said new measures should be enforced soon to tame capital inflows, such as rules to limit foreign bond purchases, as inflows to the bond market have had a great influence on the baht. This measure would not lead to a fall in stock prices or discourage foreign direct investment.
Foreign net purchases of Thai bonds totalled US$12 billion (Bt355 billion) in the first four months.
Pridiyathorn said it was a good sign that Prasarn and Finance Minister Kittiratt Na-Ranong could now see eye to eye. Both organisations must cooperate and this would prevent speculation.
"Things are improving. The baht should not rise further," he said. "A policy framework will make it difficult to speculate."
The Cabinet gave the green light for the Mass Rapid Transit Authority of Thailand to swap baht into yen to pay off a Bt41.55-billion loan from Japan, Transport Minister Chadchart Sittipunt said. The early repayment saves the MRTA about Bt3.73 billion in interest expense.
The Cabinet spent about 45 minutes discussing the exchange-rate issue. Kittiratt still appeared emotional. He said that among the BOT’s proposed measures was a limit on state-enterprise bond sales to foreigners. A 30-per-cent capital requirement like the one imposed in 2006 could send the stock market into a spin, he said.
The central bank also suggested legal amendments. The Finance Ministry asked it to specify which parts and which agencies should be responsible for that.
"It’s like the BOT is throwing the ball back to the government, forcing the government to take responsibility. Indeed, this is within the authority of the Monetary Policy Committee, but the BOT shoulders no responsibility," said Kittiratt, whose pleas for the central bank to lower the policy rate have been in vain.
Several ministers shared their views on the baht’s impacts. Citing the 41-per-cent fall in jewellery exports, Commerce Minister Boonsong Teriyapirom complained that the central bank did not heed the government’s advice on the interest rate.
They agreed that the Finance Ministry and BOT should improve their coordination and brief the government on their policy direction. Prime Minister Yingluck Shinawatra, who refused to comment on Prasarn’s performance, instructed all ministries to survey the baht’s impacts and submit their findings to the National Economic and Social Development Board.
She told reporters that since the central bank has full authority over the baht’s management, conflicting opinions with the government could be resolved only through dialogue, indicating that there would be no interference from the government.
Prasarn has continually insisted that a policy-rate cut could send the wrong signal. Loans could spike and threaten financial stability. He was also not convinced that a lower rate would slow down capital inflows, given the huge excess of global liquidity and strong economic fundamentals of Thailand.
Pridiyathorn also backed up Prasarn’s policy-rate stance, saying a reduction might not help much as inflows would continue.
Australia’s central bank shaved 25 basis points off its interest rate, bringing it to 2.75 per cent – the same as Thailand’s.