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Published on July 13, 2007

At the end of last year, the baht stood at Bt36, up from Bt41 at the end of 2005. Why does the baht keep on rising?

The answer is simple. It is because the Bank of Thailand has not been buying up enough of the US dollar.

But if you look more closely, you'll find that the central bank is pursuing a strong baht policy. Although it wants a weak baht to maintain the competitiveness of Thai exports, it - knowingly or unknowingly - follows all kinds of policy initiatives that keep the baht strong.

First, Thailand now has a current account surplus. If we have a surplus in our current account, then we'll certainly have a strong currency.

Second, the central bank is pursuing a contradictory foreign-exchange policy by managing a floating baht with capital controls. Since December of last year, the central bank has been imposing capital controls to deter international money managers from speculating against the baht.

With the capital controls the baht is not allowed to get out of the country. Now we only have money flowing into Thailand but not the other way around, so the value of the baht can only go up.

Third, Thai companies or individuals are not allowed to invest abroad due to the exchange controls. Again, there is no way for funds to get out, so the baht goes up.

Incidentally, Finance Minister Chalongphob Sussangkarn, and Bank of Thailand Governor Tarisa Watanagase were discussing measures yesterday that would allow listed companies to invest abroad without limits. A panel is also studying a package to relax the exchange controls by allowing individual Thais to invest abroad.

Fourth, foreign-fund managers have been investing in the Thai stock market. This has also contributed to a sharp rise in the baht, apart from pushing up the stock index. Foreign investors are simply investing in 18 blue-chip stocks, but they have managed to push up the Thai exchange rate like crazy.

Fifth, the central bank has not been aggressive enough in buying up the US dollar, probably for fear that this would result in it posting losses.

Tarisa and her team must now be asking themselves hard questions over what kind of foreign-exchange policy they should now pursue. In other words, what level of the baht would they be willing to support?

If they do nothing, or if they don't care, it won't be a surprise to see the baht jump to Bt30 against the dollar pretty soon because of all the factors cited above.

Anyone who read Tarisa's comments on Wednesday about the exchange-rate policy must have been confused. She said several people would like the central bank to maintain the baht rate at a certain level, but that it would be difficult to do so because this would require massive foreign-exchange reserves.

"There is huge capital in this world. Although Thailand also has a high level of international reserves, it won't create any benefits to keep the exchange rate at a certain level while the economic conditions of the world are changing," she said.

Buying up the dollar to keep the baht at a certain level does not require using the country's reserves at all. The central banks of China, Hong Kong, Japan, Singapore, and other countries in the region are doing this all the time to keep their currencies competitive.

Indeed, the Thai central bank has also been buying up the dollar in large sums to build up its reserves, which have jumped from US$67 billion (Bt2 trillion) at the end of 2006 to $73 billion now. But don't ever think that this is too much for Thailand.

Before the crisis, reserves stood at $39 billion to $40 billion, enough to cover four to five months of imports. But then we were facing a current account deficit. The size of the Thai economy in 1997 was around Bt4.7 trillion. By last year it had grown to about Bt7.8 trillion. With a larger economy, the current level of foreign reserves, $73 billion, cannot be considered too high.

There is room to buy even more of the US dollar to add to the central bank's foreign-exchange reserves - the more the better, which would also help deter the baht's rise. All regional central banks are doing the same.

If the baht has strengthened, why then are Thai exporters enjoying double-digit growth? Does that mean that they are doing well?

No, they are not doing well. The exporters keep on selling their goods every month and get the dollar in return. The dollar figures look just fine. But when they convert the dollar into baht, they get less baht. This has put pressure on their operations. Several factories have been folding. The latest casualty was a big garment manufacturer in Samut Prakan, Thai Silp Southeast Asia Import Export, which closed down suddenly on Wednesday and laid off some 5,000 workers.

Tarisa and her team must not pursue a contradictory foreign-exchange policy. Let's correct the mistake now.

Thanong Khanthong

The Nation