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Published on July 18, 2007

Finance Minister Chalongphob Sussangkarn rebutted calls from a top economist yesterday for a sharp cut in interest rates to stem the baht's rise, but said other measures were being considered.

Visit Thanong Khanthong's blog to see his series on 1997 crisis

Chalongphob countered the call by renowned economist Virabongsa Ramangkura for a 1 to 1.5 percentage point cut in the Bank of Thailand's policy rate, saying lower rates were not a panacea to stop the baht appreciating.

"We need more tools as domestic rates are near bottom levels, while interest rates globally are about to head up," he said, signalling that the central bank's Monetary Policy Committee may not cut the policy rate at its meeting today.

He said the Bank of Thailand would announce additional measures, which include an extension of the dollar holding period as well as deposits of foreign currencies at domestic banks.

"We need to carefully consider the measures and their possible impacts on potential outflows in the future. We have sufficient tools, and this will not cause an economic crisis like in 1997," he insisted.

Virabongsa called yesterday for the Bank of Thailand to avert a looming economic crisis by slashing its policy rate today.

It should then target a baht exchange rate of Bt36 to the US dollar, he said.

Speaking at an economic seminar at the Export Import Bank of Thailand, Virabongsa also urged Prime Minister Surayud Chulanont to assume a hands-on approach to avert a potential crisis from the strong baht.

His suggestions followed the fast appreciation of the baht against the US dollar, buoyed mainly by inflows to the stock exchange.

The baht closed slightly weaker last night at 33.33 to the dollar, down from 33.26-28.

Last week, the dollar fell to Bt33.18 onshore - its lowest level since August 1997. It is down from Bt34.53 at the end of June and from around Bt36 at the end of last year.

There are fears that many small and medium-sized export businesses could be driven out of business, following the near closure of Thai Silp South East Asia Import Export Co Ltd, a large local garment manufacturer.

The Cabinet yesterday set up a committee which will specify guidelines and solutions for factory closures. Deputy Prime Minister and Industry Minister Kosit Panpiemras is chairman of the panel.

Kosit said after the Cabinet meeting the government recognised that the rise of the baht was an urgent problem that needed solving.

He is due to meet tomorrow with Chalongphob and Bank of Thailand Governor Tarisa Watanagase to discuss the baht. He would also discuss the issue at an economic steering committee made up of private associations and academics. Suggestions would then be forwarded to the Cabinet next Tuesday.

"The prime minister insisted that if any factory has to shut down, employees' benefits must be protected. We will be alert and find new measures to ensure the baht does not fluctuate. Interest rates tend to head downward, but not steeply," Kosit said.

In his speech, Virabongsa warned that without strong political will to resolve the baht crisis, it could lead to a domino effect, hitting exporters, local firms, farmers, labourers and financial institutions. The appreciation of the baht must be considered an urgent national concern.

"We are having a baht crisis now," he said. "The issue is beyond the capacity of the Bank of Thailand and the Finance Ministry to resolve alone.

"Effective action from the government is needed in order to break market expectation that the baht will appreciate further," Virabongsa said.

He blamed bank authorities for failing to tackle the exchange rate issue over the past two years during which the baht was at Bt40-Bt41 to the US dollar at the end of 2005, Bt35 at the end of 2006 and slightly above Bt33 at the present. If left untouched, the baht could rise further and erode overseas markets for Thai exports.

Virabongsa is well known for his alternative views. In 1997, he correctly urged Thai authorities to devalue the baht to prop up exports and lead Thailand out of the financial crisis.

The economist has proposed solutions of sharp cuts in interest rates, plus the central bank buying large amounts of dollars, converting foreign debt into baht debt and accelerating investment in mega-projects.

"The central bank should cut the policy rate by one percentage point or 1.5 during the Monetary Policy Committee meeting [today], and the central bank should target the baht at Bt36 to the US dollar from the current Bt33 level," he suggested.

Chalongphob, however, said an interest rate cut might not have much effect in slowing capital inflows, which have recently shifted largely into Thai equities.

Most economists expect the Bank of Thailand to leave its key policy rate unchanged at 3.5 per cent. The rate has already been cut 150 basis points so far this year.

Chalongphob said the government was working on ways to boost demand for the US dollar.

"The recent rise of the baht was caused partly by an absence of dollar demand," he said. "Greater dollar demand would lessen the need for the central bank to manage [the baht in the foreign exchange market]."