• 
• 

Published on July 31, 2007

If the Bank of Thailand had intervened in the foreign exchange market sufficiently, it would not only have gained profits but would also have succeeded in arresting the baht's rise, said Dr Olarn Chaipravat, one of the country's top economists.

In an interview with The Nation, Olarn said: "The problem with the central bank is that it is facing foreign exchange losses not because of the intervention but because of its failure to intervene in the foreign exchange markets sufficiently."

Two weeks ago, Olarn was the first well-known economist to lash out at the central bank over its mismanagement of its foreign exchange policy. Without a specific target for the baht exchange rate, the central bank has allowed the currency to slip out of control, which has resulted in a sharp rise in its value that is hurting the overall Thai economy.

On Friday, the baht closed at 33.70 to the US dollar. Now honorary adviser to the Fiscal Policy Research Institute, Olarn calls for the central bank to keep the baht at 34 to the dollar in order to support the competitiveness of Thai exports.

He has come up with the Bt34 figure through his economic model, which compares the competitiveness of the Thai exchange rate with those of China, Vietnam and other neighbouring countries such as Ma-laysia and Singapore.

MR Pridiyathorn Devakula, the former central bank governor and finance minister, earlier called for the central bank to keep the baht at 34-35/dollar, compared with Dr Virabongsa Ramang-kura's 36/dollar.

Olarn and his research team have been closely following the capital flows and the central bank's foreign exchange operations. They have tracked the central bank's balance sheets in minute details.

To his dismay, Olarn has found that the central bank does not seem to have any foreign ex-change strategy at all to deal with the rise of the baht. Its daily foreign exchange intervention also seems to lack direction in influencing the movements of the baht to the desired levels, he said.

To illustrate his point, Olarn and his research team studied the baht situation between July 2 and July 27. The currency reached a 10-year high of 33.24 on July 16. Coincidentally, the period marked the 10th anniversary of the baht's devaluation, which triggered the full-blown financial crisis.

The baht's movements depend on supply and demand. Whenever there is more dollar supply than demand, the value of the baht will rise. When there is less dollar supply than demand, the baht's value will weaken.

Overall, capital moves into and out of the country through five channels: the current account, foreign direct investment, equity, debts and bank loans. Olarn cited the first week of July as an example. Between July 2 and July 6, Thailand posted $155 million in the current account surplus, $125 million in net foreign direct investment, $598 million in net equities, $40 million in net debt and $200 million in net loans. The total amount was around $1.11 billion.

But forward foreign exchange contracts helped reduce the exchange risks, of $2 billion, bringing the total net capital inflow of $3.118 billion in the first week of July, which exerted pressure on the baht's rise.

But the central bank bought $578 million in the spot market and the forward market to stabilise the baht in the first week of July, at an average of $106 million a day, compared with $70 million a day in the last week of June.

By doing so, it issued bonds worth Bt18.03 billion ($578 million multiplied by the exchange rate of Bt34) in order to raise the baht from the financial system to purchase the dollar, in case that its intervention took place with 100 per cent in the spot market.

If its intervention was 50 per cent in the spot market and the other 50 per cent in the forward market, then it would only need to issue bonds worth about Bt9 billion because it could delay the bond issue for the forward market.

The Bt18 billion of bonds issued by the central bank that week to buy dollars came at a cost of 3.5 per cent based on its repurchase rate. It then deposited this amount at Chase Bank in New York at 5 per cent. The central bank earned around Bt700,000 a week in interest rate differential.

Without adequate foreign exchange intervention from the central bank, the burden naturally fell on the shoulders of the commercial banks, which were obliged to spend less in baht to buy dollars.

With this half-hearted intervention, the central bank allowed the baht exchange rate to rise from 34.52/dollar on June 29 to 34/dollar on July 6, or an exchange rate appreciation of Bt0.52.

With the exchange rate appreciation of Bt0.52 that week, the central bank had to post book losses from its foreign reserves holdings of $83.048 billion (including forward positions) by another Bt42.911 billion when marked to market. Since it earned Bt700,000 a week from its dollar deposits in Chase New York, the central bank still ended up with a book loss of Bt42.910 billion that week.

Olarn argued that in the first week of July, if the central bank had intervened by buying up at least $2.45 billion in dollar supply both in the spot and forward markets, it would have succeeded in halting the baht's appreciation and also made profits.

The baht, he said, would have been able to stabilise exactly at 34.52 if intervention amounted to $431 million on July 2, $632 million on July 3, $556 million on July 4, $445 million on July 5 and $390 million on July 6.

In that particular case, the central bank would have issued bonds worth Bt84.65 billion to raise the baht from the financial system to buy dollars. This amount of bond issue would carry a cost of 3.50 per cent but the dollars earned would be deposited in Chase New York at 5.0 per cent.

In this instance, when marked to market, the central bank would have squared its position without any foreign exchange loss but would have gained Bt3.49 million in US dollar interest. Its foreign reserves would have increased to $84.974 billion (including the forward positions).

The central bank's book loss of Bt42.910 billion in that first week could have been prevented if it had intervened sufficiently and tactfully enough, Olarn said.

Since the beginning of this year, the central bank has posted about Bt160-Bt170 billion in book losses from its foreign exchange intervention. Without sound foreign exchange operations, it will continue to post foreign exchange losses, making it even more reluctant to intervene in the foreign exchange market.

Since the baht peaked at a 10-year record of 33.24/dollar on July 16, the central bank has increased its intervention, resulting in a downward drift of the baht to 33.70/dollar last Friday.

"Now they should target the exchange rate at Bt34 and try to work it out to that level," Olarn said.

Thanong Khanthong

The Nation