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Published on August 2, 2007

Tarisa Watanagase said the central bank would not permit exporters to pay for local products in foreign currencies because it could turn Thailand into a dollar-payment country.

"If the central bank allows them to settle trade transactions in dollar terms, it would have a widespread impact on the economy," said the governor, adding that the country's clearing system serves only the baht.

Last month the private sector raised this proposal at the Joint Public Private Committee meeting at Government House. Some companies - especially those that have foreign-currency earnings and have to settle trade transactions with their headquarters - sought the central bank's approval to settle transactions in US dollars.

The central bank felt that too much use of the dollar for transactions could lead to a "dollarisation" of the economy. However, the issue will be tabled at a meeting of the government's economic steering committee on Monday.

Nonetheless, Tarisa said the central bank had allowed exporters to pay freight costs in foreign currencies to foreign-owned shipping companies. "This should help reduce demand for the baht," she said.

The governor warned exporters to be cautious about the volatility of the baht for the rest of the year and encouraged them to do hedging transactions regularly and obtain export income in terms of non-dollar currencies instead. She was speaking in a seminar entitled "Thai export industry and competitiveness''.

The increasing current-account surplus and capital inflows spurred by the global imbalance could cause the baht to continue to appreciate. Tarisa was optimistic that the baht would be weaker next year when imported goods were brought in for the government's mega-project investments.

Santi Vilassakdanont, chairman of the Federation of Thai Industries (FTI), said exporters had concerns about another round of capital inflows. They hoped that the central bank's series of measures would help slow down the baht.

"Exporters could not remit the money any more if a large amount of capital flows into the country. We have to react to the situation properly and find a way to reduce the risk," he said.

Santi believed the country would be able to succeed in its target of 12.5 per cent for export growth this year, thanks to 18-per-cent growth in the first half with an expansion in new markets.

Rachen Pojanasunthorn, director-general of the Commerce Ministry's Export Promotion Department, was also confident of hitting the target but said it could not guarantee the exporters' profits.

According to Tarisa, exports grew in the first half of the year by 18.4 per cent in dollar terms in every sector, but expanded only 7.4 per cent in baht terms, with a 4.3-per-cent contraction in labour-intensive manufacturing goods.

As of July 25, the baht appreciated by 5.2 per cent against the dollar compared with the end of last year, lower than only the 8.8-per-cent strengthening of the Philippine peso and 9.7 per cent for the Indian rupee.

The FTI will finalise the interest rate for the SME Fund worth Bt5 billion with the Thai Chamber of Commerce and the Thai Bankers' Association before proposing it to the economic steering committee next Monday. Santi expected the rate would be more than 2 per cent lower than minimum lending rate.

Meanwhile, Finance Minister Chalongphob Sussangkarn plans to discuss with the Bank of Thailand the options to manage the country's foreign reserves effectively in order to ease the pressure on the baht, including the possibility of setting up a sovereign wealth fund.

Chalongphob said he would assign the Fiscal Policy Office to invite experts to discuss guidelines to manage the reserves as well as ways to manage the currency in the medium term.

Asked about the central bank's plan to lay down guidelines to manage foreign reserves, he said the Finance Ministry had yet to officially discuss the matter with the central bank. Nonetheless, he thought the central bank may study options to manage the currency in the long term.

In recent months there have been increasing calls for the government to follow the example of other countries which set up sovereign wealth funds to manage excessive reserves for investment abroad as a way of easing pressure on their currencies.

Asked if the central bank should reduce the dollar amount in foreign reserves, he said the Bank of Thailand had already managed the country's reserves. Nonetheless, he said the majority of the funds in the foreign reserves were kept in US dollars because that currency was normally used in international currency trading.

He added that reserves were not regarded as excessive as the sum of US$80 billion (Bt2.68 trillion) was not considered high.

Anoma Srisukkasem

The Nation