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Published on August 13, 2007

Woo: What has caused the baht to strengthen so much more than other Southeast Asian currencies against the US dollar?

Sarakorn: Even before the Bank of Thailand (BOT) imposed capital controls last December, speculators and hedge-fund operators all understood the dollar was headed for a protracted decline. As a group, many of them decided they would go long on the baht to bet against the dollar and profit from its expected decline.

Why did the speculators and hedge-fund operators specifically pick the baht as the currency to go long on?

The baht at that time was very liquid, whereas the Philippine peso and Indonesia's rupiah were not as liquid.

Why didn't they go long on Malaysia's ringgit and the Singaporean dollar?

Those countries' central banks had already proven they would be very strict against speculators. Remember what happened immediately after the 1997 crisis. Bank Negara [Malaysia's central bank] immediately imposed capital controls and pegged the ringgit at 3.80 to the dollar. After that, few speculators wanted to mess with the ringgit. At the same time, the Monetary Authority of Singapore has always been very strong and has the largest war chest among Southeast Asian countries with which to defend its currency.

So the baht was a good target?

Yes, it was very liquid at that time, and the speculators felt they could use the BOT as a liquidity provider. The central bank was buying all of the US dollars that people were selling, because the BOT at that time wanted to stabilise the baht at 35 or 36. In effect, the BOT was soft intervening, in order to keep the baht within a managed float.

What do you mean by "soft intervening"?

Basically, this happens when the Thai commercial banks don't have enough demand for the US dollar. So the BOT steps in and becomes the liquidity provider. They come into the market, buy the dollars and stabilise the market.

Why is intervention an important BOT policy tool?

The main key intervention element is setting threshold limits for the baht. The central bank did not want the baht to crash through certain limits, because once they let it pass a certain barrier, it would be hard to bring it back down.

So basically, once it crashed through these threshold barriers, the BOT's soft-intervention policies became less effective?

Yes, that's when they implemented capital controls.

What are your views on the capital controls that were imposed?

I don't think the capital controls were the wrong thing for Thailand to implement. Actually, I think they were the right thing. There is nothing wrong with a country controlling its currency. Nobody looks back and blames Malaysia for implementing capital controls. Does anyone blame China for making the yuan non-convertible? People are still investing in China, because they believe in the country's growth.

Why did so many people trash the BOT for putting in capital controls?

The BOT did a poor job communicating why they decided to impose capital controls. This created a lot of confusion, and the stock market immediately crashed.

Sarakorn Gerjarusak is a Hong Kong-based Thai investment banker who is better known to his many friends as "Bobby". He holds a doctorate in chemical engineering from the Massachusetts Institute of Technology. His bachelor's and master's degrees are from the University of Pennsylvania and Yale University, respectively. At Yale, he won an Olin Fellowship as the top graduate student in chemical engineering. Sarakorn has been a top investment banker in New York and Hong Kong for more than a decade.

Next, part two: "How should the BOT have communicated the capital controls?"