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Published on November 10, 2007

Thailand's international reserves have swelled to a record, zooming past the US$100-billion (Bt3.4 trillion) mark as the Bank of Thailand sucks up dollars from the foreign-exchange market to rein in the galloping baht.

Gross foreign reserves of $82.6 billion plus net forward positions of $17.7 billion brought total reserves to $100.3 billion as of November 2, the Bank of Thailand (BOT) reported yesterday.

Although the central bank imposed capital controls in the second half of last December, it has still come under tremendous pressure to buy up the dollar to curb the baht's rise for fear of undermining the country's overall competitiveness.

Net reserves have grown by a staggering $26.4 billion this year, reflecting the huge hoard of dollars that the central bank has accumulated in its struggle to manage the baht.

BOT Governor Tarisa Watanagase said that like other central banks in the region, the BOT has been intervening in the forex market to stabilise its currency, and that has kept the baht moving in tandem with its regional peers.

The baht has risen by 6 per cent against the dollar so far this year, compared with 4.9 per cent for the Chinese yuan, 5.9 per cent for the Singaporean dollar and 6 per cent for the Malaysian ringgit. The Philippine peso, Indonesian rupiah and Indian rupee have experienced double-digit appreciation.

"The Bank of Thailand has been doing a fine job in stabilising the baht and managing foreign-exchange reserves. Our currency has been fairly valued against regional currencies over the past three to four months," a former central banker said.

"I don't think that $100 billion is too much, given the global financial volatility of this age. What they need to make sure is to manage the reserves in such a way as not to create losses on the central bank's books. If they intervene at a certain forex rate and hold on to that, they won't lose money," the former official said.

The baht opened yesterday at Bt33.92 to the greenback, up a slight 0.06 per cent from the previous day and 0.97 per cent from last month.

The baht should not be compared with the dollar alone, but should also be judged against other regional currencies based on the real effective exchange rate (REER), which is adjusted for inflation and accurately measures the level of competitiveness.

Critics have warned the central bank about the potential for financial loss from the dollar's falling value as hard-currency reserves have steadily piled up.

Supavud Saicheua, managing director of Phatra Securities, warned in an article in The Nation yesterday about the risk of the central bank's massive forex dealings to tame the baht.

Asian central banks are committing a collective policy error by buying up the US dollar to keep their currencies relatively weak, he said. But by doing so, they "are deliberately depressing the price of Asian assets".

"After Asian exporters sell their goods and services, receiving dollars in return, it is pretty certain they will quickly convert them into more trustworthy currencies. When Asian central banks convert these dollars into US bonds [at high prices and low yields] they enable US investors to borrow dollars cheaply and recycle them to invest in Asian assets.

"As the Federal Reserves injects more dollars into the system to alleviate the tightening credit [from the sub-prime fiasco], much of it probably leaks out to purchase Asian assets. What is the result then? Asian central banks face a wall of foreign capital flowing into their countries.

"Some Asian governments and central bankers then blame the massive capital inflows on speculation when it is more likely motivated by common sense," Supavud argued.

But Tarisa said the central bank has tempered the baht by not only buying dollars but also other currencies. It has also diversified its portfolio according to proper risk management since 2002. The weighting of dollars in the portfolio is lower than the 66 per cent of the global average.

Tarisa insisted that the central bank has not yet dumped the withholding reserve requirement of 30 per cent and would carefully consider the proper time next year to revoke the measure. Capital movements should be neutral without any strong upward pressure on the baht before the controls can be lifted, she said.

Although the dollar is likely to weaken further next year as a result of the US sub-prime mortgage loan problems, the baht's surge would decelerate thanks to a thinning current-account surplus, she said.

"The pressure on the strong baht will ease next year because exports will lose steam from the sluggish global economy as imports accelerate from the domestic economic recovery," she said.

Exporters, importers and debtors should hedge all the time and not bet on the one-way baht trend, otherwise they could get burned, she added.

Anoma Srisukkasem,

 Thanong Khanthong

 The Nation