Central bank should worry about the real economy

If the BOT rolled down the windows, it would notice a chill outside. The financial markets in the West have been derailed and banks are only as strong as the governments backing them. The real economy is going to be the next casualty, and those who think this won't happen for another six months are dreaming. The time horizon is more like three weeks. Central banks as lenders of last resort and governments as spenders of last resort are no longer an abstraction. Massive intervention has not been enough to restore confidence. It will have to be accompanied by equally large fiscal stimuli.

Thailand's policy options are limited. The tenuous political situation precludes the takeoff of any mega projects. The danger of inflation is over and interest rate cuts, while a definite possibility, cannot stimulate the economy when there is a disconnect between the discount rate and the lending rates. That would be pumping money down a sink hole. That leaves us with the same old single engine on which this economy is flying - exports. An undervalued exchange rate is not just unnecessary, it would ultimately be counterproductive. But nothing can impede exports more than an overvalued one. That would be the equivalent of an export tax. The exchange rate is the single most important variable determining the viability of exports because it is on the revenue side. Nothing on the cost side is as significant whether it is the labour rate, raw material cost or energy cost. Getting the exchange rate wrong would be a death knell for exports.

Waiting for the market to correct the exchange rate after our exports have crashed would be like closing the barn door after the horses have bolted. The world can't afford unfettered free-wheeling capitalism which keeps overshooting in one direction or the other. All we need to do is to see what the competition is doing to avoid an export crash. Most Asian currencies are depreciating substantially more than the baht. The notable exception is the Chinese yuan but the Chinese government has recently increased export rebates to remain competitive. In Thailand, we don't have export rebates. We depend on a competitive exchange rate to be able to export.

The BOT seems more concerned about stability. Initially it was the stability of the overall price level and now it is the stability of the financial markets. The bank is currently intervening in the foreign exchange market to maintain the value of the baht as if this is a repeat of the 1997 crisis, while the currencies of our Asian competitors are sliding. The BOT must be mindful of the impact of its intervention on the real economy. It is comforting that our central bank is taking action to ensure that we do not revisit 1997. However, a better guarantee of that would be if they did the opposite.

SUTHEP KITTIKULSINGH

BANGKOK

We can't really trust the police to be truthful

Many of us would have seen the video that showed a police officer with his pistol aimed in a ready-to-shoot position during the crackdown on the PAD last Tuesday. He claimed he was aiming at a pickup truck and was going to shoot out the tyres, but that the truck changed course and sped away, and he did not pull the trigger.

Another officer evidently told him to put away the gun and they walked from the scene. At the same time, they seemed to be aware that they were being filmed and were making signs at the camera to stop filming.

It makes one wonder whether the officer's story had any credibility and could it be that the filming was the reason his colleague went over to tell him not to shoot (possibly at people)? Judging from past police behaviour, it is extremely difficult to believe what they tell us. The clip and other clips on the crackdown can be seen on YouTube.

SUPREECHA

BANGKOK