BOT ends rumours and currency
speculation at banks (27-03-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Recent public discussion on Thai monetary policy (see yesterday's article) has been accompanied by uncertainty as well as rumours circulating in the face of this uncertainty.
The Bank of Thailand (BOT) and Finance Ministry took steps to end these rumours yesterday by making clear statements about future policies.
The BOT has also taken steps to end currency speculation by banks and financial institutions in Thailand.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What kind of exchange rate system is Thailand currently using?
2. Before the Asian Economic Crisis of the late 1990s, what kind of exchange rate system did Thailand use?
3. What is the difference between the two exchange rate systems?
(Note: Some research outside the article on the internet or the library is needed here)
4. What kind of rumours were circulating yesterday? Were these rumours founded or unfounded? (Note: There were two rumours. Look further down in the article for the second.)
5. Why might it be a good idea for an interim government to avoid making "drastic" changes? (Question for open discussion)
6. What is the main international economic problem that countries currently face in Asia? What is needed to solve this problem?
7. Why is the BOT ordering banks to submit daily reports of buying and selling activity?
8. What is the likely effect of this regulation on the baht? Would the effect take place immediately or later in the week when the reports are due? Explain. (Scan further down in the article for the explanation)
9. In general, is currency speculation an acceptable or unacceptable activity as far as the BOT is concerned? Explain.
10. What factors have driven recent baht appreciation? (List them and explain with a little story how each factor affects the supply and demand for baht and dollars and then the exchange rate)
11. What good and bad effects result from currency appreciation? List them.
Bangkok Post Article: March 27, 2007
FINANCE EXCHANGE RATE POLICY RUMOURS SWIRL
Chalongphob rules out pegging baht, says it's impossible POST REPORTERSThailand will not change the managed float exchange rate system, said Finance Minister Chalongphob Sussangkarn. "It is 100% impossible. There will be no drastic changes. The managed float system is the best, although it is a question how best to manage the exchange rate," he said.
"Countries across the region have been affected by volatile capital flows. And yet the market should understand that the authorities need to have instruments to manage volatility," he said.
Rumours circulated wildly in the banking community yesterday that the Bank of Thailand was considering a return to the fixed-rate basket system used prior to the 1997 economic crisis.
Central bank governor Tarisa Watanagase hastily called a meeting with domestic and foreign bankers to clarify the exchange rate policy.
"The rumours are unfounded. There have been no changes," she said.
But the baht yesterday weakened to 35.03 to the dollar, compared to 34.7 last week, after the central bank directed dealers on Friday to reverse their current market positions to match their holdings at the beginning of the year.
Authorities also tightened reporting requirements to force banks to submit daily updates of buying and selling activity, and emphasised that banks should "cooperate" with the central bank in guarding against baht speculation.
Ms Tarisa declined to offer details on the measures, saying only that "some banks had been taking advantage of the system and speculating on the baht".
Apisak Tantiworawong, chairman of the Thai Bankers Association, said the central bank indicated clearly yesterday that local financial institutions should not speculate on the currency.
"The message is that while market speculation is acceptable, it shouldn't be from the banks themselves," he said.
Steady export growth, weak imports and volatile capital inflows have helped push the baht to a nine-year high against the dollar. While a stronger baht reduces import costs and inflation, exporters have seen profits decline in the global market.
Local bankers said the order to readjust their currency portfolios would push the baht weaker this week as most banks would have to buy dollars. Thai banks have to adjust their positions by today and foreign banks get until tomorrow.
"The clear signal is that this is a warning shot, and that even tougher measures could follow if things don't improve," one foreign banker said.
Dealers said the move would only offer temporary relief, as the trend still clearly pointed towards a stronger baht.
M.L. Thongmakut Thongyai, head of equities of Citicorp Securities (Thailand), said market rumours had focused on whether the central bank's Dec 18 reserve rule on foreign inflows would be scrapped.
"Market sentiment will improve if the measure is cancelled. But I think we will also see new controls, ones more directly addressing speculators," he said.
Vocabulary (in discussion above)
taken steps to... - taken policy actions to...
a rumour - news that is unofficial and unverified (a story or piece of information that people are talking about but that may or may not be true)
rumours circulate, rumours swirl, rumours circulated wildly - when there is not official announcement or news, people share what information they have, and this informal news becomes rumours
rumours are unfounded - rumours are untrue (have no basis in fact)
rule out x - decide not to do x
managed float exchange rate system - the exchange is allowed to move or float up and down according to supply and demand in the market of people buying and selling the currency, the central bank "manages" the exchange rate to reduce volatility by entering the market (intervention) and buying and selling sometimes
pegging the baht - fixing the value of the baht by defining its value in terms of other currencies (See "fixed-rate basket system" below)
a basket of currencies - a group of currencies
currency x pegged to a basket of currencies - the value of a currency can be defined as the value of a group currencies, each currency contributing a certain percentage of value (for example currency x is defined as 50% of value of the dollar and 50% of the value of the yen)
fixed-rate basket system - pegging a currency to a basket of currencies (see last entry)
drastic changes - extreme changes, changing things a lot
volatile - changing suddenly and unexpectedly, sudden unpredictable movements
volatile capital flows - investment flowing into and out of a company suddenly and unpredictably (like a tsunami)
instruments to manage volatility - government policy to control volatility (for example adjusting interest rates, accumulating currency reserves, or imposing capital controls)
tightened reporting requirements - more information is required by authorities, more often
the move would only offer temporary relief - the action is only a temporary, not a permanent solution to the problem
the trend still clearly pointed towards... - the long-term movement means that...
market sentiment - the general feeling in the investment community regarding the expected movement of the stock market
[Note: The great macroeconomist John Maynard Keynes used the term "animal spirits" to capture the idea of "market sentiment" or "the idea that aggregate economic activity might be driven in part by waves of optimism or pessimism":
]
"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
(The General Theory of Employment Interest and Money, 161-162; Source)
Answer Key:
1. What kind of exchange rate system is Thailand currently using?
A managed float exchange rate system.
2. Before the Asian Economic Crisis of the late 1990s, what kind of exchange rate system did Thailand use?
A fixed-rate basket system.
3. What is the difference between the two exchange rate systems?
(Note: Some research outside the article on the internet or the library is needed here)
4. What kind of rumours were circulating yesterday? Were these rumours founded or unfounded? (Note: There were two rumours. Look further down in the article for the second.)
a. That the BOT would return to the pre-1997 exchange rate system.
(This rumour is unfounded. A move back to the old exchange rate system is impossible, according to Finance Minister Dr. Chalongphob.)
b. That the capital controls of Dec 18 would be ended.
(Finance Minister Dr. Chalongphob has indicated that the capital controls will remain in place. See previous article.)
("Rumours circulated wildly in the banking community yesterday that the Bank of Thailand was considering a return to the fixed-rate basket system used prior to the 1997 economic crisis.")
("M.L. Thongmakut Thongyai, head of equities of Citicorp Securities (Thailand), said market rumours had focused on whether the central bank's Dec 18 reserve rule on foreign inflows would be scrapped.")
5. Why might it be a good idea for an interim government to avoid making "drastic" changes? (Question for open discussion)
6. What is the main international economic problem that countries currently face in Asia? What is needed to solve this problem?
Many countries in Asia have been affected by "volatile capital flows" and they need policy instruments (tools) to reduce this volatility. The capital controls of December 18 are one kind of policy intrument. Worldwide, interest rates are a more common policy instrument, as Dr. Chodechai Suwanaporn of the Fiscal Policy Office pointed out in a Bangkok Post op-ed piece last week.
7. Why is the BOT ordering banks to submit daily reports of buying and selling activity?
Some banks have been speculating in currency markets and this is unacceptable to the central bank.
8. What is the likely effect of this regulation on the baht? Would the effect take place immediately or later in the week when the reports are due? Explain. (Scan further down in the article for the explanation)
Since Thai banks and local financial institutions have been speculating on the baht, anticipating appreciation, they have been holding baht. In the next two days they will have to convert this baht into dollars, this will decrease the demand for baht and the baht will decrease in value (depreciate, weaken).
The value of the baht would take place immediately when the information is released in anticipation of the change.
("Local bankers said the order to readjust their currency portfolios would push the baht weaker this week as most banks would have to buy dollars. Thai banks have to adjust their positions by today and foreign banks get until tomorrow.")
9. In general, is currency speculation an acceptable or unacceptable activity as far as the BOT is concerned? Explain.
Currency speculation is acceptable if the speculator is not a bank or "local financial institution".
10. What factors have driven recent baht appreciation? (List them and explain with a little story how each factor affects the supply and demand for baht and dollars and then the exchange rate)
a. Export growth: When Thai exporters selling to foreign countries receive dollars, they need to exchange them for baht. This creates demand for baht. Increased baht demand causes the baht to increase in value (appreciate).
b. Weak imports: If imports to Thailand increased, importers would need dollars to pay for them, creating increased demand for dollars. This increased demand for dollars causes the value of the dollar to increase (appreciate) and the value of the baht to decrease (depreciate).
c. Capital inflows: When investment money flows into Thai stock and bond markets (Foreign Direct Investment (FDI) also) this increases the demand for baht which causes the value of the baht to increase (appreciate).
[Note: Dollars is used in the above example, but some other intermediary currency is possible also.]
11. What good and bad effects result from currency appreciation? List them.
Good Effects:
a. Reduces import costs.
b. Reduces inflation.
Bad Effects:
a. Exporters become less competitive and profitable.
