BOT watching: Natural or dangerous? (28-03-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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"Fed watching" means looking for small hints about what the American central bank (named "the Fed") will do next.
Fed watching is a well developed art in the United States.
You can read what Fed watchers are currently thinking online at places like professor Brad DeLong's economics blog at UC Berkeley.
"BOT watching" (watching the Bank of Thailand to predict its next move) isn't as well developed as Fed watching.....yet.
Rumours about what Fed officials are thinking about and planning to do are normal and natural in the United States.
Similar rumours in Thailand about the BOT are regarded by many as yet another sign that the interim government lacks credibility and legitimacy, but should they?
Perhaps BOT watching will become more common in the future and rumours about monetary policy merely routine.
Today Dr. Thitinan Pongsudhirak of Chulalongkorn University provides a nice overview of recent events in Thai monetary policy and their repercussions in financial markets.
Yesterday's Statement of policy direction by the Finance Minister
In the wake of rumours and public discussion policy does seem to be getting more focused. Earlier this week, the Finance Minister Dr. Chalongphob stated that he would focus on greater transparency in the government's fiscal policy and making the screening of public-private infrastructure projects more efficient.
Working on increased transparency is important because "the next government will probably follow populist policies, regardless of the party." Dr. Chalongphob stated his intention "to make state spending more transparent, to develop an early warning mechanism and make public information about what is spent and how." He indicated a return to a focus on the rural poor:
"During the Thaksin Shinawatra governments, the state gave too much [to the grassroots]. Now we have pulled back, but perhaps too quickly," he said
As for central bank independence, the current procedures for appointment and dismissal of the central bank governor will be maintained:
(Bangkok Post 28-03-07, Read the full story)
"Dr Chalongphob disagreed with moves to make the central bank governor accountable to the Senate, saying the concept could be flawed in practice. Under current law, the finance minister is responsible for the appointment and dismissal of the governor. ...For decades, the central bank has operated quite well under the current system, and I'm not sure it is one that should be changed,' he said."
Reading Questions
Here are some questions to guide your reading (See answers at end):1. How do current exchange rate problems differ from those in 1997?
2. What high-level government events immediately preceded the current baht crisis?
3. What factor increased volatility in Thai money markets?
4. Is the 30% reserve requirement really needed anymore? Why?
5. Does Dr. Chalongphob seem to prefer a monetary policy that is expansionary, contractionary, or no change to monetary policy? Why?
6. What immediate policy action would initiate an expansionary monetary policy?
(Be specific.)
6. What pressures does the BOT currently face? Why?
7. If the benchmark interest rate currently stands at 4.75%, how much would it be if it fell 50, 100, or 125 basis points?
8. Are there differences in opinion between the BOT governor and the Finance Minister about what monetary policy should be pursued? (Note: You can argue either way given recent history.)
9. Will interest rate cuts solve the baht appreciation problem?
10. Will the Thai government be blamed for further appreciation in the Thai baht? Would this be justified? (Question for open discussion)
Bangkok Post Article March 28, 2007
OPINION/ECONOMIC POLICYGovernment's baht policy in disarray
The growing politicisation of exchange rate policy risks degenerating into a full-blown crisis of confidence By THITINAN PONGSUDHIRAKJust as it is besieged by pressure groups and street protesters suffering from a widening array of grievances from low commodity prices and the Japan-Thailand Economic Partnership Agreement to the general lack of policy achievements, the government of Prime Minister Surayud Chulanont is facing a crisis in its macro-economic management in view of the baht's recent appreciation. As opposed to a decade ago when it faced devaluation pressure, the baht this time is under scrutiny for having strengthened excessively to the detriment of exporters and other stakeholders involved. If not managed effectively, the growing politicisation of exchange rate policy runs the risk of degenerating into a full-blown crisis of confidence in the Surayud government's macro-economic management.
The baht crisis is partly an outcome of Gen Surayud's minor cabinet reshuffle following Deputy Prime Minister and Finance Minister Pridiyathorn Devakul's resignation. The reshuffle gave the prime minister a chance to shore up his macro-economic management team with a full-scale revamp. However, the prime minister only installed two deputy ministers and a new finance minister, Chalongphob Sussangkarn, and rotated other ministers around. While PM Surayud himself plays a role in overseeing the finance ministry, it is unclear as to who is really in charge of the government's macro-economic team.
Unsurprisingly, the money markets have been in turmoil with volatile trading as they are beset with prolonged uncertainties regarding baht policy.
Finance Minister Chalongphob has backtracked from his earlier criticisms of the Bank of Thailand's capital controls, conceding to the central bank's 30% reserve requirement.
Yet Mr Chalongphob indicated that the reserve requirement no longer holds its intended impact on capital inflows as these are now fully hedged, implying that the Bank of Thailand (BoT) should do away with the capital controls altogether.
Mr Chalongphob also has shown preferences for a sharp monetary policy loosening both to boost economic growth and to stem the baht's rise. In the same vein, a senior finance ministry official at the Fiscal Policy Office has openly called for an immediate policy rate cut of 100 basis points to dampen baht appreciation.
On the other hand, BoT Governor Tarisa Watanagase is adamant on maintaining the 30% withholding rule, although she is not opposed to a looser monetary policy. She has not explained why the capital controls were preferred over monetary policy instruments as a policy choice.
As the baht management regime is in disarray, market rumours have swirled that the central bank may re-install a peg or a targeted trading band, a bold move that would bring the baht back to its pre-flotation days prior to July 1997. Such a return to a pegged exchange rate regime would be controversial, risking further politicisation as the baht would become a set target for speculation. A return to the peg would also challenge the BoT's credibility at a time when public confidence in the central bank is at a low.
Fortunately, Finance Minister Chalongphob promptly stubbed out the rumour. Pegging the baht is 100% impossible, he said.
With the growing pressure from the finance ministry and the public's increasingly vocal concerns about the baht's rise, Mrs Tarisa and the central bank's Monetary Policy Committee will be under the gun to soften monetary policy conspicuously. At least a cut of 125 basis points in the benchmark rate, which stands at 4.75 percent, for the remainder of this year is now expected, with the near-term reduction of 50 basis points anticipated next month when the MPC meets.
Mrs Tarisa lacks domestic stature to ward off internal political pressure and equally lacks the prominence and prestige abroad to move and shake the markets.
Her signalling carries decreasing weight, and the BoT measures under her watch to stabilise the baht have not worked. The policy differences between Mrs Tarisa and the finance minister do not bode well for exchange rate stability.
Yet Mr Chalongphob also does not have the policymaking wherewithal to provide clearer exchange rate policy directions in the face of competing interests from industrialists and the interest groups involved.
The absence of any firm preference from the prime minister and deputy prime ministers in charge of the economy further undermines exchange rate supervision.
Both Mrs Tarisa and Mr Chalongphob are unlikely to be able to provide the leadership needed for sounder exchange rate supervision. The problem for them is the baht's potentially resilient strengthening despite looser monetary policy.
It may continue to appreciate despite the interest rate cuts. Indeed, the baht's strength going forward may well snowball into a crisis for the embattled Surayud government, adding to the erosion of its credibility and legitimacy and further exposing its incompetence.
Thitinan Pongsudhirak is Director of the Institute of Security and International Studies, Faculty of Political Science, Chulalongkorn University.
Vocabulary (in discussion above)
the Fed - the American central bank (See Wikipedia on the Federal Reserve)
Fed watching - closely watching and analysing everything the Fed does to better guess what its next policy decision will be
credibility - believability
legitimacy - political legitimacy, the popular acceptance of a governing regime or law as an authority (See Wikipedia on political legitimacy)
repercussions - unpleasant and bad things that happen after the original event
policy direction - the general goals of government policy
public-private infrastructure projects - the megaprojects that the government and
private corporations work together on
transparency - making information available to the public (to prevent corruption)
populist policies - policies that claim to defend the interests of the common people or fight for the poor people of a country (they may or may not actually do this)
full-blown - an extremely bad case, with every possible problem or bad symptom
crisis of confidence - a political crisis caused by lack of confidence in the government
a full-blown crisis of confidence - an extreme crisis of confidence
besieged by - attacked by
pressure groups - an organised group of people trying to change government policy and force government action on a problem
Japan-Thailand Economic Partnership Agreement - the free trade agreement between Japan and Thailand currently being negotiated
under scrutiny - being closely observed, monitored, and studied
to have a stake in - to be a part-owner or participant, to have an interest in (to be affected by the success and failure of an organisation or project)
stakeholders - people who have an interest in an organisation ()
politicisation of x - make x political, when it usually isn't
the cabinet - the group of most senior ministers in a government, who meet regularly to discuss policy
cabinet reshuffle - changing the jobs and responsibilities of ministers in the cabinet
shore up - strengthen and support something about to fail
revamp - make changes to improve
money markets - short-term debt securities (maturities less than one year) that are safe and highly liquid, examples include treasury bills, commercial paper, and certificate of deposits
beset with x - to be negatively affected by problem x
backtracked from x - not longer agree or believe x
hedged - to protect against danger (nowadays protect against baht appreciation which makes revenues for exporters unpredictable)
fully hedged - to protect 100% against danger
has shown preferences for x - his actions show that he likes x
monetary policy loosening, looser monetary policy, soften monetary policy - acting to expand the money supply and credit
in the same vein - in the same style or mood
policy rate cut of 100 basis points - interest rate changes by 1%
dampen - make less strong and intense
adamant on x - determined not to change your mind about x
30% withholding rule - 30% reserve requirement, Dec 18 capital controls
credit - money lent by banks in an economy
monetary policy instruments - the normal ways that governments do monetary policy (using interest changes and open market operations)
regime - the way that something is run (like a government or exchange rate system)
in disarray - disorganised and confused
a peg - fixing the value of a currency by defining it in terms of other currencies (for example 1 dollar = 26 baht)
a targeted trading band - the range that the central bank keeps the exchange rate within by intervening and trading in foreign exchange (currency) markets
flotation - floating exchange rate (that can move up and down accordign to supply and demand)
pegged exchange rate regime - when a currency is tied or fixed to the values of other currencies
stubbed out - stopped
be under the gun - facing pressure
conspicuously - easy to be seen, very publicly
basis points - 1/100th of 1%, used to calculating changes in interest rates (See Wikipedia on basis points)
benchmark - used as a standard of comparison with others
near-term - short-term, in the near future
the MPC - the Monetary Policy Committee of the BOT
domestic stature - how much someone is respected in their own country
ward off x - prevent x from affecting you
lacks the prominence - is not well-known and important
signalling - communicating indirectly (for example signalling the direction of future monetary policy in public speeches and writing)
do not bode well for, bodes ill for - makes you think that something bad is going to happen in the future
wherewithal - the means to do something (for example to have the financial wherewithal to support a family)
the policymaking wherewithal to - have the means or tools necessary to carry out policy successfully
the absence of any firm preference - they don't know what they want and they change policy often (according to the author)
sounder - more reasonable and sensible
resilient - strong and not easily damaged or reversed
snowball into - when a small problem develops into a larger problem (like a small snowball rolling down the hill and getting larger and larger)
embattled - having a lot of problems and difficulties
erosion of - decrease in
Answer Key:
1. How do current exchange rate problems differ from those in 1997?
Whereas in 1997 the problem was baht depreciation, now the problem is baht appreciation.
("As opposed to a decade ago when it faced devaluation pressure, the baht this time is under scrutiny for having strengthened excessively to the detriment of exporters and other stakeholders involved.")
2. What high-level government events immediately preceded the current baht crisis?
The recent cabinet reshuffle preceded the current baht crisis.
("The baht crisis is partly an outcome of Gen Surayud's minor cabinet reshuffle following Deputy Prime Minister and Finance Minister Pridiyathorn Devakul's resignation.")
3. What factor increased volatility in Thai money markets?
Uncertainty regarding baht policy.
("Unsurprisingly, the money markets have been in turmoil with volatile trading as they are beset with prolonged uncertainties regarding baht policy.")
4. Is the 30% reserve requirement really needed anymore? Why?
No, it is not needed since "capital inflows are fully hedged."
("...Mr Chalongphob indicated that the reserve requirement no longer holds its intended impact on capital inflows as these are now fully hedged, implying that the Bank of Thailand (BoT) should do away with the capital controls altogether.")
5. Does Dr. Chalongphob seem to prefer a monetary policy that is expansionary, contractionary, or no change to monetary policy? Why?
He seems to prefer an expansionary monetary policy in order to help economic growth and reduce appreciation in the exchange rate.
6. What immediate policy action would initiate an expansionary monetary policy?
(Be specific.)
A cut in interest rates would initiate an expansionary monetary policy. Cuts from 100 to 125 basis points during the next year have been suggested with an immediate cut of 50 basis points.
6. What pressures does the BOT currently face? Why?
There is pressure for an expansionary monetary policy and interest rate cuts to counter the appreciation of the baht.
7. If the benchmark interest rate currently stands at 4.75%, how much would it be if it fell 50, 100, or 125 basis points?
4.25% (50 basis points)
3.75% (100 basis points)
3.50% (125 basis points)
8. Are there differences in opinion between the BOT governor and the Finance Minister about what monetary policy should be pursued? (Note: You can argue either way given recent history.)
Even though the Finance Minister criticised the BOT governor's policy before he became Finance Minister he publicly declared his support once he became Finance Minister.
9. Will interest rate cuts solve the baht appreciation problem?
Maybe yes, maybe no. The baht "may continue to appreciate despite the interest rate cuts."
The Thai government can only act to protect itself from events in the world economy that are driven by larger countries such as China, the US, the EU, and India. An example is the accumulalion of over $1 trillion in exchange reserves by China. Any changes in these reserves or their value may affect the Thai economy.
10. Will the Thai government be blamed for further appreciation in the Thai baht? Would this be justified? (Question for open discussion)
The government may be blamed for further baht appreciation, but it is unlikely that they will be able to do anything about it, if it is caused by greater pressures in the world economy.
("...the baht's strength going forward may well snowball into a crisis for the embattled Surayud government, adding to the erosion of its credibility and legitimacy and further exposing its incompetence.")
