Capital controls end in Thailand
By Jon Fernquest |
Today the Bangkok Post marked the end of capital controls imposed after the coup by an editorial discussing what might lie ahead for the baht in the uncertain world of the global economy.
The Finance Ministry announced the following new policies and measures to help ease pressure on the baht on Friday:
- Refinance $3 billion in government foreign debt to local baht.
- Reduce new foreign borrowing by government agencies and state enterprises.
- Increase the amount of public savings bonds as an investment alternative; issue 30-year bonds to finance infrastructure megaprojects.
- Facilitate state investment in foreign debt instruments.
- Encourage state financial institutions to invest abroad.
- Expand limits and ease restrictions for foreign investment by Thai residents.
(Photo on right is Tarisa Watanagase, Bank of Thailand governor)
Here's today's editorial in full:
Monday March 03, 2008
EDITORIAL: Taking baht at face value
Today will mark the end of costly measures that the central bank used in its struggle to curb the surge in the strength of the baht. The Bank of Thailand's 30% reserve requirement on capital outflows produced little benefit compared to its adverse side-effects.
Capital controls have been ruled out as a measure available to correct market failures. In Thailand's case, some argue whether the capital controls were justified and their implementation tactful.
The 30% reserve requirement on capital inflows turned out to be impractical. The measure was received poorly, causing the deepest single-day stock market loss, causing policymakers to reverse the measure one day after implementation. The measure affected confidence in the country's consistency toward market liberalisation.
The central bank's motive for imposing the measure was to protect exporters, especially labour intensive companies, which lacked imports as a natural hedge, and small- and medium-sized enterprises which are at a disadvantage in buying hedging contracts.
The central bank was prompted to act after investor and consumer confidence was weakened by political instability that started in early 2006. The side effects were far greater than the central bank anticipated.
The baht in 2006 outperformed its regional peers, mainly because of a ballooning current account surplus caused by historic growth in exports and slowing import demand. Capital inflows have been strong because of the low valuation of stocks and the central bank's interest rate increase to stem inflation. The baht outpaced regional peers. There were unusual inflows to bills of exchange and property funds, but one can argue the situation was different from massive speculative attacks on the baht in February and May 1997.
The central bank decided to lift the measure today, amid signs of weakening current accounts and upward pressure on the baht. However, the backdrop of a continually sinking dollar could contribute to the strengthening of the baht. This is particularly the case as the Fed continues to cut interest rates aggressively in the first half of the year.
Now that the baht will be allowed to freely float, the central bank is expected to more heavily intervene in the currency market. The intervention should not be interpreted as a long-term measure to control baht strength, but as a short-term move to ensure a volatile baht does not hamper economic activity.
Over the long term, what good is it if policymakers weaken a baht which was strengthened because the country has better fundamentals than other countries. The policymakers should encourage outward bound investment by educating the public about the benefits and increased efficiency of hedging instruments and provide incentives. Prudent measures could be used to discourage investors from taking advantage of a stronger trend in the baht, but we should not give high importance to non-traditional measures.
Lessons need to be learned. Thailand cannot have its own rules on mobile capital flows in the international market without serious negative consequences. For the central bank, it should have learned before the 1997 economic crisis that it needs to have better dialogue with the private sector and better knowledge of market behaviour.
The government should learn that foreign exchange policy must be based on long-term benefits. Strong currency should not be viewed as an economic threat. A strong baht should be viewed as an opportunity to import with a lower cost to upgrade our own competitive fundamentals.
(Source: Bangkok Post, 03-03-08, editorial, op-ed section, temp-link)
Vocabulary:
lies ahead - will happen in the future
measures - actions to achieve a result
prudent - sensible and careful
prudent measures - taking careful actions to achieve a result
facilitate - help
marks the end of Y - shows the importance of Y ending
curb Y - reduce or end Y entirely
surge - a sudden increase
adverse - unfavourable, has a negative effect on people
side-effects - effects in addition to the main positive effects, usually negative (for example, sleepiness is a side-effect of this cold medicine)
adverse side-effects - negative side-effects
rule out Y - decide that Y is not suitable and prevent Y from happening
market failures - when markets alone fail to provide what an economy needs (for example, if temporary changes in the exchange rate might wipe out important parts of the export sector that are critical to the long term growth and development of the Thai economy, South Korea protected export industries in its development; See Economist Glossary)
tactful - polite, careful not to offend or upset
consistency - behaving the same way in similar situations, not contradicting oneself (for example, always giving 20 baht as a tip in a restaurant, rather than sometimes nothing or sometimes 100 baht which is "inconsistent")
market liberalisation - "limiting the role of governmemt to the things it can do to help the market economy work efficiently ...can include privatisation and deregulation" (See The Economist glossary)
motive for X - a person's reason for doing X
labour intensive - uses a large amount of labour and less capital (See The Economist glossary)
hedge - reducing risk by "deliberately taking on a new risk that offsets an existing one, such as your exposure to an adverse change in an exchange rate" (See The Economist Glossary)
hedging contracts - an options or futures contract used to hedge risk
imports as a natural hedge - some export industries use only a little labour and a lot of foreign imported components which are assembled and re-exported, the high percentage of imports in the added value protects the industry from a strong baht (automobile assembly is an example)
prompted to act - make someone do something
far greater than anticipated - expected a lot less
peers - those having the same status (usually means people of the same age, same job, and same school, etc)
regional peers - countries in the same region with similar economies (Malaysia, Thailand, Phillipines, and Singapore are peers, but Burma does not really participate in the international economy yet so probably isn't)
ballooning - suddenly and quickly getting much larger (See glossary)
current account surplus - roughly when exports are greater than imports (See Wikipedia on current account)
ballooning current account surplus - exports suddenly become much larger than imports
low valuation of stocks - when the market value of stocks is low, in this case lower than their true worth so capital flowed into the country and bought the stocks
stem inflation - reduce and control inflation
outpaced - run or move faster than others (See glossary)
a bill of exchange - "an unconditional order issued by a person or business which directs the recipient to pay a fixed sum of money to a third party at a future date. The future date may be either fixed or negotiable. A bill of exchange must be in writing and signed and dated. also called a draft." (Source: investorwords.com; also see Wikipedia on bill of exchange)
X amid signs of Y - X happens while it looks like Y is happening
weakening current accounts - roughly value of exports decreasing relative to imports, less of a current account surplus
backdrop - the general situation when something happens
intervene in the currency market - when the central bank buys or sells currencies to control movements of the country's currency
a volatile baht - when the baht moves suddenly and unpredictably in value
hamper - make if difficult for someone to do something
fundamentals - economic fundamentals, the underlying health of an economy, an perfectly healthy economy fully capable of producing goods can fail when a financial panic spreads and people suddenly lose confidence in the economy (See glossary)
incentives - rewards for behaving in a certain way
upgrade - improve
upgrade competitive fundamentals - make industries in an economy more competitive in international markets
