Fending off export sector collapse: Dr. Virabongsa on baht appreciation and accumulating foreign reserves
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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The Bangkok Post's INPrint Column by Kamol Hengkietisak provides a more local perspective on the news.
The column features translations from Thai language newspapers.
The appreciating baht was the target of criticism by economist, former deputy Prime Minister and Finance Minister Dr. Virabongsa Ramangkura in Saturday's column.
Originally printed in Thai Rath, Thailand's largest mass circulation daily, Dr. Virabongsa's comments underscore the fundamentally different nature of central bank intervention under currency appreciation in contrast to the currency depreciation of 1997.
Currency appreciation allows for the safe accumulation of reserves.
Dr. Virabongsa invokes the example of China which has accumulated record levels of foreign reserves and invested them in overseas assets, much to the chagrin of the US government, with continual threats to retaliate if China's trade surplus and foreign reserve build-up is not reversed.
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Negative memories of the IMF are invoked by Dr. Virabongsa with the little dash of sarcasm noted by M.R. Pridiyathorn yesterday, Dr. Virabongsa quips:
"The International Monetary Fund (IMF) may criticise the BOT's intervention because the hedge funds cannot make a killing from manipulating the market, but this is all right."
Meanwhile, zooming out to the international economic arena, Martin Wolf at the Financial Times reviews two books on trade, exports, and development with a decidedly pro-industrial policy slant to them. Korean economist Ha-Joon Chang's new book sounds like a description of post-coup Thailand with US GSP trade privileges revoked:
"Chang's book Bad Samaritans is shorter and more punchily written. He considers how people who want to help developing countries but instead are hurting them, constrain policy options for developing countries. Among these constraints are limits on their ability to regulate inward direct investment, an undue obsession with privatisation, restrictions on access to intellectual property, exaggerated attention to financial stability, excessive emphasis on corruption and lack of democracy and, last but not least, undue stress on the importance of culture. [Link]
Notable is the early economic success of South Korea compared to India:
"The contrast between South Korea's success and India's failure was striking. Both used protection and other tools of industrial policy. Yet the orientation of India's policies was inward-looking and anti-competitive, while that of South Korea was the opposite [outward-looking and competitive]. In the literature on development and trade, the Korean strategy came to be called "export promotion", because its economy did not have an overall bias towards the home market."For further reading, read a simplified explanation of exchange rates and the problems associated with them in yesterday's Bangkok Post. [Link]
For further reading, check out a recent (July, 2007) essay on trade and development by Korean economist Ha-Joon Chang in the liberal British magazine of essays and commentary The Prospect.
Check out a recent (July 18 2007) article at IPS on the breakdown of the Doha round of WTO negotiations, in which Ha-Joon Chang observes:
"Almost all rich countries got wealthy by protecting infant industries and limiting foreign investment"
Check out a recent editorial by Ha-Joon Chang at the British Independent (July 23 2007).
Dr. Ha-Joon Chang, a Cambridge economist, provides a lot of food for thought along the same lines as Dani Rodrick's "Industrial Policy" idea.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What sectors besides the export sector is baht appreciation affecting?
2. Why is Thailand dependent on the export sector?
3. Can the baht appreciation problem be solved by the BOT alone, according to Dr. Virabongsa?
4. Is it true that the strong baht is a short-term problem, according to Dr. Virabongsa?
5. Is baht appreciation seen as a problem by only the export sector?
6. Was Thai Silp the first factory to shut down?
7. What other economic problems do factory closings result in besides unemployment?
8. What does Dr. Virabongsa call on the BOT to do immediately?
9. Why are people uneasy about intervention in foreign exchange markets nowadays?
10. Why is intervention now different than intervention in 1997?
11. What is the appropriate exchange rate for Thailand, according to Dr. Virabongsa?
12. Why does Dr. Virabongsa object to capital controls?
13. What could cause another financial crisis, according the economists cited?
14. What kind of government spending project to stimulate the economy could take advantage of lower interest rates and greater availability of credit?
Bangkok Post Article July 21, 2007
IN Print - Kamol HengkietisakStrong baht needs strong medicine
A noted economist this week cautioned that the problems created by a rapidly strengthening national currency cannot be ignored.
By KAMOL HENGKIETISAK
Esteemed economist Dr Virabongsa Ramangkura recently remarked that the strong baht is posing economic problems because it not only affects exporters, the repercussions are also felt by manufacturers and farmers throughout the country, reported Thai Rath.
"A small country like Thailand which does not have many natural resources such as oil depends on the export sector. The government has not paid much attention to the exchange rate for the last two years, which makes the problem serious. If the prime minister does not personally take charge of looking into the problem, instead of allowing the Bank of Thailand (BOT) governor to tackle it alone, the crisis cannot be solved," said Dr Virabongsa.
He noted that a high-level figure had recently said in an interview that the strong baht is a short-term problem. Dr Virabongsa said that person in authority should not send a wrong signal to the public.
Dr Virabongsa pointed out that on July 15 a group of economists came out to propose a new measure to tackle the strong baht. The next day, a joint public/private consultation committee proposed 7 measures to tackle the strengthening baht. On July 17, 35 industrial groups under the Federation of Thai Industries also proposed a solution. It is clearly evident that all sectors see the strong baht as a national problem in need of urgent attention.
The former deputy prime minister noted that the strong baht during the past year had forced several small factories to shut down, but this did not become known until the recent closure of a large garment firm in Samut Prakan. Not only were many people laid off, the closed factories became NPLs, placing a burden on the financial institutions. If the situation is allowed to continue there will be a second round of financial crisis soon, as the baht is now touching 33 baht/dollar, said Dr Virabongsa, adding that the BOT must be courageous in implementing some medicine to stop the baht from gaining more strength.
He proposed that the BOT immediately cut the repurchase rate by 1-1.5% and also heavily intervene in the forex market. Many observers who remember the past intervention by the central bank, which cost the country billions in losses, were worried that it might happen again.
However, Dr Virabongsa argued that if the BOT successfully intervenes and the baht is weakened, the bank will make a profit. Thailand would not be bankrupted by buying a lot of dollars because the currency can be used as external reserve, which can then be used to invest in government bonds and other financial instruments overseas which yield higher returns than in Thailand. The best example is China, which uses its huge reserve to buy debt instruments in the US market.
"The BOT must intervene strongly and sufficiently, while the Finance Ministry must not hesitate in permitting the central bank to issue bonds to drain off excessive liquidity... The International Monetary Fund (IMF) may criticise the BOT's intervention because the hedge funds cannot make a killing from manipulating the market, but this is all right," said Dr Virabongsa.
"The baht value that is appropriate for Thailand and exporters is 36 baht/dollar, not 33 baht. By lowering the BOT's repurchase rate aggressively, it can prevent selling of dollar holdings and stop money flowing into the country without having to issue any additional measure," noted Dr Virabongsa, who disagreed with last year's BOT measure of a 30% reserve requirement for hot money inflow because it distorts the market: the stock market is exempt while the money market is under this control.
Noted economist Dr Narongchai Akrasanee agreed with Dr Virabongsa's proposal to cut the repurchase rate aggressively to stop the baht from rising further. He remarked that a 1-1.5% cut in the repurchase rate may affect the debt market and people's savings, but it is necessary. If the country's interest rate is not cut drastically, the baht will continue to strengthen and might cause the collapse of the export sector, which in turn may cause another round of financial crisis. Other adverse repercussions from a low interest regime are easier to tackle than a strong baht, he said. Dr Narongchai also urged the government to fast-track investment in mega-projects to revive the domestic economy...
Vocabulary (in discussion above)
fend off - stopping something from affecting you, prevent, defend yourself from
Dr. Virabongsa Ramangkura - prominent economist and former deputy Prime Minister and Finance Minister, the most prominent in a group of economists pushing for more proactive action to protect the economy from baht appreciation
Bangkok Post's INPrint Column - translation of local Thai language news by Kamol Hengkietisak, provides local perspective on the news
Thai Rath - the oldest and highest circulation Thai-language daily newspaper, the news section is best known for sensationalist coverage of crimes, accidents, and barely clothes females, it also includes stories on Thai politics, economy and society, the second section covers sport and entertainment (See Wikipedia on Thai Rath and Thailand's Media)
underscores - draws attention to, emphasises importance
a little dash of sarcasm - a little bit of sarcasm
sarcasm - saying the opposite of what you mean, use of apparent approval to express disapproval, mockery, scorn, or insult
a dash of - a small amount (for example, of spice to make the food you're cooking tastier)
quips - make a clever and amusing remark or comment
GSP trade privileges - Generalised System of Preferences, exemption from the more general rules of the World Trade Organization WTO for developing countries (See Wikipedia)
invokes - use to support argument
chagrin - disappointment and annoyance (especially when due to a failure or mistake)
much to the chagrin of... - very much disappointed and annoyed about...
retaliate - punish in return for harm done to you
strong medicine - extreme policy action
* implementing some medicine to
repercussions - the bad or unpleasant things that happen after an event (See glossary)
take charge of looking into the problem -
tackle a problem - solve a problem (in the game of American football and also rugby, tackle means jumping on the opponent to knowck him or her down)
measure to tackle the strong baht -
send a signal - change peoples' beliefs or opinions by what you say
* send a wrong signal to the public
joint public/private consultation committee - a group of representatives from industry (private sector) and the government meeting to solve problems
industrial groups - industries associations, groups of company presidents in an industry who work together to solve problems that they all face
urgent - must do quickly, do ASAP (As Soon As Possible) (See glossary)
laid off - people were made unemployed because there was no more work for them in the company
loan in default - failure to meet the terms of a loan agreement such as not making scheduled payments or paying off the loan at the agreed time (See The Economist)
NPLs - Non-Performing Loans, loans in default, loans not earning income for the lender, technically conditions have to be met to qualify as an NPL such as: (1) full payment of principal and interest is no longer anticipated, (2) principal or interest is 90 days or more delinquent, or (3) the maturity date has passed and payment in full has not been made (Source: TeachMeFinance.com)
repurchase rate - the interest rate used by the central bank to control credit and the money supply, the main monetary policy instrument, the interest rate charged on central bank repurchase agreements
a Repurchase Agreement, REPO - selling a security and agreeing to buy it back in the future for a fixed price, central banks use repos to provide liquidity to the financial system, they inject money into banks and the economy by buying securities from banks, agreeing to sell them back in a week or two, this controls the money supply and inflation (See The Economist)
cut the repurchase rate by - lower interest rates to expand credit and the money supply, and stimulate investment and economic expansion
* hedge funds cannot make a killing from manipulating the market
hedge funds - large funds that try to make as much money as possible often through speculation, often bet against the herd of other speculators (See The Economist and Wikipedia)
make a killing - make big profits from speculation (no one was expecting it)
manipulating the market - unfairly making prices move in a market so you can profit from them (for example, by using insider information or by using the sheer bulk of investment money at your disposal as hedge funds have)
exempt - does not have to follow a rule (See glossary)
money markets - financial markets for short-term borrowing and lending, markets where short-term liquid assets such as money and government treasury bills are traded, the opposite of long-term capital markets, the core money market consists of banks borrowing and lending money to each other using commercial paper or repurchase agreements (See The Economist and Wikipedia)
fast track - as quick as possible, As Soon As Possible (ASAP)
fast-track investment - making the investment and doing the project as quick as possible
Answer Key:
1. What sectors besides the export sector is baht appreciation affecting?
Baht appreciation is affectign the manufacturing and agriculture sectors also.
2. Why is Thailand dependent on the export sector?
a. It is a small country.
b. It does not have many natural resources.
c. It does not have much oil of its own.
d. It is a small open economy, a small economy heavily dependent on trade.
3. Can the baht appreciation problem be solved by the BOT alone, according to Dr. Virabongsa?
No, the Prime Minister has to personally take charge of finding a solution to the problem, according to Dr. Virabongsa.
4. Is it true that the strong baht is a short-term problem, according to Dr. Virabongsa?
No one can be sure, because no one can perfectly predict the movement of exchange rates. It may very well be a long-term problem.
("He noted that a high-level figure had recently said in an interview that the strong baht is a short-term problem. Dr Virabongsa said that person in authority should not send a wrong signal to the public.")
5. Is baht appreciation seen as a problem by only the export sector?
No, many industrial groups and economists have called for action. The agricultural and manufacturing sectors have also been affected. Dr. Virabongsa notes that "all sectors see the strong baht as a national problem in need of urgent attention."
("Dr Virabongsa pointed out that on July 15 a group of economists came out to propose a new measure to tackle the strong baht. The next day, a joint public/private consultation committee proposed 7 measures to tackle the strengthening baht. On July 17, 35 industrial groups under the Federation of Thai Industries also proposed a solution. It is clearly evident that all sectors see the strong baht as a national problem in need of urgent attention.")
6. Was Thai Silp the first factory to shut down?
No, during the last year several small factories have shut down.
7. What other economic problems do factory closings result in besides unemployment?
Non-Performing Loans (NPLs) also increase since the businesses that close the factories are insolvent. Increasing NPLs weakens and places stress on the financial system.
8. What does Dr. Virabongsa call on the BOT to do immediately?
a. Cut interest rates by 1 to 1.5%
b. Invervene heavily in the foreign exchange market to support the baht.
9. Why are people uneasy about intervention in foreign exchange markets nowadays?
The failed attempts to defend the baht in 1997 cost Thailand billions.
10. Why is intervention now different than intervention in 1997?
The baht is appreciating now. In 1997 the baht was depreciating.
Building up reserves to weaken the baht will actually lead to profit, not to loss as in 1997.
Accumulated foreign exchange reserves can be invested in "government bonds and other financial instruments overseas which yield higher returns than in Thailand."
This is what China has been doing for several years much to the chagrin of the US government.
("However, Dr Virabongsa argued that if the BOT successfully intervenes and the baht is weakened, the bank will make a profit. Thailand would not be bankrupted by buying a lot of dollars because the currency can be used as external reserve, which can then be used to invest in government bonds and other financial instruments overseas which yield higher returns than in Thailand. The best example is China, which uses its huge reserve to buy debt instruments in the US market.")
11. What is the appropriate exchange rate for Thailand, according to Dr. Virabongsa?
36 baht to the dollar, not 33 to the dollar.
12. Why does Dr. Virabongsa object to capital controls?
They distort the market because they apply to money markets and not the stock market. Stocks are favored over bonds or bank lending, for instance.
13. What could cause another financial crisis, according the economists cited?
Baht appreciation could cause the collapse of the export sector and this could cause another financial crisis.
14. What kind of government spending project to stimulate the economy could take advantage of lower interest rates and greater availability of credit?
Fast-track investments in large-scale infrastructure projects ("mega-projects") like mass transportation lines.
