Thai baht fully backed by foreign reserves
By Jon Fernquest[Introduction | Vocabulary | Article | Reading Questions | Answers]
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Last week the Bangkok Post featured two articles that gave readers a peek at how Thailand's central bank operates. Here is the first of these articles.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What Thai monetary policy will soon become law?
2. Why was the move in the year 2000 to merge foreign reserve accounts opposed by the public?
3. How will the new law change the amount of backing required for the baht?
4. What effect has full backing of the baht had on market confidence in the baht's value?
5. How will the new law expand the range of assets that can be used to back the baht?
Are these new types of assets more risky?
6. Are Thailand's foreign exchange reserves currently increasing or decreasing? Why?
7. How will the new law help the central bank avoid end of year valuation losses?
Bangkok Post Article: November 14, 2006
Legal change would keep baht fully backed by foreign reserves
PARISTA YUTHAMANOPA Currency Act amendment will leave the baht fully backed by foreign reserves, according to Chanchai Boonritchaisri, senior director of the Bank of Thailand's Legal and Litigation Department.
Planned legal changes would not include the merging of reserve accounts as previously proposed following the 1997 economic crisis, he added.
The central bank in 2000 sought to merge its Banking Department's account and the Note Issuing Department's annual benefits account in order to tap funds for purposes other than backing banknotes and investment.
The proposal was strongly opposed by civic groups that expressed concerns over the use of reserve funds, causing the cabinet to reject the bill.
The current law stipulates that 60% of the central bank's banknotes must be backed by foreign assets and gold, with the rest backed by baht-denominated assets. But the central bank, in practice, has kept banknotes fully backed by foreign assets.
"The amendment maintains that the baht remains fully backed. After all these years, confidence in the baht still appears to be strong,'' Mr Chanchai said. "Not many countries still have their currencies fully backed.''
He said that the amendment was aimed at enhancing the central bank's efficiency in managing foreign reserves, as eligible assets under the current law were limited to government bonds and bonds issued by foreign governments.
"There have been new supplies from government agencies that have rated on par with the government's issues, but we are obstructed by the letter of the law,'' Mr Chanchai said.
The central bank is also looking to invest in bonds issued by international agencies including the Bank for International Settlements and the United Nations.
Growing foreign reserves caused by steady capital inflows also meant an increasing need to widen the scope of foreign-reserve management, he said.
Mr Chanchai said the amendment was also aimed at helping the central bank to mark-to-market foreign reserves on a monthly basis so its account would better reflect market trends.
Current law permits the central bank to mark-to-market its foreign-reserve accounts once at the end of the year, running the risk of valuation losses.
"By making accounts better reflect the market, the central bank will be more careful with foreign-reserve management,'' he said.
Vocabulary
fully backed by foreign reserves - for every baht it issues, the country's central bank owns high quality, low risk assets such as government bonds or gold that can be used as foreign exchange reserves
Currency Act - Thailand's laws regarding its currency the baht (Read the law)
litigation - prosecuting or defending a legal case in a court of law
merging, merge - combine (separate things joining together to make one thing)
foreign exchange reserves, reserves, foreign reserves, reserve funds , reserve accounts, foreign reserve accounts - "Liquid assets held by a central bank or government of a country, for use in intervening in the foreign exchange market. This includes gold, or convertible foreign currencies, eg US Dollars for countries other than the United States, and DM for countries other than Germany. This also includes government securities issued in the above currencies." (Source; See Wikipedia on Foreign Exchange Reserves)
tap funds - make use of funds (to do something you need to do)
civil society - people acting voluntarily outside of government, family, and business in organisations including charities, NGOs, community groups, women's groups, religious groups, professional associations, trade unions, self-help groups, social movements, business associations, coalitions and advocacy groups, Thailand has a rich civil society, neighboring Burma does not (Source of definition; See Wikipedia on Civil Society)
civic groups - voluntary organizations of citizens working to make a better society, part of civil society (as opposed to the force-backed structures of the government or the business community)
a bill - a proposed new law that is discussed and then voted on
reject the bill - a proposed new law that fails when people vote against it
stipulates - state clearly that something must be done (for example in a condition in an agreement or contract) (See examples in Bangkok Post business vocabulary)
baht-denominated assets - assets whose value is given in baht (for example assets bought and sold in Thailand)
banknotes - pieces of paper money (in Thailand: 20 baht, 50 baht, 100 baht, 1000 baht)
enhancing - improving value or quality
x rated on par with y - x judged to be equal to y (for example equally good, bad, or important)
Bank for International Settlements - "an international organization of central banks which exists to 'foster cooperation among central banks and other agencies in pursuit of monetary and financial stability.'" (See Wikipedia)
widen the scope of -
mark-to-market - "assigning a value to a position held in a financial instrument based on the current market price for that instrument, or on a fair valuation based on the current market prices of similar instruments." (See Wikipedia on mark to market)
Answer Key:
1. What Thai monetary policy will soon become law?
The Thai baht will be fully backed by foreign exchange reserves.
2. Why was the move in the year 2000 to merge foreign reserve accounts opposed by the public?
The merger was to be made in order to "tap funds for purposes other than backing banknotes and investment." The public opposed the merger because it was not clear what the funds would be used for.
("The proposal was strongly opposed by civic groups that expressed concerns over the use of reserve funds")
3. How will the new law change the amount of backing required for the baht?
There is essentially no change.
Even though current law requires that "60% of the central bank's banknotes must be backed by foreign assets and gold, with the rest backed by baht-denominated assets," the central bank "has kept banknotes fully backed by foreign assets."
The amendment will make existing practice into law.
4. What effect has full backing of the baht had on market confidence in the baht's value?
Full backing of the baht has strengthened market confidence in the baht's value.
("After all these years, confidence in the baht still appears to be strong," Mr Chanchai said. "Not many countries still have their currencies fully backed.")
5. How will the new law expand the range of assets that can be used to back the baht?
Are these new types of assets more risky?
The new law will expand the assets that can be used to back the baht from government bonds and bonds issued by foreign governments to also include bonds issued by government agencies as well as from the Bank for International Settlements and the United Nations.
6. Are Thailand's foreign exchange reserves currently increasing or decreasing? Why?
Thailand's foreign exchange reserves are growing due to "steady capital inflows." According to Kasikorn Research:
"The strengthening of the baht stemmed in part from a foreign capital inflow into Asian countries including Thailand due to the weakening of the US dollar.""Another reason behind the stronger baht is that local interest rates remain higher than those of most countries in the region." (Source)
7. How will the new law help the central bank avoid end of year valuation losses?
It will allow the Bank of Thailand to "mark-to-market foreign reserves on a monthly basis so its account would better reflect market trends."
Currently, it is only marked to market once at the end of the year and this can result in losses because foreign exchange reserves were over or under valued.
