You can read the Bangkok Post : Readbangkokpost Economics Business Blog

M.R. Pridiyathorn suggests some steps to alleviate baht appreciation

By Jon Fernquest

[Introduction|Vocabulary|Article]
[Reading Questions|Answers]

M.R. Pridiyathorn Devakula, with long experience as Governor of the BOT since 2001 and then Finance Minister and Deputy Prime Minister in the interim government, is probably more qualified than anyone in the country to comment on the current baht crisis.

Today's op-ed piece is a well-reasoned analysis of immediate steps that should be taken to alleviate the "currency crisis."

Currency appreciation is the opposite of the depreciation usually found in currency crises, but baht appreciation threatens the economy with business closings and unemployment just the same.

M.R. Pridiyathorn's analysis acknowledges fully that maintaining export competitiveness is an important issue that has to be dealt with urgently, exports being essential for Thailand's economic growth and development.

In this article, the author draws a line in the sand and claims that the baht won't appreciate much further.

He argues that after the 2004 tsunami the Thai export sector was sheltered from currency appreciation that other Asian economies were experiencing at the time.

The enhanced competitiveness of the Thai export sector in international markets during this period may have encouraged some over-expansion in the export sector.

A little bit of exchange rate pressure may be inevitable and some less competitive Thai exporters may "feel the urge to seriously adjust themselves to become competitive."

If uncompetitive export businesses close shop, the workers will have to be helped in transitioning to new jobs. How should they be helped?

If the baht appreciation does continue, the question of a more long-term fix arises. Would an industrial policy that Dani Rodrick of Harvard's John F. Kennedy School of Government has proposed for some countries, help build a stronger export sector similar to that of Japan and South Korea? [Link to recent article]

I've taken the liberty of breaking the article into smaller chunks with headings before each section to make the article easier to digest. Don't worry, I have not changed a single word of M.R. Pridiyathorn's precise analysis.

Reading Questions

Here are some questions to guide your reading (See answers at end):

1. What contention by some economists is the author addressing in his op-ed piece?

2. Will the baht continue to appreciate, according to author?

3. Has the baht reached the level where its value will affect Thailand's competitiveness in export markets, according to Pridiyathorn?

4. Would the removal of the 30% capital reserve rule alleviate baht appreciation?

5. How would the prepayment of foreign currency loans held by state enterprises reduce baht appreciation?

6. How does the supply of US dollars in the Thai foreign exchange market cause baht appreciation? (Draw a simple supply and demand diagram to illustrate this)

7. What kind of inflows of money into Thailand create an excessive supply of dollars?

8. How can the import-export sector's confidence in the currency create an excessive supply of dollars? How does this add to baht appreciation?

9. When has an excessive supply of dollars due to dollar buying and selling patterns of exporters caused excessive baht appreciation? What events were behind each incident?

10. What has been the main cause of the recent appreciation in Asian currencies?

11. When did the appreciation of Asian currencies begin, according to the author?

12. Was the baht one of the first currencies to appreciate from US capital inflows? Why or why not?

13. Did the tsunami effect on capital markets cited by the author help or hurt Thai exporters at the time? Why?

14. How does the baht currently compare to other Asian currencies?

15. What baht level would make Thailand's exports competitive vis-a-vis other Asian currencies, according to the author?

16. Which measures for curbing baht appreciation does the author find most promising?

Bangkok Post Article Article July 23, 2007

OPINION / CURRENCY CRISIS

Who did what to curb stronger baht?

Some economists have come out to emphasise that a stronger baht would damage the competitiveness of Thai exports and accused the Bank of Thailand of not doing enough to stabilise the currency
By M.R. PRIDIYATHORN DEVAKULA

After several tireless attempts by concerned parties, the strengthening baht has started to stabilise. The value of the baht is not getting stronger - though not promising to fall back to the 34 baht level of last month. At least, we could be content that it would not strengthen beyond 33 baht this time around.

During the days that the baht strengthened from around 34 to the 33 baht level, I was very much alarmed by the possibility that it might stretch to 32 baht - the level which would strongly reduce competitiveness of Thai exports against its Asian competitors. During this period of time, a number of economists came out to emphasise that a stronger baht would damage the competitiveness of Thai exports against their regional competitors and accused the Bank of Thailand of not doing enough to stabilise the currency.

Some of them even pinpointed that to raise the competitiveness of Thai exports, the baht should weaken to 36 baht/US dollar. Some even sarcastically suggested the revocation of the 30% capital reserve rule although being fully aware that without this rule, the baht would have strengthened to the level as high as those in the offshore market.

Thai industry leaders and the Chamber of Commerce suggested the modification of regulations which were very much worthy of note. However, no one has as yet identified what and how the suggested measure can alleviate the currency crisis. Certain economists advised the government to urge state enterprises to prepay their foreign currency loans which would increase outflow of foreign currency and ease pressure on the baht, resulting in the stability of the currency or even weakening it if the amount of prepayment is big enough.

I write this article with three main purposes. Firstly, I would like to put in plain words about how and when the central bank's intervention measures would be effective and when they would be futile. Secondly, I would like to illustrate the appropriate level of exchange rate that would make the Thai export sector remain competitive. Lastly, I would like to pinpoint that out of the suggested measures, which one is the most effective in my view and what has been done by whom that has effectively stabilised the baht.

Basics of exchange rates

First, allow me to explain certain principles. Technically, the value of the baht would strengthen when the supply of US dollars in the foreign exchange market is more than its demand. Trade surplus would provide excessive supply of US dollars into the market.

Also, when there is more capital inflow than capital outflow, the net capital inflow will be sold in the market. These two excesses will strengthen the baht value should no one purchase this excessive US dollars. Therefore, when the country experiences a trade surplus and net capital inflow, the central bank could simply handle the currency situation by purchasing the excessive dollars. However, in the real world, it is not as easy as it might seem.

The import-export sector as a factor in baht appreciation

At times, the import-export sector's confidence in the currency becomes a more important factor affecting the value of the baht. When there is speculation of a stronger baht, exporters will hurriedly sell their US dollar income while importers will prolong their US dollar payment in the hope of some exchange profit. Each month, the export value is higher than that of import by not more than 1,000 million US dollars. In a normal situation, therefore, the excessive amount that the central bank has to handle is only around 1,000 million US dollars which the central bank can manage conveniently.

However, when the market reflects on the stronger baht, exporters swiftly sell and importers delay their purchase. Subsequently, the excessive US dollars to be handled will increase many times rapidly - so much so that it is merely impossible to be drained out in a very short period of time. The baht, as a result, becomes stronger.

The above-mentioned scenario occurred twice this year. In early March when there was a change at the Finance Ministry, the business community misunderstood that the newcomer would revoke the preventive measure of 30% reserve which would result in a strong baht. Exporters, therefore, rashly sold the dollar proceeds of that month as well as those of the following 2-3 months. (The amount was as high as 10,000 US dollars per month.)

To make the situation even worse, importers prolonged their selling. The baht value at around 35 baht/US dollar strengthened to around 34 baht in a few days even if the central bank had absorbed quite a lot. The other case occurred during the last 2-3 weeks when the exchange rate was stronger due to the unusual speed of the US dollar capital inflow.

As a consequence, exporters were worried that the baht would become even stronger so they rushed to sell their dollar proceeds to the market, which worsened the situation. The baht strengthened to around 33. The central bank could easily absorb the excessive amount in the customary circumstances but the excessive amount that arose from unexpected justification is easier said than done to deal with.

Maintaining the competitiveness of Thai exports

The second concern is about the appropriate exchange rate that would help maintain the competitiveness of Thai exports, compared with their rivals in the region. It is well understood that the main cause of a strong Asian currency was the shift of US dollar funds from US capital markets to Asian markets. Therefore, the reference point of time to compare exchange rates for the purpose of maintaining competitiveness should be the time when the shift occurred.

Many Thai economists commented that since the beginning of 2006 (or the end of 2005), our baht had risen 22.6%, which was much stronger than other regional currencies. However, in my opinion, the comparison starting at the beginning of 2006 was not accurate. At the time when I was central bank governor, I closely monitored the situation and found that the US dollar capital started flowing massively into Asian countries since the end of 2004 (or the beginning of 2005). However, in the first half of 2005, when Thailand had just recovered from the tsunami, the US dollar flew into other Asian countries but not Thailand. The result was that other Asian currencies strengthened while the baht became weaker. Thai exporters at that time benefited from the situation. Therefore, there was no urge for them to adjust themselves to the market mechanism.

Until the beginning of 2006, the US dollar inflow to Asia turned to Thailand at a more rapid rate than any other countries; the baht value then moved up quickly.

Compared to exchange rates at the beginning of 2005 (or the end of 2004), the stronger baht in the first half of 2006 was still behind those of other Asian countries. The country's competitiveness had not been affected. Since the end of 2004 (or the beginning of 2005) until the end of June 2006, the baht had risen only 2.21% (appreciation against US dollar), which was not stronger than other regional currencies. From the end of 2004 (or the beginning of 2005) until the end of 2006, the baht had risen only 8.38%, much less than the currencies of Korea, the Philippines and a little bit higher than those of China, Singapore and Malaysia.

It was only later that the rush sale of the US dollar as a result of uneasiness of Thai exporters toward the change of finance minister at the beginning of March and toward the rapid capital inflow at the beginning of July strengthened the baht up to the point that affected the country's competitiveness.

Though the baht now has strengthened at a rate a little less than the Philippine peso, the rate was considered to be high in comparison to the rest. It is high time we curbed the baht's strength. If we could even bring it down to the level which is weaker than 33 baht, it would much help improve the competitiveness of our exports. However, it does not need to fall to 36 baht/US dollar as some economists cited. If it touched that level, Thai exporters would enjoy the windfall and would not feel the urge to seriously adjust themselves to become competitive, as it was the case in 2005. Considering the value of other Asian currencies at this moment, keeping the baht at around 34-35 would be enough and, at the same time, deliver a message for exporters not to be complacent and to adjust themselves for the future change.

Measures to curb baht appreciation

The next question would be what measures would really be effective in preventing the baht to strengthen and if it is possible, how to make it weaken to the level of 34-35 baht smoothly and effectively.

The monetary measures that business leaders have proposed to the Finance Ministry and the central bank are practical in terms of reducing the pressure to sell export proceeds in US dollars. They also widen the opportunity for local investors to buy the US dollar for investing in securities overseas, thus increasing the demand for the US dollar. Consequently, the US dollar would become stronger while the baht would be weaker.

However, one can argue that this opportunity might not be attention-grabbing for Thai investors as in times of a weakening US dollar, those considering investing in US dollar assets might feel that their investment might devalue and run losses.

This measure might not be effective for the time being but will become constructive when the global market is stable later on. Moreover, there will be no guarantee that the exporters would be interested in taking advantage of other measures, i.e. the permission for exporters to hold US dollars.

Prepayment of foreign currency loans by state enterprises

In case exporters are guarded against the stronger baht, they will definitely accelerate their sale as witnessed twice this year. The proposed measure which I found most beneficial now is the one that encourages state enterprises to prepay foreign-currency loans as it will urge immediate purchase of US dollars in high amounts. This would generate a sudden effect and if the purchase is excessive enough, it might even avert the appreciation of the baht. Two leading economists suggested these similar measures and called on the government to approve them.

As I have been monitoring this situation with high concern, I am well informed of the government's movement in handling the currency crisis. The central bank agreed with the measure to encourage state enterprises to prepay foreign-currency loans and also proposed the same to the Finance Ministry. This measure is considered not to have a negative impact on the stock market as well as the other sectors of the economy. If everything goes well, the stronger medicine which might affect the stock exchange will not be needed.

However, at the Finance Ministry meeting last week (before July 14) and again at Government House on July 16, the ministry showed a reluctance to urge state enterprises to adopt the measure. I was disappointed to have heard that. Keeping a distance from the problem does not really prevent your hands from dirt. Nothing will be more right and proper than for the minister to ask state enterprises to follow their suggestions for the country's benefit.

These state enterprises drew down the loans at a time when the rates were 39, 38, 37 or 36 baht/US dollar accordingly. Paying back loans when the current rate is at 33.50 will definitely be profitable. There's no other suitable time to raise the issue.

Being very annoyed, I raised this prepayment issue when I ran into Khun Sommai Phasee, the deputy finance minister, at a social gathering on July 17. I got a glimpse that he did understand it well but was still awaiting the policy. I gave him confidence that directly overseeing the Public Debt Management Office, he had full authority to proceed before the rate reached 32 baht. I learnt later that Khun Sommai moved forward the very next day (July 18) when he announced the loan prepayment plan to the public.

The market responded well to the news of the 2,180 million US dollar state enterprise prepayment with the slightly weakening of the baht. I do believe that if we dig deeper, we could do more in this direction.

Settling import payments at sight

Allow me to add one more paragraph here regarding the measure proposed by the private sector. I see that the measure was not brought up. Actually, there are ways of settling the import payment - to pay at sight or to take the credit of up to 180 days under the trust arrangement with the banks. The latter has an effect of delaying the payment in US dollars. The private sector can help alleviate the problem by encouraging importers to settle the import payment at sight instead of the extension of the US dollar payment.

I personally do not have figures at hand but I strongly believe that the amount of imports that enjoy this financial flexibility is as vast as thousands of million US dollars. This particular measure will be more effective to accomplish the weakening of the baht than the measure that loosens the period of holding foreign currency of exporters.

To bring it to a close, after the Finance Ministry has persuaded state enterprises to prepay foreign currency loans, the foreign exchange became stabilised. The chance of the baht getting stronger has subsided. If the Finance Ministry makes a move for the bigger amount of prepayment and the central bank together with the Bankers' Association jointly determine the measure for importers to pay at sight, the baht will possibly depreciate more. Moreover, maintaining a good dialogue between the central bank and the private sector will reduce the chance of businessmen being easily alarmed and the chance of the rush sale of US dollars, whenever such excessive capital inflow ever occurs again.

M.R. Pridiyathorn Devakula is a former deputy prime minister and former finance minister.

Vocabulary (in discussion above)

M.R. - Mom Rajawongse, a Royal Title indicating a member of the Royal Family (See Wikipedia on Mom Rajawongse and Thai royal and noble titles)

M.R. Pridiyathorn Devakula - former Finance Minister and Governor of the Bank of Thailand (See Wikipedia)

The 2004 Tsunami - the 2004 earhtquake and tidal wave that killed many and destroyed property in Southeast and had an overall negative effect on the Thai economy (See Wikipedia)

enhanced - improved

a more long-term fix - a solution that will solve the problem over the long-term

a currency crisis - when the value of a currency changes quickly, undermining its ability to serve as a medium for exchange or a store of value (See The Economist and Wikipedia on currency crisis)

alleviate - make an unpleasant situation less intense or severe, reduce negative impact and effects

alleviate the currency crisis - reduce the negative impact of the currrency crisis

B>draws a line in the sand - to state something clearly for all to see

curb - reduce, stop

curb the stronger baht - reduce or stop appreciation

the competitiveness of Thai exports - competitiveness of Thai exports compared to exports from other countries, a strong baht makes Thai exports more expensive and less competitive

tireless - persistent, refuse to stop and rest, never get tired doing

* several tireless attempts

be content - satisfied, willing to accept, don't want more or better

reduce competitiveness of Thai exports against its Asian competitors -

sarcasm - saying the opposite of what you mean, use of apparent approval to express disapproval, mockery, scorn, or insult (See Wikipedia)

suggested - not said directly, implied

* sarcastically suggested

revocation - cancelling, stopping

30% capital reserve rule - the capital controls that Thailand put on place last December

offshore market - market outside the country

onshore market - market inside the country

the Chamber of Commerce - The Thai Chamber of Commerce

worthy of note - valuable to know

showed a reluctance to urge state enterprises to adopt the measure

urge x to y (verb) - strongly advise, try to persuade

an urge to, an urge for (noun) - a strong wish or desire

* advised to urge x to y: advised the government to urge state enterprises to prepay their foreign currency loans

* no urge for x to y: there was no urge for them to adjust themselves to the market mechanism

* feel the urge to x: would not feel the urge to seriously adjust themselves to become competitive

- urge x: it will urge immediate purchase of US dollars in high amounts

intervention - becoming involved in a situation and trying to change it (See glossary)

central bank's intervention measures - actions taken by the BOT to stop baht appreciation

effective - works well, gets the job done (antonym: futile) (See glossary)

futile - useless, does not work well, does not get the job done (antonym: effective)

pinpoint - identify or determine precisely

import-export sector's confidence in the currency -

prolong - make longer, extend period of time

a reference point - used to describe other points, relative to this point

reference point of time - other points in time are positioned relative to this time

the tsunami - the large wave that struck Thailand (See Wikipedia)

a windfall - a winfall profit or gain, sudden unexpected profit

enjoy the windfall -

feel the urge to - want to

constructive - helpful and useful (for example, constructive criticism is always welcome)

as witnessed - as seen or experienced

state enterprises - companies owned by the state (for example, CAT, TOT, or the Tobacco Monopoly)

strong medicine - extreme remedy or solution to a problem, strong action taken to solve a problem

stronger medicine - even more extreme remedy

reluctant - do not want to do (unwilling to do and hesitate before doing)

show reluctance - showing that you do not want to do

- showed a reluctance to urge -

adopt the measure - choose the measure

oversee - supervise (ensuring that work is done properly)

directly - with close connection and contact, without intermediary

directly overseeing - supervise closely with contact

had full authority to proceed -

dig deeper - try something more involved, less superficial (look at details)

on sight, at sight - immediately, without delay, when you see them

pay at sight - immediate payment, without delay

settle the import payment at sight -

Bankers' Association - Thai Bankers Association

measure for importers to pay at sight -

a dialogue - continual communication and discussion, to solve problems as they occur

maintaining a good dialogue between -

rush - go quickly, do quickly

rush sale of US dollars - lots of people suddenly selling US dollars

Answer Key:

1. What contention by some economists is the author addressing in his op-ed piece?

Some economists believe that "a stronger baht would damage the competitiveness of Thai exports."

They have "accused the Bank of Thailand of not doing enough to stabilise the currency."

2. Will the baht continue to appreciate, according to author?

No, the baht has "started to stabilise" and is "not getting stronger."

3. Has the baht reached the level where its value will affect Thailand's competitiveness in export markets, according to Pridiyathorn?

No, 32 baht to the dollar is the level that would "strongly reduce competitiveness of Thai exports against its Asian competitors."

The baht hasn't reached this level yet.

("During the days that the baht strengthened from around 34 to the 33 baht level, I was very much alarmed by the possibility that it might stretch to 32 baht - the level which would strongly reduce competitiveness of Thai exports against its Asian competitors.")

4. Would the removal of the 30% capital reserve rule alleviate baht appreciation?

No, without these capital controls would have already appreciated to the even lower offshore rate.

5. How would the prepayment of foreign currency loans held by state enterprises reduce baht appreciation?

Prepayment of foreign currency loans would "increase outflow of foreign currency and ease pressure on the baht."

Baht would be converted to dollars now rather than later to pay off loans.

6. How does the supply of US dollars in the Thai foreign exchange market cause baht appreciation? (Draw a simple supply and demand diagram to illustrate this)

An excessive supply of dollars in foreign exchange markets causes the baht to appreciate.

The basic economic law of supply and demand means that an increase in the supply of dollars, leads to a decrease in the value of dollar compared to the baht, so the baht is said to become more valuable, stronger, or appreciate.

7. What kind of inflows of money into Thailand create an excessive supply of dollars?

a. Money from trade (exports and imports) or a "trade surplus."
b. Money from investment (capital inflow greater than outflow).

8. How can the import-export sector's confidence in the currency create an excessive supply of dollars? How does this add to baht appreciation?

a. When exporters swiftly sell their US dollar income, they create excess dollars in the market.
b. When importers delay their US dollar payment to gain exchange profits, they hoard dollars and they create excess dollars in the market.

This adds to the normal amount of dollar inflows ("Exports - Imports") that the central bank has to deal with every month into the country.

("Each month, the export value is higher than that of import by not more than 1,000 million US dollars. In a normal situation, therefore, the excessive amount that the central bank has to handle is only around 1,000 million US dollars which the central bank can manage conveniently.")

("However, when the market reflects on the stronger baht, exporters swiftly sell and importers delay their purchase. Subsequently, the excessive US dollars to be handled will increase many times rapidly - so much so that it is merely impossible to be drained out in a very short period of time. The baht, as a result, becomes stronger.")

9. When has an excessive supply of dollars due to dollar buying and selling patterns of exporters caused excessive baht appreciation? What events were behind each incident?

Twice this year:

a. Early March, 2007 - Change at Finance Ministry led to speculation that capital controls would be revoked.
b. During the last 2-3 weeks.

10. What has been the main cause of the recent appreciation in Asian currencies?

The shift of US dollars from US capital markets to Asian capital markets.

("It is well understood that the main cause of a strong Asian currency was the shift of US dollar funds from US capital markets to Asian markets.")

11. When did the appreciation of Asian currencies begin, according to the author?

Around the end of 2004 or beginning of 2005.

("...the US dollar capital started flowing massively into Asian countries since the end of 2004 (or the beginning of 2005). However, in the first half of 2005, when Thailand had just recovered from the tsunami, the US dollar flew into other Asian countries but not Thailand. The result was that other Asian currencies strengthened while the baht became weaker.")

12. Was the baht one of the first currencies to appreciate from US capital inflows? Why or why not?

The baht was not among the first currencies to appreciate.

Thailand was recovering from the tsunami, so there were not large capital inflows into Thailand.

There were large capital inflows into other Asian countries, so their currencies appreciated compared to the baht.

You could call this a "tsunami effect."

13. Did the tsunami effect on capital markets cited by the author help or hurt Thai exporters at the time? Why?

The tsunami effect helped Thai exporters because the Thai exchange rate was low relative to other Asian countries making Thai exports more competitive.

("However, in the first half of 2005, when Thailand had just recovered from the tsunami, the US dollar flew into other Asian countries but not Thailand. The result was that other Asian currencies strengthened while the baht became weaker. Thai exporters at that time benefited from the situation. Therefore, there was no urge for them to adjust themselves to the market mechanism.")

14. How does the baht currently compare to other Asian currencies?

The baht is stronger than most Asian currencies except the Phillipine Peso.

("Though the baht now has strengthened at a rate a little less than the Philippine peso, the rate was considered to be high in comparison to the rest.")

15. What baht level would make Thailand's exports competitive vis-a-vis other Asian currencies, according to the author?

Around 33-34 baht to the dollar.