Replacement for Thai capital controls?
By Jon Fernquest |
Today's Bangkok Post business section has a front page article on increasing capital outflows from Thailand as a way of easing upwards pressure on the baht.
This would probably mean reducing regulations on Thai nationals and companies converting Thai baht to other currencies so that they can invest in business ventures in other countries.
With the end of the capital controls imposed by the interim post-coup government possibly drawing near, a search for ways to keep the baht stable is underway:
"Boosting overseas investment to increase capital outflows is one way of easing pressure on the baht, according to Pannee Stawarodom, the director-general of the Fiscal Policy Office.'The best way to help stabilise the baht would be to encourage capital outflows that help lead to value creation,' she said. 'Malaysia, for instance, invests $5 billion to $6 billion overseas each year. For Thailand, the figure is in the hundreds of millions of dollars.'"
Despite the gradual relaxing of the capital controls that made them close to meaningless, capital controls did create separate onshore and offshore foreign exchange markets for the baht that complicated financial transactions:
"The central bank imposed a 30% reserve requirement on foreign inflows in December 2006 to help stem the appreciation of the baht. Authorities have since relaxed the measure for most transactions and investments, save for inflows into the bond market and property funds."Even though the 30% rule was all but meaningless with the various waivers by the central bank, the effect has been to create a separate onshore and offshore market for the baht," Mrs Pannee said...
...The baht, which was quoted at 32.9 in the local market on Friday, is currently quoted at 31 offshore, due to imbalances in supply and demand as a result of the capital controls, which effectively serve as a tax on inflows."
Since international markets for investment funds are competitive, Thailand must compete with other countries for these funds.
Having capital control policies that are a lot different from other countries is bound to affect Thailand's competitive advantage in international markets for investment funds:
"Some economists have proposed an exit tax on short-term transactions instead of placing barriers on capital inflows.But Mrs Pannee said that an exit tax would still be viewed unfavourably by the investment community. "There isn't any country in the region that uses an exit tax. I don't think this is the right measure for Thailand," she said."
Exporters have been very vocal in demanding that the baht remain weak so that Thailand can remain competitive in international export markets.
A strong bath, however, makes financing projects from abroad cheaper, at least in the short-term.
Since the infrastructure projects being planned are long-term projects, it is important to lock in low long term rates.
Both the 1997 crisis and the recent subprime crisis featured attractive low short-term interest rates that caused problems in the long-run when they shot up suddenly and became unmanageable.
Exporters are not the only part of the economy to think about when setting exchange rate policy:
"The central bank should not overemphasise the need of exporters in setting exchange rate policies," he added.New infrastructure projects will require financing from abroad, Dr Somphob said, adding that a liquid and efficient bond market was also critical for the country's long-term economic development.
There are still other experts recommending a return to the pre 1997 crisis days of relatively fixed exchange rates:
"Chotichai Suwannaporn, a Finance Ministry economist, said another alternative was for the central bank to return to a basket system as used in the past before the float of the baht in 1997.Pre-crisis, the central bank announced a reference rate each day to fix the currency based on a basket of currencies held as foreign reserves.
"'What is important is that the reference rate be allowed to truly reflect the country's economic fundamentals. We cannot seek to manipulate the rate as was done during the 1997 crisis, when the baht was maintained at a rate stronger than reality,' Dr Chotichai said."
Read previous Bangkok Post articles on last year's mini currency crisis.
(Source: Bangkok business section, 11-02-08, temp-link)
Vocabulary:
Thai nationals - citizens of Thailand, Thais
interim - temporary, between two permanent
is underway - is currently happening, being done
fiscal Policy - government policy about how much money is spent by the government and on what projects
relaxing of (laws or regulations) - making the law or regulation less severe, making it apply to fewer cases
lead to value creation - the investment leads to value being created within the firm investing overseas in many ways: 1. profit, 2. experience and expertise, competing in foreign markets that are both larger and different from Thailand can be a learning experience for the firm, makign the firm more competitive in the long-run, there is also a learning curve for dealing with investments in less developed countries, for example Thai Ariways failed investment in running airports in Bangladesh
made them close to meaningless, all but meaningless - have nearly no effect
onshore - inside the country
offshore - outside the country
a reserve - money kept for some purpose, not used right now
waivers - permission not to do something that is required (See Readbangkokpost glossary)
X is bound to Y - Y must surely happen to X
exit tax - a tax on money that leaves the country too quickly after entering the country
viewed unfavourably by the investment community - investors don't like it
been very vocal - make a lot of noise and publicity to draw attention to themselves and their opinions
lock in - make permanent and fixed
liquid - how easily an asset can be turned into cash (liquidated), whereas real estate is not liquid (illiquid) short-term treasury bonds sold by the US government are very liquid (See The Economist glossary and Readbangkokpost glossary: #1, #2)
fixed exchange rates - when the exchange rate of a country is fixed (See Economist glossary)
the average - the average of the set {1, 2, 3} is (1 + 2 + 3) / 3 = 3
a weighted average - the average of the set {1, 2, 3} with weights {0.25, 0.5, 0.25} is (1.(0.25) + 2.(0.5) + 3.(0.25)) / 3 = 2/3 = 0.6666...
basket system - when a country's exchange rate is defined to be a weighted average of a set of currencies
float of the baht - when the value of the baht is allowed to move freely up and down according to market conditions
a reference rate - a rate that other rates are compared to and measured against
reflects - shows
economic fundamentals - the productive capacity of an economy and whether this productive capacity is functioning well (despite what is happening in fickle financial markets)
manipulate - skillfully control for one's own benefit
