Singapore's "crawling band" exchange rate system
would improve baht stability?
By Jon Fernquest |
Today's Bangkok Post business section looks at Thailand's exchange rate regime and whether changing it might add stability to the baht.
The "crawling band" exchange rate regime used by Singapore is being proposed as a replacement for the current "managed float" that Thailand adopted after the 1997 crisis:
"Thailand has used the current "managed float" system since 1997. Under the system, market forces are left to determine the currency rate, with the central bank intervening in the markets to smooth short-term volatility.Under a crawling band, exchange rates are allowed to move within a set range that can be adjusted to match economic fundamentals."
Thirachai Phuvanatnaranubala, secretary-general of the Securities and Exchange Commission and a former deputy governor of the central bank claims that this move would improve the stability of the baht:
We could use the system for say one or two years until the currency is stable... shifting to a crawling band system would send a clear message to the private sector that the baht would be maintained at a competitive rate relative to the country's trade competitors.
Short-term destabilising inflows should be prevented but not at the expense of destroying Thailand's fledgling bond market:
...a second measure that regulators should adopt would be to penalise "hot" short-term inflows that disrupt the economy."At the moment, all types of inflows do not have any cost. The 30% capital control has caused investment in the bond markets to decline, and even though the central bank allows for fully hedged investments [to be exempt from the capital controls], it doesn't work at all," he said.
Capital controls should be kept to make exporters happy but capital outflows should be allowed to relieve some of the upward pressure on the baht from inflows:
But Mr Thirachai said he disagreed with calls to scrap the capital controls, first imposed in December 2006, as that would only further rattle exporters about current policy. The central bank should also relax further regulations on capital outflows, including allowing Thais to more freely invest abroad."The SEC has proposed this, but the central bank rejected the idea due to concerns about the possible losses [from capital outflows]," Mr Thirachai said.
"I am not certain what the concern is about, as this is private money, and the central bank's intervention in the markets has cost more than 100 billion baht to defend the baht. I think that the private sector can look after their own money."
Mr Thirachai criticised the central bank's existing currency management as half-hearted, due in part to legal restrictions on regulators. But he noted that the Bank of Thailand Act opened the door for a change in currency management systems if necessary.
The newly elected government is still studying the issue of whether capital controls should be scrapped or not and is going slowly on the issue:
Finance Minister Surapong Suebwonglee said there was no immediate urgency to review the existing currency management system."The main problem now is confidence, both on the part of local and foreign investors. For the baht, we have some time to decide, and it is an issue that I will look into later," he said.
Dr Surapong said he was awaiting further analysis by the central bank about the pros and cons of scrapping the capital controls and what supplementary measures were needed to help stabilise capital flows and the currency.
Others object that in the long-run Thailand will experience the same currency appreciation as its Southeast Asian neighbors whether capital controls exist or not:
Kongkiat Opaswongkarn, the chief executive officer of Asset Plus, noted that the baht had appreciated 10% against the US dollar over the past five years, in line with Singapore and Malaysia, which did not resort to capital controls."I question whether capital controls really are effective for stabilising the baht. I think that to cancel the capital controls would certainly help the capital market mechanism fully function," he said.
(Source: Bangkok Post, business section, page B2, 28-02-08, Nuntawun Polkuamdee, temp-link)
Vocabulary:
exchange rate regime - the system used by a country to control and determine the value of the currency
a crawling band - a currency band that can be adjusted slowly up or down if need be (See Wikipedia on currency band)
a managed float - the market usually determines the rate but the government intervenes to influence, stabilise, and steer the rate
intervening in the markets - buying and selling large amounts in the market to affect the market price
volatility - the amount that a price swings up and down, for example the price of a currency or "exchange rate," a measure of risk (See Economist glossary)
smooth short-term volatility - make changes smaller and less sudden
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)
the Securities and Exchange Commission - the government agency that protects the public from malpractice in securities and financial markets
stability of the baht - when the baht does not move suddenly by large amounts
would send a clear message to the private sector - government action shows people how the government will act in the future
destabilising inflows - money flowing into an economy that can cause instability when it flows out again (for example, in 1997 banks borrowed at short maturities, lent the money at long maturities, then there was a panic and when the short-term loans to the banks were pulled by international lenders the Thai economy suffered from instability)
X at the expense of Y - X gains or benefits, Y loses
fledgling - new and without experience, like a baby bird learning to fly (See glossary)
hot short term inflows - money that moves around international financial markets at a quick pace looking for short-term profits
disrupt - cause difficulties and problems, prevent from operating normally
disrupt the economy - cause new problems for the economy
hedge - reducing the risk of holding an asset, taking on a new risk that offsets an existing risk (See The Economist glossary)
fully hedged investments - investments that are fully protected from the risk of exchange rate movements (obviously all risks of an investment cannot be eliminated)
exempt - does not have to follow a rule (See glossary)
a pressure on Y- a force causing Y to move
capital controls - (See The Economist glossary)
relieve pressure - stop forcing to move
relieve some of the upward pressure - reduce the force causing movement
scrap - get rid, eliminate, stop
rattle - make someone nervous and worry
rattle exporters - make exporters worry
relax regulations - make regulations and rules less strict
half-hearted - not done with much enthusiasm or energy
immediate - right now, at the present time
urgency - needs to be done now, without delay
no immediate urgency - not urgent, does not have to be acted upon quickly
look into an issue - investigate an issue, find out what is happening, how the problem can be solved
issue that I will look into later -
pros and cons of - the good and bad points of, the benefits and costs of
stabilise capital flows - stop sudden large capital flows in and out of the country from occurring
resort to Y - forced to do Y that you didn't want to do (for example, resort to firing someone because they don't come to work on time)
