Use Thailand's foreign exchange reserves first, before taking out new foreign debt, suggest economists
By Jon Fernquest
Thailand
has over $100 billion foreign
exchange reserves.
Much of this is in US dollars. The exact amount is not released to
the public
by the Bank of Thailand. Just 10% of these reserves represented 400 billion baht in funds.
Aekkachai Nittayagasetwat, the dean of the Nida Business School, made this suggestion at a Stock Exchange of Thailand conference yesterday.
Some of these foreign reserves should be tapped before taking out more US dollar debt.
Large amounts of foreign debt was a contributing factor behind the 1997 Asian economic crisis in Thailand. The lesson? A small open economy like Thailand has to worry about the effect of increased public debt on the country's future financial position.
foreign exchange reserves
- money in other currencies that a country's central bank holds (to
protect themselves)
released to the public - when information is presented so that everyone can know it (through a press or news release or press conference)
tapped - used
small open economy (SMOPEC) - an economy that participates in international trade, but is small enough compared to its trading partners that its policies do not alter world prices, interest rates, or incomes (See Wikipedia)
a contributing factor - one cause (among many)
public debt - government debt, money that the government borrows when tax income is not enough to cover spending (spending deficit)
Nida Business School - a school that offers graduate studies in business set up in 1966, the first MBA programme in Thailand, has joint studies programmes with many schools in the US such as Wharton (See website)
released to the public - when information is presented so that everyone can know it (through a press or news release or press conference)
tapped - used
small open economy (SMOPEC) - an economy that participates in international trade, but is small enough compared to its trading partners that its policies do not alter world prices, interest rates, or incomes (See Wikipedia)
a contributing factor - one cause (among many)
public debt - government debt, money that the government borrows when tax income is not enough to cover spending (spending deficit)
Nida Business School - a school that offers graduate studies in business set up in 1966, the first MBA programme in Thailand, has joint studies programmes with many schools in the US such as Wharton (See website)
Investment as well as fiscal stimulus
Like almost all countries around the world Thailand's government has increased spending this year to combat the global economic downturn in trade.Like other countries the increase in government spending in Thailand combines the Keynesian multiplier effect of short-term fiscal stimulus with investment aimed at long-term growth (Read Jeffrey Sachs on need for long-term fiscal investment framework and article on short-term government spending multipliers).
The first fiscal stimulus programme introduced in January spent 116.7 billion baht on training programmes, cash handouts, property tax breaks and public works (Read article).
The government plans to spend 1.4 trillion baht between 2010 and 2012 in a second fiscal stimulus programme. Of this, 29 billion will go towards infrastructure projects, mostly transportation (Read article).
combat - try to
solve a problem (like you are fighting a serious
war)
Keynesian multiplier effect - the idea that an initial spending rise can lead to an even greater increase in national income (See Wikipedia)
fiscal stimulus - either increased government spending or decreased taxes to get economic activity going again
handouts - free money or things, given by the government
tax breaks - reductions in taxes
public works - government construction projects (roads, sewers, dams, public buildings, etc)
framework - a set of rules, ideas, and beliefs used to deal with problems and make decisions
investment framework - a set of rules and ideas used to make investment decisions
Keynesian multiplier effect - the idea that an initial spending rise can lead to an even greater increase in national income (See Wikipedia)
fiscal stimulus - either increased government spending or decreased taxes to get economic activity going again
handouts - free money or things, given by the government
tax breaks - reductions in taxes
public works - government construction projects (roads, sewers, dams, public buildings, etc)
framework - a set of rules, ideas, and beliefs used to deal with problems and make decisions
investment framework - a set of rules and ideas used to make investment decisions
Sovereign wealth fund or central bank loans
One option would be to establish a sovereign wealth fund that would oversee investments using reserve funds. Another option is the central bank extending loans to the Finance Ministry for use.Tapping reserve funds for a sovereign wealth fund has been used in many countries, including Sweden and the United Kingdom.
Sovereign Wealth Fund
(SWF) -
a state-owned investment fund composed of financial assets
such as stocks, bonds, property, precious metals or other financial
instruments. Sovereign wealth funds usually invest globally
but here local
investment in the Thai economy is indicated (See Wikipedia)
Risk of reserve loss
Although the US economy is unique in being at the center of the global financial world, during a financial crisis a country's currency usually depreciates. This would mean that the baht would appreciate and US dollar holdings in Thailand's foreign exchange reserves would lose value.So the current financial crisis in the US puts Thailand's foreign reserves at risk. Converting US dollar reserves to baht and then using this for domestic loans makes more sense than taking on new foreign dollar-denominated debt.
But any use of foreign reserves is likely to be sharply resisted by the central bank as well as require legal amendments.
depreciates - when
a currency decreases in value
appreciate - when a currency increases in value
makes more sense - is a better idea
dollar-denominated debt - debt that must be paid back in dollars (difficult if your currency becomes worth less)
resist - refuse to accept a change and try to prevent the change
sharply resisted - try very hard to prevent a change
legal amendments - changes in laws
appreciate - when a currency increases in value
makes more sense - is a better idea
dollar-denominated debt - debt that must be paid back in dollars (difficult if your currency becomes worth less)
resist - refuse to accept a change and try to prevent the change
sharply resisted - try very hard to prevent a change
legal amendments - changes in laws
(Source #1: Bangkok Post, business, 19/03/09, State urged to tap foreign reserves, NUNTAWUN POLKUAMDEE, link)
