Devalue baht, loans
from state banks, don't raise oil tax
Dr. Olarn Chaipravat's prescription
for Thai economic policy
By Jon Fernquest 
Thai
central bank governor Dr. Tarisa Watanagase was interviewed by
the Bangkok Post earlier this week (Read article). Disagreeing with Dr. Tarisa at least about exchange rates economist Dr. Olarn Chaipravat who served as Deputy Prime Minister under Thaksin was featured in a Bangkok Post interview yesterday (See article below).
Dr. Olarn calls for aggressive government intervention aimed at:
1.
Baht devaluation
2. Expanding credit and loans in the economy
2. Expanding credit and loans in the economy
To expand credit he calls for 300-billion-baht in new loans by state banks. Where is this money to come from? From the Thai government? Is the borrowing capacity of the Thai government enough to support such a loan programme? The Fiscal Policy Office declared yesterday:
...fiscal policy is at its limits, so that additional spending programmes could jeopardise the country's long-term financial position. Under current budget plans, public debt is projected to jump, from 40% of gross domestic product now, to 60% by 2013, a level last seen during the 1997 economic crisis (Source: Bangkok Post, Fiscal Policy Office report, 26-06-09, link)
As for baht devaluation, Dr. Olarn cites the recent Korean example:The
Korean government and central bank have
intervened in the currency markets to weaken the won, benefiting
exporters and resulting in overall economic growth...
Actually, the Korean government did not intervene but rather allowed the currency to collapse and many suffered as a result (Read analysis and article and The Economist) . Dr. Tarisa pointed out in her interview that a weak baht policy would likewise hurt some industries as well as help some.
Yesterday's report by the Fiscal Policy Office also notes: "A weaker baht would not necessarily help exporters increase sales." With weakened global demand export opportunities have largely dried up.
The world economy is currently tracking the Great Depression (Read article). Beggar-thy-neighbor competitive devaluations sparked trade wars in the 1930s precipitating the Great Depression (Read article and Eichengreen). If there are currently no new export markets to be had, then export expansion can only be at the expense of neighboring countries.
There is also the BOT's disastrous interventions in foreign currency markets in the run up to the 1997 Asian Financial Crisis. Would their track record this time around be any different? BOT governor Dr. Tarisa Watanagase is too prudent to allow a repeat of 1997.
Dr Olarn claims that "every 1% decline in the value of the baht would help create 50,000 new jobs and boost economic growth by 0.14 percentage points." One can only ask whether these econometric estimates are really based on a global recession with collapsed export markets? Probably not.
devalue - take
action to make the currency of a country worth less (depreciate) and
therefore make exports cheaper and more competitive on international
markets
prescription - medicine that a doctor prescribes to cure an illness
aggressive - done with great energy and intensity
government intervention - when the government buys and sells in markets to influence prices and supply and demand
devaluation - when the value of a currency falls and the export goods of the country become cheaper
capacity - the ability to do something
borrowing capacity - the greatest amount that a company or government is able to borrow and not have trouble paying back
jeopardise - create a situation with possible loss
financial position - the state of the balance sheet of a company, person, or government; what assets, liabilities, and equity it has
tracking the Great Depression - following the Great Depression in all its details
beggar-thy-neighbor - a policy in which one country wins but another must lose
competitive devaluations - when countries compete to have the lowest exchange rate to make their export goods the cheapest
precipitating - causing
in the run up to - in the events the happened beforehand
track record - how well or badly a person has done at a certain job over time
prescription - medicine that a doctor prescribes to cure an illness
aggressive - done with great energy and intensity
government intervention - when the government buys and sells in markets to influence prices and supply and demand
devaluation - when the value of a currency falls and the export goods of the country become cheaper
capacity - the ability to do something
borrowing capacity - the greatest amount that a company or government is able to borrow and not have trouble paying back
jeopardise - create a situation with possible loss
financial position - the state of the balance sheet of a company, person, or government; what assets, liabilities, and equity it has
tracking the Great Depression - following the Great Depression in all its details
beggar-thy-neighbor - a policy in which one country wins but another must lose
competitive devaluations - when countries compete to have the lowest exchange rate to make their export goods the cheapest
precipitating - causing
in the run up to - in the events the happened beforehand
track record - how well or badly a person has done at a certain job over time
Olarn: Weakening baht key to growth
Disagrees with raising oil taxes as wellBy WICHIT CHANTANUSORNSIRI
25/06/2009
Economic policymakers should aggressively intervene in the foreign currency and credit markets to help spur economic growth, says the economist and former deputy prime minister Olarn Chaipravat.
Dr Olarn, speaking at an economics conference hosted by the Fiscal Policy Research Institute, said this year's budget deficit would almost certainly exceed 400 billion baht, considering the 350-billion-baht deficit set under the budget law and projections that revenues could fall short by at least 200 billion.
Running a budget deficit in the midst of a global economic contraction was a proper policy response, one that is being implemented by numerous countries.
"Raising oil taxes, however, is counter to the government's policies to stimulate growth," Dr Olarn said.
The central bank also should help lift exports in baht terms by aggressively intervening in the markets to push the baht lower against major currencies.
State-owned banks should also lift lending activity, he said. A 300-billion-baht new loans target for this year would help ease credit constraints faced by key industries, such as automobiles, electronics and property.
Government efforts to facilitate lending in the first half proved a complete failure, he said. Outstanding loans 120 billion baht system-wide in the first quarter and 30 billion in the second. Banks have contractedtightened lending criteria over fears of higher risk. And the recession has cut demand for credit to finance investment and spending.
Dr Olarn noted that the baht fell to 35.5 to the US dollar in the first quarter but has since appreciated to around 34.5 in the second.
"What we should be looking for is a rate of 36 baht to the dollar, weakening to 36.5 in the third quarter and 37 in the fourth quarter. If we can do this, it would generate another 500 billion baht in export revenues for the country," he said.
The Bank of Thailand has steadfastly refused to set explicit currency targets, and said it will only intervene in the markets to smooth volatility.
The baht has appreciated in recent months thanks to the country's growing trade surplus and portfolio inflows.
Most economists also expect the greenback to weaken in the medium-term as a result of a significantly weaker debt and fiscal position caused by the global crisis.
The Korean government and central bank have intervened in the currency markets to weaken the won, benefiting exporters and resulting in overall economic growth, said Dr Olarn.
The US and Chinese economies have also taken aggressive action to spur growth, with the Federal Reserve directly purchasing bonds from the market to boost liquidity and China directing large state-owned banks to boost lending to the real sector.
"Thailand faces fewer restrictions in currency policy if compared with China, which is too large to really sway the value of the yuan," Dr Olarn said.
But every 1% decline in the value of the baht would help create 50,000 new jobs and boost economic growth by 0.14 percentage points, he said. Inflation would also increase by 0.2 percentage points, as the cost of imports increase in local terms.
Dr Olarn said a weak baht policy would increase the cost of energy in local terms, but the government could choose to reduce oil taxes to lessen the impact on the public, although this policy could potentially widen the budget deficit.
aggressively - done
with great energy and intensity
intervene - when the government buys and sells in markets to influence prices and supply and demand
credit markets - markets for borrowing money (bonds, commercial paper, bank loans, etc)
spur economic growth - make the economy grow faster
Fiscal Policy Research Institute (FPRI) - non-profit organisation part of Finance Ministry founded in 2001, both carries out research as well as promotes research (See website and history)
a deficit, a budget deficit, running a budget deficit - when the government spends more money than it receives in tax revenue (must borrow to pay for deficit)
widen the budget deficit - the budget deficit gets bigger
the budget law - Thailand's law on the largest sized budget that the government can have and the largest budget deficit it can have
revenues could fall short - the money the company makes is less than the goal
face constraints - be limited, activity is difficult due to limitations
ease credit constraints - make the activity less difficult, remove constraints and limitations
facilitate lending - help companies and people get loans
outstanding loans contracted - the amount of loans that have not been paid back yet decreased
tightened lending criteria - made it more difficult to get loan, requirements more difficult to meet
steadfastly refused - continued to say they would not do it, would never never agree to do it
explicit currency targets - an exchange rate announced to the public that a country tries to achieve
volatility - moving suddenly and unexpectedly
smooth volatility - reducing sudden and unexpected movements
intervene in the markets to smooth volatility - when the government buys and sells to reduce sudden and unexpected movements
trade surplus - when a country's exports are greater than imports
portfolio investment - when investors invest by buying stocks and bonds
Foreign Direct Investment (FDI) - when investors invest in another country by buying or starting an actual company
portfolio inflows - the portfolio investment entering a country during a period
the greenback - the US dollar
spur growth - make the economy grow faster
sway the value of the yuan - change the value of China's currency
a weak baht - a baht that is cheaper compared to other currencies
lessen the impact on the public - make the negative effects and damage to people less
intervene - when the government buys and sells in markets to influence prices and supply and demand
credit markets - markets for borrowing money (bonds, commercial paper, bank loans, etc)
spur economic growth - make the economy grow faster
Fiscal Policy Research Institute (FPRI) - non-profit organisation part of Finance Ministry founded in 2001, both carries out research as well as promotes research (See website and history)
a deficit, a budget deficit, running a budget deficit - when the government spends more money than it receives in tax revenue (must borrow to pay for deficit)
widen the budget deficit - the budget deficit gets bigger
the budget law - Thailand's law on the largest sized budget that the government can have and the largest budget deficit it can have
revenues could fall short - the money the company makes is less than the goal
face constraints - be limited, activity is difficult due to limitations
ease credit constraints - make the activity less difficult, remove constraints and limitations
facilitate lending - help companies and people get loans
outstanding loans contracted - the amount of loans that have not been paid back yet decreased
tightened lending criteria - made it more difficult to get loan, requirements more difficult to meet
steadfastly refused - continued to say they would not do it, would never never agree to do it
explicit currency targets - an exchange rate announced to the public that a country tries to achieve
volatility - moving suddenly and unexpectedly
smooth volatility - reducing sudden and unexpected movements
intervene in the markets to smooth volatility - when the government buys and sells to reduce sudden and unexpected movements
trade surplus - when a country's exports are greater than imports
portfolio investment - when investors invest by buying stocks and bonds
Foreign Direct Investment (FDI) - when investors invest in another country by buying or starting an actual company
portfolio inflows - the portfolio investment entering a country during a period
the greenback - the US dollar
spur growth - make the economy grow faster
sway the value of the yuan - change the value of China's currency
a weak baht - a baht that is cheaper compared to other currencies
lessen the impact on the public - make the negative effects and damage to people less
(Source: Bangkok Post, business, Olarn: Weakening baht key to growth, WICHIT CHANTANUSORNSIRI, 25/06/2009, link)
