Recent public discussion on Thai monetary policy (26-03-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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In the last week there has been public pronouncements and a lot of discussion regarding Thai monetary policy.
These pronouncements and discussion followed the resignation of Finance Minister M.R. Pridiyathorn and the appointment of Dr. Chalongphob, former director of the Thai Development Research Institute (TDRI)
After the Pridiyathorn resignation, Dr. Chodechai Suwanaporn of the Finance Ministry's Fiscal Policy Office wrote a Bangkok Post Op-Ed piece on international best practice in monetary policy for dealing with currency appreciation. (See previous article)
Shortly afterwards, the new Finance Minister Dr. Chalongphob declared that he would hold to a policy of central bank independence and supported Dr. Tarisa_Watanagase, governor of the Bank of Thailand (BOT). (See previous article)
This was followed by an editorial by the Thai-language Thai Rath newspaper included as article one below. Kamol Hengkietisak's column in the Bangkok Post offers summaries of news from Thai-language newspapers which often see the news from a different perspective.
An article on Saturday mentions the possibility of expansionary fiscal policy (increases in government spending). This article is included as article number two.
The new EcoCafe column from last Friday is also included as article three. This column argues for an expansionary monetary policy.
Important economic developments usually take place over several weeks or months. To understand these developments, reading a single article is not enough. Integrating news from several articles is necessary.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Is the recent appreciation of the Thai baht very great? How great?
2. What important group of businesses in the Thai economy are affected most by the strong baht? Why?
3. What have Thai exporters been accused of? What logical reason might they be doing this for?
4. How have Dr. Chalongphob's opinions about the 30% reserve requirement changed?
5. What current law prevents the Bank of Thailand (BOT) governor from acting completely independently? Why?
6. Is there a danger of the BOT governor being fired in the near future? (See this recent article)
7. Does the author of the Thai Rath article really appear to understand the idea of central bank independence?
8. What problems are there with the recent criticism of BOT monetary policy by the fiscal policy agency within the Finance Ministry, according to the Thai Rath author?
Article I: Perspective March 25, 2007
IN PRINTMonetary policy etiquette
KAMOL HENGKIETISAKAs of now, the Thai baht is stronger than at any other time in the past nine years, with one US dollar worth 34.80 baht, noted a Thai Rath writer last week.
Those most affected by the strong baht are exporters, who now get less return than before. Not only do they suffer from a stronger baht, they are also being accused of making it even stronger by dumping their dollars quickly when they are paid for their goods.
The Thai daily said it was notable that the new finance minister, Dr Chalongphob Sussangkarn, who used to criticise the Bank of Thailand's 30% reserve requirement for short term money inflow when he was still an independent academic and president of the economic think-tank TDRI, did not abolish the 30% reserve requirement, he also forbade Finance Ministry's senior bureaucrats to comment on this issue.
Chalongphob also kept quiet after inviting BOT Governor Dr Tarisa Watanagase over for a talk. The Thai Rath writer praised Dr Chalongphob for his adoption of a soft approach toward the BOT. This is in line with many global monetary policy experts who believe that central banks must have independence in conducting monetary policy. If government actions are deemed to show that the central bank is under the beck and call of the government, its authority will evaporate and it will create panic and uncertainty.
The writer conjectured that after the exchange of views between Dr Chalongphob and Dr Tarisa, there should be some plan forthcoming from the BOT, reached in consultation also with deputy prime minister, Kosit Panpiemras who is in charge of overseeing the country's overall economic direction.
If the central bank governor chooses to ignore the finance minister's opinion, said Thai Rath, the minister has the authority to ask the cabinet to fire the governor and name a replacement. If this drastic measure is considered necessary, it must be done promptly and a new governor must be appointed promptly as well, in order for negative repercussions to be shortlived.
Such a course, if deemed necessary, would be better than constant criticism of the BOT's measures, which would undermine the BOT's independence and create uncertainty.
The writer also agreed it was correct that Dr Chalongphob forbade any Fiscal Policy Office officials to talk too much to the press about the BOT's policies.
Monetary policy is a sensitive matter. Government officials in every country typically know this very well.
Thai Rath noted that a recent exception was in Thailand, where one agency which was responsible for fiscal policy dared to utter comments on monetary policy, the prerogative of another agency.
Article II: March 24, 2007
Market forces to help stabilise baht
WICHIT CHANTANUSORNSIRI and CHATRUDEE THEPARATMarket forces will eventually cause the baht to adjust to a suitable level, Finance Minister Chalongphob Sussangkarn said yesterday.
He made the comment after economic ministers met with Prime Minister Surayud Chulanont to discuss exchange rates and the prospect of new state measures to boost economic growth.
The baht is now trading at its strongest level in nine years, thanks to steady current account surpluses from strong export earnings and foreign investment inflows.
Exporters and local business groups have raised concerns that the appreciating baht would undermine the country's competitiveness in the global market, particularly for producers dependent on domestic raw materials.
The baht was quoted late yesterday at around 34.90 to the dollar, down from 34.65 the day before.
Dr Chalongphob cautioned against undue concern about the level of the baht.
"Now the baht is appreciating, but it could just as easily turn to weaken. At a certain point, the market will see that the rate has overshot and rates will adjust," he said.
A stronger baht, while reducing the profit margins of exporters, benefits importers and also helps reduce inflation.
Dr Chalongphob said that with the economy slowing, the government would look to implement new measures to help spur growth and inject funds to assist community businesses.
Specialised state banks such as the Government Savings Bank and the Bank for Agriculture and Agricultural Co-operatives would also increase their lending activity to help stimulate growth.
Dr Chalongphob added that consumers could also be delaying new purchase decisions for the next few months in anticipation of lower interest rates.
Gen Surayud said that state agencies were monitoring exchange-rate and economic trends closely.
"The appreciation of the baht is something that everyone is concerned about," he said.
Kosit Panpiemras, the industry minister and deputy prime minister, said he would hold meetings on Tuesday with Santi Vilassakdanont, the chairman of the Federation of Thai Industries, to discuss possible state assistance for industrial sectors hurt by the stronger baht.
"[Currency appreciation] is a phenomenon that is happening across the world, not just in Thailand," he said.
"The Bank of Thailand is looking at the data, and together with other economic agencies, will help discuss the best way to address the country's economic problems. We are confident that things will improve from the third quarter."
Most analysts project economic growth this year to slow to around 4%, compared with 5.1% last year.
Article III: New EcoCafe Column, March 23, 2007
ECO CafeA simple solution for reviving confidence
TIENTIP SUBHANIJWhen I came back to Thailand in 2000, the post-economic crisis sense of trauma was still in the air. In Bangkok, one could buy a luxury flat for only a million baht - people felt hopeless and nobody wanted to buy a house (or start a family perhaps). Three years later, I was looking for a one-bedroom apartment and the price had shot up to 2.4 million. The economy was well back on track with everyone looking to buy a house. I was one of them.
You might think that other people are different from you, but I learned from this incident that people usually think the same. And this affects how the whole economy performs. Recently, prices in the property sector have started to come back down again. People have decided to stop or put off buying houses - their confidence is low, together with their confidence in the overall Thai economy.
Confidence has been particularly low since the military coup last September. The interim government's inconsistent policies increasingly worry investors. Confidence in Thailand, which has long been regarded as one of the most stable investment destinations in Southeast Asia, has been eroded. And the overall economy has been trending downward.
One would think that it's time to start regarding the economic slowdown as an urgent concern. Yet there is a strange tone to the discussions of the nation's problems. Instead of a serious, thoughtful analysis, all one hears is a long list of the things that are wrong with Thailand. The country, we are told, has too strong a currency; it's growing too slowly; government policy consists entirely of flip-flops; the political situation is uncertain; inflation is too low, and so on.
All of these things are true to some extent. But a list is not the same as a real analysis. And in fact the tendency to explain Thailand's problems in terms of a long list of factors does real harm, because it discourages confidence in the face of an economic slowdown.
Thailand has many problems - but then again, which country does not? The main obstacle to Thailand's recovery now is not the long list of structural difficulties but a lack of clear thinking.
What went wrong? If you look at the recent figures, you would see that the problems lie not with the long list of factors mentioned above, but with domestic demand. Both private consumption and private investment continue to decline. The problem with the Thai economy is too little demand. The country isn't using the production capacity it already has.
There is usually nothing easier than increasing demand: just have the central bank increase the money supply, and have the government spend more. Thailand has suffered from low demand for quite a while. So to push demand high enough to get the economy back to more or less full use of its capacity would require a big stimulus.
So, why not provide that stimulus now? The Bank of Thailand so far has cut its short-term interest rate twice this year, which is a move in the right direction. The question remains as to whether the cuts are big enough.
The simple fact is that there is no limit on how much a central bank can do to put money into the system. It is likely that putting more cash in circulation will stimulate spending directly. Banks, abundant in reserves, might be more willing to lend. Also, when the central bank increases the monetary base it does so by buying government debt - and therefore makes room for government spending increases or tax cuts.
So never mind those long lists of reasons for Thailand's faults. The answer lies in supplying a lot of money to the system. This can be done by the Bank of Thailand providing the monetary base, and the government speeding up disbursements of the delayed 2007 budget and seeking a larger deficit next year.
Will this generate inflation? Injecting a lot of money is only inflationary if people spend it, and if that spending exceeds the economy's capacity to produce. Considering the current level of Thailand's capacity utilisation and inflation rate, any big stimulus would not likely result in the danger of inflation.
To get the economy back on track, one cannot do it alone. We need consumers to be confident by stopping their complaining about trivial problems; we need the Bank of Thailand to inject a lot more money or to lower rates more rapidly; and most importantly, we need the government to spend a lot more.
Consumers like me, my neighbours and their friends are usually quite ready to be confident. We only need a boost now and not later. If the government does not get a grip soon, our confidence may be much harder to revive.
Dr Tientip holds a PhD in economics from the University of Cambridge, and currently has a career in banking as well as academia. She can be reached at tien201@yahoo.com
Vocabulary (in discussion above)
Article I:
pronouncements - official public statements on an important topic
central bank independence - when the central bank is free to make monetary policy decisions without the interference of politicians who might force monetary policy changes that damage the economy in the lon-run (See Wikipedia on central bank independence)
op-ed pieces - editorial, newspaper articles that present the opinion of an individual contributor usually not affiliated with the publication (See Wikipedia on editorials)
economic stimulus, stimulate the economy - take policy action to increase economic and business activity (to increase the growth rate or pull the economy out of a recession)
expansionary monetary policy - stimulating increased economic activity by increasing the amount of money in the economy (See summary notes)
etiquette - rules for polite behaviour
Thai Rath - the oldest and best-selling Thai-language newspaper featuring sensationalist coverage of crime and accidents in the front, but also stories on Thai politics, economy and society. (See Wikipedia on Thai Rath)
think-tank - an institute doing research funded by the government or companies (See Wikipedia on think-tank)
soft approach - being gentle and not forceful
adoption of a soft approach toward - start being gentle (before you were more forceful)
in line with - agrees with (See glossary)
x at the beck and call of y - x is always available and ready to do everything that y wants
conjectured that - opinion based on uncertain or incomplete information
forthcoming - planned to happen soon
in consultation...with y - using the advice of y
Kosit Panpiemras - former Executive Chairman of Bangkok Bank, a leading Thai commercial bank
drastic measure - taking an extreme action to solve a problem
repercussions - bad things that happen from an action or event
prerogative - a power or privilege
Vocabulary (in discussion above)
Article II:
the [exchange] rate has overshot - exchange rates are volatile because they adjust more quickly than other prices in an economy, this means they go beyond (overshoot) where they should be, where they will eventually will be (See Wikipedia on the Dornbusch overshooting model)
a margin - the difference between two amounts (for example, in the election he won by a large margin)
profit margin - profitability (See Wikipedia on profit margins)
growth - economic growth, increases in national income over time (See economic growth)
spur growth - create or generate growth
Government Savings Bank - a government bank that began operations in 1947, but whose origins go all the way back to 1913 (See history)
Bank for Agriculture and Agricultural Co-operatives (BAAC) - Thai government bank specialising in microfinance and banking for farming households (See website, a case study [pdf], at the FAO, and at microfinance gateway)
Federation of Thai Industries - "an organisation of industrial leaders that "represents Thai manufacturers at both national and international levels, to help promote and develop industrial enterprises, to work with the government in setting up national policies, and to offer consulting services to members." (See Wikipedia on Federation of Thai Industries)
Article III:
trauma - severe shock or sudden change doing injury
x is still in the air - people are still thinking about x
back on track - return to making progress and success
flip-flops - changing direction in policy frequently
capacity, production capacity - "The amount a company or an economy can produce using its current equipment, workers, CAPITAL and other resources at full tilt..." (See Economist Glossary)
capacity utilisation - how much of potential output is being produced (See Wikipedia on capacity utilisation)
full use of capacity, full utilisation of capacity
domestic demand - aggregate demand, total demand for goods and services in an economy during a period of time (See Wikipedia on Aggregate demand)
Collocations / word combinations:
too little demand
increasing demand
push demand high enough to get the economy back to...full use of its capacity
private consumption - households buying goods and services (See Wikipedia on Aggregate demand and National Income and Product Accounts)
private investment - companies investing in new plant and equipment (See links for private consumption above)
short-term interest rate
reserves, foreign exchange reserves
abundant in reserves
government spending increases -
tax cuts - reducing taxes to stimulate consumer and business spending
money supply - "the amount of money available in an economy" (See Economist Glossary and Wikipedia)
monetary base - "currency in circulation plus banks' required and excess deposits at the central bank" (Source), "Usually, the currency and central bank deposits that together provide the base for the money supply under fractional reserve banking. Also defined as the central bank assets the acquisition of which creates this monetary base by injecting domestic money into the economy. The latter definition usually includes international reserves and domestic credit. By either definition, the monetary base changes as a result of open market operations and exchange market intervention" (Source)
a disbursement - an official paying out of money
inflation rate - the rate of increase of the average price level in an economy (See Wikipedia on the inflation rate and the Consumer Price Index (CPI))
back on track - following the plan again (after detour or distraction)
revive - bring back to life, be successful and prosperous again
Answer Key:
1. Is the recent appreciation of the Thai baht very great? How great?
Yes, the appreciation has been great. The baht has not been this strong for nine years.
2. What important group of businesses in the Thai economy are affected most by the strong baht? Why?
Thai exporters are affected the most since the Thai products they sell abroad are worth less after they convert the money they make from selling the products overseas into baht.
3. What have Thai exporters been accused of? What logical reason might they be doing this for?
Thai exporters have been accused of making the baht stronger "by dumping their dollars quickly when they are paid for their goods."
Thai exporters may be converting their dollars quickly into baht because they believe the baht will appreciate further in the near future.
4. How have Dr. Chalongphob's opinions about the 30% reserve requirement changed?
Before he became Finance Minister, Dr. Chalongphob was openly critical of the reserve requirements. Once he became Finance Minister he supported it and "forbade [the] Finance Ministry's senior bureaucrats to comment on this issue."
5. What current law prevents the Bank of Thailand (BOT) governor from acting completely independently? Why?
The Finance Minister "has the authority to ask the cabinet to fire the governor and name a replacement," so the governor cannot act completely without fear of being dismissed.
6. Is there a danger of the BOT governor being fired in the near future? (See this recent article)
No, last week Dr. Chalongphob made it clear that he respected the central bank's independence.
7. Does the author of the Thai Rath article really appear to understand the idea of central bank independence?
No, central bank independence requires no dismissal of the governor, not a quick dismissal.
Dismissal would undermine independence. Sudden new policies like the 30% reserve requirement naturally generate criticism from parties adversely affected.
("If the central bank governor chooses to ignore the finance minister's opinion, said Thai Rath, the minister has the authority to ask the cabinet to fire the governor and name a replacement. If this drastic measure is considered necessary, it must be done promptly and a new governor must be appointed promptly as well, in order for negative repercussions to be shortlived...Such a course, if deemed necessary, would be better than constant criticism of the BOT's measures, which would undermine the BOT's independence and create uncertainty.")
8. What problems are there with the recent criticism of BOT monetary policy by the fiscal policy agency within the Finance Ministry, according to the Thai Rath author?
The article being referred is apparently an article featured here last week.
The article implies that the international norm is for government officials to consider monetary policy a "sensitive matter" and not criticise it.
This norm was violated in the above article, according to the authors.
