To devaluate the baht or not?
Economists square off on what to do
in the wake of the global crisis
By Jon Fernquest |
Devaluate the baht to boost exports.
This is a shorter way of saying: "...exchange rate policies should be revised to allow for a depreciation in the value of the baht to support exports."
This was the suggestion made by Thailand's new Finance Minister Suchart Thada-Thamrongvech at a conference on the impact of the global financial crisis yesterday. Dr. Suchart claims:
For every 5% decline in the baht, exports can increase by 10%. For the agricultural sector in particular, a weak baht has benefits...Many countries around the world follow similar policies to undervalue their currencies, like China...While a weak baht would put pressure on inflation,...the overall gains would outweigh the dangers for price stability.
China's currency has been undervalued because of the massive sovereign wealth fund (SWF) it has built up from accumulated US dollar foreign exchange reserves. Financial crises often bring with them sharp depreciations in currency. If this happens in the US, then China will lose a lot of money on these reserves. The option of building a sovereign wealth fund for Thailand has already been discussed, debated, and ruled out by the last Finance Minister Surapong Suebwonglee (Read article).
Industrial policies aimed at building up strong export sectors may also be a viable alternative. President Park Chung Hee of South Korea is the most stunning historical example of industrial policy at work. Over the almost twenty years of his rule, he rationed credit and reduced import duties for strategic industries such as steel, shipbuilding and chemicals For the latest developments in industrial policy follow economist Dani Rodrick's blog at the John F. Kennedy school of government at Harvard.
Vocabulary:
devaluate a currency - take action to make a currency worth less than it is now
square off - prepare to fight with another person
revised - changed to improve
depreciation, currency depreciation - when a country's currency becomes worth less (this in turn makes exports cheaper and more competitive on world markets)
appreciation, currency appreciation - when a country's currency becomes worth more (this in turn makes exports cheaper and more competitive on world markets)
a weak baht - a baht that is worth less than in the past (or is worth less than people think it should be worth)
undervalue a currency - force a currency to be less than iot should be given the current economic situation
price stability - when prices don't move around very much
a sovereign wealth fund (SWF) - a government run fund for investing overseas with funds coming from foreign exchange reserves (See Wikipedia)
rule out Y - decide they will not do Y
industrial policy - government policy that encourages investment in and development strategic industries (See Wikipedia, World Bank, and Dani Rodrick)
Park Chung Hee - the autocratic ruler of the Republic of Korea from 1961 to 1979, has been credited with the industrialization of the Republic of Korea through export-led growth, but is also criticized for his authoritarian way of ruling the country (especially after 1971), sending troops to support the United States in the Vietnam War, named one of the top 100 Asians of the Century by Time Magazine (1999) (See Wikipedia)
Problems with targeting a weak baht
There's just a couple of problems with this idea, according to Tarisa Watanagase, long-standing governor of the Bank of Thailand.
First, "no country in the world uses a target for currency rates."
Second, using a target for currency rates is "very difficult" and "fraught with danger."
Third, and probably the most important as Finance Ministers haven't served very long recently, the long-standing policy of the Bank of Thailand is to allow the baht to move in line with regional currencies:
...central bank intervention was aimed at limiting rate volatility. As long as rates moved with regional trends, the overall impact on price competitiveness for exports was minimised.
In other words, non-volatile exchange rates, stable exchange rates that don't jump around suddenly and unpredictably, is probably the best policy achievement that the Bank of Thailand can provide exporters.
With stable exchange rates exporters can know in advance what price their products will sell for on international markets. Then they can formulate production plans for the near-future based on those plans.
Vocabulary:
a target - what you aim to reach or achieve (See glossary)
fraught with danger - has many dangers
volatile - changing suddenly, unexpectedly, and unpredictably by large amounts
non-volatile, stable - changing only slowly by small amounts
unpredictably - can accurately say what will happen in the future
formulate production plans - make plans for how much a company will produce
Look inwards for opportunities during the global financial crisis
With growth slowing in the US and Europe exports are only expected to grow 10-12% next year compared to 20% this year.
Economists suggest this is a clear signal to focus on domestic economic policy. Aat Pisanwanich, director of the Centre for International Trade Studies of the University of the Thai Chamber of Commerce (UTCC), suggests that:
The export sector is unlikely to be a hero for the Thai economy next year because of the world's economic recession...We would rather urge the government to come up with more measures to stimulate domestic consumption, private investment, and state spending
This is also what Dr. Tarisa suggests:
...funding costs in the Thai market were already low, so interest rate cuts would be a limited stimulus. Instead, she said, policymakers should accelerate fiscal spending, public investment and adopt policies to help the tourism sector to support growth.
Vocabulary:
measures to stimulate domestic consumption - actions to make people spend more and save less (during bad economic times people typically save more because they are afraid what will happen in the future)
a recession - when economic activity slows down and growth becomes negative
accelerate fiscal spending - increase government spending
The outlook for Thai exports
The Bangkok Post reported on the Thailand's export outlook on Saturday:
The value of Thailand's exports in US dollar terms in September rose 19.4% year-on-year to $15.87 billion, as sales of rice, rubber and sugar and orders from new markets helped offset cooling demand from the U.S. and Europe.Sales of canned seafood and processed food as well as industrial products remained strong for September, according to Siripol Yodmuangcharoen, the permanent secretary of the Commerce Ministry.
Exports rose 14.9% in value in August.
September exports expanded continuously both in new markets and traditional destinations.
Sales to new markets grew 21.2%, while shipments to the key markets such as the United States, European Union and Japan grew 17.7%...
Growth in the world's economies is projected to be the weakest since 1982:
The International Monetary Fund forecast last week the world's economies will expand next year at the weakest pace since 1982, slowing to 4.4% from an estimated 5.3% this year. The forecast also shows Thailand's exports will be facing a tough time next year compared with the 15-20% healthy growth estimated this year.
The Commerce Ministry has lowered its export growth target from 15% to 10%.
The Centre for International Trade Studies of the University of the Thai Chamber of Commerce (UTCC) forecasts exports to grow by 10-12% compared with about 20% this year.
(Source #1: Bangkok Post, business, 21-10-08, WICHIT CHANTANUSORNSIRI, temp-link)
(Source #2: Bangkok Post, business, 18-10-08, PHUSADEE ARUNMAS, temp-link)
