Exporters seek central bank intervention
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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A new governor, Dr. Tarisa Watanagase, began her tenure at the Bank of Thailand on Wednesday. The baht rose to 36.40 on Tuesday. Over the last month, from October 19th to November 16th, there has been a steady upwards trend in the value of the Thai baht [See Recent Thai Baht Exchange Rate Graph].
The new governor's first speech provided an opportunity for the business community to get an idea of future monetary policy direction at the central bank. The speech also provided an opportunity for Thai exporters to try to influence monetary policy. The Bangkok Post summarizes her comments on monetary policy: "the Bank of Thailand had no policy to weaken the baht. The central bank will try to keep volatility at a minimum." The Nation summarizes: "the central bank would stabilise the exchange rate as long as the actions did not run against the tide." And the International Herald Tribune concludes: "...gains in the Thai baht may be limited after the Thai central bank signaled it may sell the currency to protect exporters." The website of the Bank of Thailand (BOT) also makes Thailand's exchange rate policy clear, providing a paper with further details. The move by exporters to exert political pressure is significant given the moves being made to strengthen the poltical independence of Thailand's central bank. (Bangkok Post, November 13, 2006)
Thinking about exchange rates is a little tricky
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Baht appreciation (baht increasing in value) means a decreasing exchange rate because the exchange rate is normally displayed as baht per dollar ("the value of a dollar in baht" or "baht / dollar") like 36 baht per dollar.
The value of a baht in dollars is a lot less than one, for example 0.025, which makes it more difficult for people to think about as well as to add and subtract. However, when the baht appreciates the value of this exchange rate increases also which makes more sense.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What effect has the recent appreciation of the baht had on Thai exporters?
2. Has the baht appreciated more or less than the currencies of Thailand's competitors? What is the difference?
3. Are Thai exporters satisfied with the appreciation of hte baht compared to the currencies of its competitors? Why or why not?
4. Which countries are Thailand's competitors in internation export markets?
5. What change this week severely affected Thai exporters ability to conduct their businesses?
6. Will the Thai central bank change its policy to help exporters?
7. How does the president of the Thai Frozen Foods Association suggest that the Thai central bank should change policy to accomodate exporters? Does this seem reasonable?
8. What countries have Thai canned tuna producers lost market share to?
Bangkok Post Article: November 17, 2006
FOREIGN TRADE / CURRENCY APPRECIATIONExporters seek to have baht's rise capped at up to 2% of rivals' units
ARANEE JAIIMSINTen leading exporters of food, farm goods and garments called for monetary measures and assistance from state agencies to ease the baht's rapid appreciation, which they say has threatened their competitiveness. The exporters want the government to cap the baht's appreciation at 1% to 2% above the currencies of trading competitors, rather than the current levels of 3% to 6%. The baht has appreciated by 11.4% from 41.17 baht per US dollar at the end of 2005, to 36.48 yesterday.
''How can we compete with our rivals such as China, Indonesia, Vietnam when the values of their currencies increase only between 2% and 7%?'' asked Poj Aramwattananont, president of the Thai Frozen Foods Association.
The currency exchange rate of 37.50 baht per US dollar was the extreme tolerable rate for local exporters, he added. So when the baht jumped to 36.40 on Tuesday, he said, Thai exporters lost their ability to compete with foreign counterparts.
''Local exporters have been improving their businesses by creating innovations, upgrading their skills, and reducing costs for years to make local competitive capacity top foreign rivals by 1% or 2%,'' Mr Poj said. ''But controlling the baht's value is something that is beyond our capability to manage.''
Tarisa Watanagase, the central bank governor, insisted yesterday that the Bank of Thailand had no policy to weaken the baht. The central bank will try to keep volatility at a minimum and introduce new rules to facilitate overseas investment by local firms.
''We will stick to policies we have announced,'' she told reporters. ''We will look after the baht's stability and gradually issue rules for overseas investment.''
Mr Poj said the Bank of Thailand should review its regulations on the acquisition of currencies to make it more difficult to buy US dollars.
In addition, the central bank and the government should not allow people who are not authorised to talk about national financial policies to deliver opinions on the baht through the media, otherwise it would shake the confidence of exporters who trade under forward contracts, said Mr Poj. He cited an example of a financial executive who recently said the baht would reach 35 per US dollar.
If the government can't stop the baht's rise, he added, then it better provide other non-monetary measures to help local manufacturers cut down utility costs and other expenses.
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Export revenue from the food, farm and garment industries this year has been adjusted down to 680 billion baht from an earlier projection of 750 billion baht when the exchange rate was 41.17 baht per US dollar, said Mr Poj.
Somsak Paneetatyasai, president of the Thai Shrimp Association, said revenue from shrimp exports would drop from an earlier forecast of 10 billion baht this year.
In addition, the strong baht would keep the processed food industry from reaching its target of 12% to 15% growth this year, said Vilai Kiatsrichart, president of the Thai Food Processors' Association.
Some canned tuna producers had lost clients to Ecuador, the Philippines and Vietnam already since they could offer cheaper prices, she added.
Vocabulary (in discussion above)
currency appreciation - currency becomes more valuable (for example if the Thai baht drops from 38 to 36 this menas the baht appreciates and becomes more valuable, it now only takes 36 baht to buy one dollar)
capped - prevented from increasing
garments - clothing (used when talking about the production and sale of clothing)
competitiveness - the ability of a company to sell goods and services in a market compared to other companies in this market (See Wikipedia on national competitiveness)
cap the baht's appreciation - prevent the baht from appreciating
tolerable - can bear and endure something that is unpleasant
foreign counterparts - businesses in foreign countries doing the same business
weaken the baht - depreciate the baht, make the baht less valuable
Thai Frozen Foods Association - a trade association representing companies processing and exporting frozen foods, founded in 1968 (See website 1 and website 2)
Thai Broiler Processing Exporters Association - a trade association representing Thai chicken meat producers and exporters, founded in 1991 (See website)
Thai Food Processors' Association - trade association for food processors in Thailand (See website)
Answer Key:
1. What effect has the recent appreciation of the baht had on Thai exporters?
The appreciation of the baht has made them less competitive in international markets.
2. Has the baht appreciated more or less than the currencies of Thailand's competitors? What is the difference?
More, the baht is currently 3% to 6% above the currencies of its trading competitors.
3. Are Thai exporters satisfied with the appreciation of hte baht compared to the currencies of its competitors? Why or why not?
Thai exporters are not satisfied, they want to limit the baht to being 1% to 2% above the currencies of its competitors.
4. Which countries are Thailand's competitors in internation export markets?
China, Indonesia, and Vietnam.
5. What change this week severely affected Thai exporters ability to conduct their businesses?
The baht exchange rate jumped to 36.4 per dollar. At 37.50 they could still do business.
("The currency exchange rate of 37.50 baht per US dollar was the extreme tolerable rate for local exporters, he added. So when the baht jumped to 36.40 on Tuesday, he said, Thai exporters lost their ability to compete with foreign counterparts.")
6. Will the Thai central bank change its policy to help exporters?
The Bank of Thailand will:
a. Not intervene on behalf of exporters and weaken the baht.
b. Reduce exchange rate volatility. This means that the exchange rate will not change so often. This will make business will make it easier to conduct export business.
c. Make foreign investment by Thai companies easier. Capital outflows from Thailand could cause the baht to depreciate.
To see how this works think of the supply of baht on foreign exchange markets increasing as Thais investing oveseas buy other currencies with their baht. If supply of baht increases, then the price of the baht will decrease which means the baht will depreciate.
7. How does the president of the Thai Frozen Foods Association suggest that the Thai central bank should change policy to accomodate exporters? Does this seem reasonable?
Issue regulations to prevent people:
a. Prevent people from buying dollars.
b. Prevent people from talking about financial policy and the baht.
In a democracy citizens are usually allowed to speak freely and debate government policy.
If Thailand starts restricting imports with a protectionist policy, wouldn't other countries retaliate and restrict Thai exports.
WTO regulations and FTA terms probably make this impossible anyway.
All Asian currencies are appreciating largely because the US dollar is depreciating. The important question is why the baht is appreciating more than other Asian currencies.
Central bank independence and freedom from political interference is important in monetary policy. Reforms along these lines are currently being planned for the Bank of Thailand.
8. What countries have Thai canned tuna producers lost market share to?
Ecuador, the Phillipines, and Vietnam.
