Bank on right track with transparency

It is not often to see the Bank of Thailand (BoT) announce its intervention in the Thai currency even though such practice is a normal duty of a central bank. On Thursday, BoT governor Veerathai Santiprabhob made his statement that the central bank has sporadically taken action against the currency’s weakness by selling the US dollar to smooth out the baht’s movement after it depreciated at a faster pace and lowered foreign reserves. The move is to curb the baht’s rapid retreat against the greenback as the local currency hit a nine-month low.

The baht, which was the second-best performing currency in Asia last year, has depreciated around 2% so far this year to 33.26 to the dollar, compared with an almost 7% decline in India’s rupee, a 6.5% weakness in the Philippines’ peso, a 5.8% drop in the Indonesian rupiah and almost a 5% fall in the Korean won.

The governor is on the right track as his announcement helps make the bank’s operation transparent. It can prevent a possible rumour and speculation about damage to foreign reserves caused by baht intervention, which could create prevailing panic. The announcement is also a deterrent signal sent by the central bank to currency speculators who could worsen the situation.

The BoT data showed foreign reserves fell to US$215 billion (7.15 trillion baht) in April, $231 billion in May and $207 billion last month from $216 billion in March.

For a country where people experienced a severe financial crisis in 1997 like Thailand, foreign exchange reserves are a sensitive issue.

Twenty-one years ago, Thailand had pegged its currency to the greenback at a rate of around 25 baht to the dollar. The fixed rate meant there was no risk of exchange fluctuations affecting trade, investment, loans and other transactions between Thailand and other countries. Taking advantage of how easy it was to borrow from foreign entities, Thai companies embarked on a period of breakneck expansion.

In 1996, however, Thailand’s current account deficit skyrocketed, and many began to view the baht as overvalued compared with the dollar. The widening deficit eventually caught the attention of speculative investors, and in 1997 they attacked the nation’s currency, carrying out an aggressive bout of baht selling.

It is not an easy task of the central bank to cope with the currency fluctuation.

The Bank of Thailand at the time chose to defend the currency peg with baht-buying interventions, to no avail.

At the time, the public had never known what the central bank was doing. The fiercest attacks came in February and May 1997. On May 14, the central bank lost US$10 billion in foreign reserves in 24 hours. Within days, the bank had almost run out of net reserves, which had stood at US$33.8 billion at the beginning of 1997, although this fact was not known at the time, because only gross reserve figures were reported.

As a result, it is a good move of the central bank to explain its action against the baht weakening, particularly in the time of mounting capital outflow.

Despite currency intervention taking place, the current situation is totally different from that of 1997. Currently, the baht is not pegged to any currency but it is under the “managed float” exchange rate regime by the central bank. In addition, the country has already amassed a large amount of foreign exchange reserves. The central bank has much more room to intervene the currency.

Mr Veerathai said the BoT has prepared to built up foreign exchange reserves over the past two years.

The country’s economic prospects are also promising. Nevertheless, it is not an easy task of the central bank to cope with the currency fluctuation.

In the first quarter of this year, many exporters raised concerns over rapid baht appreciation to almost 30 baht per US dollar. However, since April the baht has continuously weakened and rapidly depreciated from May. This reflects a high fluctuation.

There are two key factors behind the baht depreciation — pressure from trade war prospects created by US President Donald Trump and massive capital outflow from emerging market economies, including Thailand. The latter factor is caused by “tapering “of quantitative easing programme by the US Federal Reserve and it is being followed by the European Union and Japan.

But challenges remained for the central bank are how to cope with the capital outflow, which has resulted in the baht appreciation, and how to prevent its measures form hindering overall economic prospects.

The capital outflow has forced several emerging markets, including several countries in Southeast Asia, to increase interest rates. The Bank of Thailand has still kept its benchmark interest rate unchanged. Instead, the central bank has opted to intervene the currency with its foreign exchange reserves.

The central bank’s public communication about its actions is a very important and right approach during this challenging time, even though for the time being it is hard to say whether its bath intervention is a right or wrong measure.