The Bank of Thailand is under heavy pressure to weaken the baht, either
by slowing down foreign-capital inflows through interest-rate cuts or slamming
on the brakes through capital controls. Last year, net inflows hit US$11.49
billion, helping to push the baht past the 31-per-dollar level.
"The government could
announce that foreign funds brought in since January 1 would be kept in the
country for some time," Ammar Siamwalla, professor emeritus of the
Thailand Development Research Institute, said yesterday.
He favours capital controls, as
lower interest rates alone may not be effective enough to stem inflows and
prevent asset bubbles. A lower policy rate could also put pressure on
inflation, which is on an uptrend from higher domestic consumption. And
promoting overseas investment is like exporting long-term funds, while
short-term funds are imported.
Echoing Bank of Thailand chairman
Virabongsa Ramangkura, Finance Minister Kittiratt Na-Ranong said he favoured a
policy-rate cut to match historically low interest rates in the United States
and Japan, but left it to the central bank to make the decision.
Central bank Governor Prasarn
Trairatvorakul was noncommittal, saying that keeping the rate low for a long
time could create problems including asset bubbles.
"Interest rates must respond
to economic fundamentals. The Thai economy is expanding well, compared with the
US and Japan, with low unemployment and high loan growth and investment. These
factors must be taken into account.
"In 2008, the US lowered its
rate and kept it low for some time. This could lead to bubbles, and the bubbles
will burst when interest rates are raised," Prasarn said.
The BOT revealed that in December
alone, Thailand witnessed net capital inflows of $2.2 billion, partly due to
short-term borrowing of foreign-bank branches in Thailand and portfolio
investment. Economists say the central bank is biased towards natural
appreciation of the baht, with as little intervention as possible, as long as
the dollar/baht movement is in line with regional movements.
Phacharaphot Nuntramas, senior
economist of Siam Commercial Bank's Economic Intelligence Centre (EIC), said
the BOT should take the current opportunity of low inflationary pressure and a
slowing global economy to cut the policy rate in the first half of this year.
It should trim the 2.75-per-cent rate by 0.25 percentage point this month and
another 0.25 point in April. If the rate is lowered to 2.25 per cent, that
would be enough to maintain economic stability during the second half, he said.
Since early this year, the baht
has gained more than other regional currencies, appreciating 2.7 per cent
against the dollar, while South Korea's won dipped 2 per cent and the
Philippine peso rose 1 per cent. The baht is surging towards 29.50 against the
dollar late this year, Phacharaphot said.
Huge inflows are also hitting
other Asean countries. In the Philippines, since mid-2010, the capital account
has been much more substantial, with net inflows averaging $1.3 billion per
quarter from $300 million before the global financial crisis in 2008. The bulk
of these flows are portfolio investments, and the latest readings of
high-frequency indicators suggest that this was sustained into late last year.
A report by the EIC, completed
after its analysts' visit to Manila, shed some light on what the Central Bank
of the Philippines was doing with the inflows that have pushed up the peso by
5.5 per cent in the past 12 months.
"Managing these capital
flows remains a priority for BSP," or Bangko Sentral ng Pilipinas, the
report said. "By contrast, inflows of foreign direct investment remain
fairly limited (more on this later) and this, in our view, is partly fuelling
the central bank's concerns over the short-term nature of capital flows.
Combined with the current-account surplus, strong capital flows have led to
peso appreciating by nearly 6 per cent on an REER [real effective exchange
rate] basis - one of the region's strongest performers."
As in Thailand, both the
Philippine government and the export sector have become increasingly vocal
about the potential for deterioration in external competitiveness. Philippine
central bank governor Amando Tetangco said on Wednesday he was weighing more
curbs on fund flows, as the inflows include a "speculative" sum going
to the equity and bond markets. Besides financial assets, the real-estate sector
is also believed to be attracting these flows.
According to Moody's economists,
the response so far has been a combination of macro-prudential measures, which
include more regulations in the non-depository forward (NDF) markets and higher
capital charges. In the real-estate market, the central bank is closely
monitoring developments and has asked banks to declare their exposures using a
broader definition of mortgage lending.
Like the Thai central bank, the
BSP has reiterated that it has the tools to mitigate speculative flows and will
not hesitate to use them as necessary. Existing macro-prudential policies could
be tightened and implemented more aggressively. It is in consultation with
banks through the Bankers Association of the Philippines in further regulating
the NDF markets.
The other measures in
consideration that have also been mentioned in the press are imposing holding
periods and reserve requirements on certain trust instruments.
"These are just some
examples, and given the range of tools, it is difficult to forecast exactly
which measures will be implemented next - indeed, it is not clear whether the
implementation of any these is already imminent," Moody's said. "It
is, however, clear that discussions at BSP (both at the technical and the
monetary board level) are now held on a more regular basis. This should be
reassuring as it allows a timely implementation of a policy option that has
already been studied carefully."
Moody's analysts said last week's
adjustment on special deposit accounts (SDA) demonstrated further preference
against draconian policies. This decision came as the central bank incurred
losses of 78.4 billion pesos ($1.9 billion) during the first 10 months of 2012,
about three times the losses of the previous year, from foreign-exchange
options, and interest costs on deposits including SDAs.
More drastic capital controls are
part of the discussions, but Moody's analysts continue to think "this is
not the preferred option given the questions of effectiveness, and more
importantly, the concerns over negative market reactions and the impact on
longer-term policy perceptions".
In 2006, Thailand imposed capital
controls, which did not stem the appreciation of the baht during the 14-month
period. The currency appreciated by about 14 per cent during the period and in
spite of this appreciation, exports rose by more than 30 per cent in 2007.
Yet the measure, which required
30 per cent of all foreign-capital inflows to be deposited with the central
bank for a year without interest, triggered a 15-per-cent one-day sell-off in
the stock market - the biggest one-day drop in its history. This wiped out $22
billion in market value and caused other emerging markets also suddenly to
swoon.
Moody's expects the peso to
appreciate further given more inflows. "From a competitiveness standpoint,
we believe BSP views the appreciation as a reflection of an economy with
strengthening fundamentals that should, in turn, partly counter any decline in
external competitiveness. As deputy governor [Diwa] Guinigundo emphasised in a
recent editorial, '… frail domestic industries and diminished competitiveness
are not exactly due to the strong peso'.
"We believe forex
interventions will continue to be aimed at reducing volatility, instead of
reversing the trend appreciation," the economists said.
The peso is expected to rise to
39.0 by end-2013 and 38.2 by end-2014.
Business Desk
The Nation
Business & Investment Opportunities
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