Thailand, like other developing economies, is doggypaddling to sustain herself and avoid being swept away and drowned in a rising ocean of liquidity. This is inevitable. In the global economic downturn, we too must bear the scars.
In our country, huge capital inflows have once again reignited the fierce debate about monetary policy and the battle between the government and the Bank of Thailand (BoT). As the voices of the two grow louder, we are at risk of losing out no matter who wins.
A surge of foreign capital inflows into the stock and bond markets led the baht to soar by 2% in the first two weeks of the year to peak at 29.60 to the dollar, which is among the fastest currency appreciations in the region.
Analysts see the inflows as a reflection of investor anticipation of baht strength, the economy's sound international trade gains, and a continued rise in the Stock Exchange of Thailand. The baht's 3% appreciation last year, however, underperformed most other regional currencies.
The rising baht trend has caused exporters and the government deep concern. After all, it is more difficult for SMEs than conglomerates to access bank currency risk hedging contracts, add value to their products, and increase productivity. The appreciating baht is their double whammy, aside from the government's policy of the minimum daily wage hike to 300 baht.
Analysts, however, see the currency appreciation and an increase in short-term funds as a phenomenon that Asian economies simply cannot avoid. The Fed has reassured the markets that its financial asset purchasing programme, aka Quantitative Easing, will continue indefinitely. The new Japanese administration is on a path of even more aggressive asset purchases next year, underlined by the resignation of its central bank governor Masaaki Shirakawa.
Thailand's economy is only small. Further massive inflows would be a significant challenge for both the BoT and the government.
The domestic investment climate is not ready to make good use of capital inflows this year. The government's grand plans for infrastructure and transportation investment will steam ahead from 2014 onwards. Its rush to sign construction contracts for 350 billion baht worth of water and flood system management projects could help the import sector to pick up and weaken the baht a bit.
A sure way to cope with the appreciating baht is for the state and the Federation of Thai Industries to ensure that the private sector is attuned to currency risk management so they have incentives to improve their production efficiency.
A wave of local conglomerate mergers and acquisitions abroad last year helped the BoT reduce its market intervention, when it usually buys dollars and issues bonds to absorb its baht injections. This allowed the BoT to reduce the interest carrying cost on bonds, as the returns from investing abroad are much lower.
Amid the baht appreciation, a fierce monetary debate has re-emerged as the government is adamant that the interest rate gap between 2.75% in Thailand and near-zero in the US is the key determining factor behind capital flows. The government apparently wants the central bank to lower interest rates.
The BoT, however, has announced that its priority is to ensure financial stability by avoiding keeping interest rates too low for too long which would inflate asset bubbles. Its statement signals that it's not willing to see interest rates slashed, although there is a chance that the Monetary Policy Committee might decide to trim interest rates somewhat.
If that's the case, then the government stands to gain from an interest rate cut which would lower borrowing costs, boost asset prices and spur economic growth. It would be a boon for the Yingluck Shinawatra administration which will run out of measures to boost consumption this year after tax rebates for car and home buyers end and its already-imposed increases in the minimum wage and graduate salaries.
It's encouraging to hear a constructive debate on economic and monetary policies in our fast-changing economic environment. I believe, however, that monetary discipline and financial stability are requirements for the Thai economy's long-term good. Having the BoT free from political interference is also an absolute necessity.
Parista Yuthamanop is Senior Economics Reporter, Bangkok Post.
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- Writer: Parista Yuthamanop