Uncertainties
abound but the baht is stable, the balance of payments has
improved and short-term foreign debt has been reduced
Return to stability, at least for now
Parista Yuthamanop
An improved economic outlook and
rising investor confidence in financial reform helped support
the baht in the second half of 1999.
External financing also continued to be positive, with the current
account surplus averaging $1.5 billion per month on steady trade
surpluses and gains in tourism revenue.
The balance of payments from January to October showed a positive
$2.35 billion, although September figures slipped negative due
to heavy repayments of foreign debt by the private sector.
Declining short-term foreign debt, coupled with steady gains
in official foreign reserves, helped the baht to stabilise at
37-39 to the US dollar from July to November.
New focus on inflation targets
The float of the baht in July
1997 prompted regulators to rethink their methods of managing
monetary policy.
A revised Bank of Thailand Act would shift the focus of
monetary policy to inflation targets.
Under inflation-targetting, the government announces a
range of inflation targets. Execution of monetary policy
to achieve these targets is the responsibility of an independent
monetary policy committee, staffed with outside experts
and central bank officials.
The central bank has developed an econometric Gyes model
to help it look ahead at inflation target for the next few
years, with operating and intermediate-range targets and
based on both external and domestic factors.
If the model shows an upward trend of inflation, the committee
raises interest rates to absorb money from the system.
On the other hand, the central bank reduces interest rates
if it believes the economy is on a downtrend.
In any case, with inflation running at 1% at the end of
1999, the central bank says it will continue with a loose
monetary policy over the new year.
Full implementation of the new model will depend on the
passage of the new Bank of Thailand Act, expected in the
second or third quarter of 2000.
Restructuring the central bank and rebuilding its credibility
was a key objective of senior policy makers in 1999.
The Bank of Thailand, a key pillar supporting the expansion
of the Thai economy for over two decades, saw its public
reputation plummet in the wake of the economic crisis.
Dubbed by some critics as an ivory tower slow to meet market
trends, the central bank in 1999 made considerable efforts
to reform into a leaner, modern organisation ready for the
21st century.
US consultancy A.T. Kearney was retained to help draw up
a reorganisation plan.
Eventually the central bank announced it would regroup
sixteen departments and sections to better match associated
functions and management lines.
The organisation chart was flattened, with senior officials
pressed to become more involved in daily operations.
Over the next several years, one of the biggest challenges
of the central bank will be in human resource development.
Increased training is viewed as crucial to help regulators
monitor new developments in the local and international
markets. A programme allowing staff to be seconded to private
financial institutions was established.
Staff officers were also rotated to other departments,
to help broaden their experience in preparation for promotion
to higher management duties.
Training for examiners of local financial institutions
was also established, with special training schools set
up to certify officers.
A 65-million-baht budget, half of the central bank's total
human resource development budget, was set aside to help
improve management and decision making skills for 2000.
Other initiatives taken includes initiating changes in
the working culture and a restructuring of the bank's information
technology systems.
Additional changes will come under the new Bank of Thailand
Act, through which the independence of the central bank
will be strengthened.
A draft of the new law would set up a four-year term for
the governor. Dismissal is possible only for certain actions,
which must be presented to parliament.
The central bank will also have to present regular reports
to the parliament on the condition of the economy and financial
system.
Stronger checks and balances on the authority of the governor
will also be established.
Under the new law, the central bank's Court of Directors,
largely comprised of outsiders, will gain new powers in
monitoring and establishing regulatory policies.
An audit committee, headed by Khunying Nongyao Chaiseri,
was also established over the past year to monitor internal
operations at the central bank.
Ultimately, the central bank will become an organisation
focus only on monetary policy.
One proposal calls for the central bank's supervisory role
over the financial sector to be transferred to other organisations,
such as the Securities and Exchange Commission and the planned
Deposit Insurance Agency.
Meanwhile, the central bank in 1999 continued its campaign
to strengthen discipline and enforce legal compliance among
finance and bank executives.
Charges were filed against former executives of several
banks and finance companies, including a high-profile case
involving Finance One.
Confidence in the currency was briefly shaken in late September
after second quarter growth figures came in below market expectations.
Investors also fled the region due to political turmoil in East
Timor and concerns about a Chinese devaluation. The baht fell
to a year-low of 41.65 baht to the dollar in late September.
Regulators responded by limited intervention in the market, spending
some $70 million to help keep the baht from breaking 42 to the
dollar.
The Bank of Thailand also issued a sharp clarification of its
existing capital restrictions. Overall, the baht rebounded sharply
in early October to less than 40 to the dollar, and to around
39 by November.
While exporters continued to criticise the central bank for maintaining
a ''strong'' baht policy, regulators continued to insist that
exchange rates were moving in line with market forces.
Relative to other regional currencies, the baht had actually
fallen against major currencies over the second half.
The competitive value of the baht, coupled with low domestic
inflation, made Thai exports more price competitive than other
countries, the central bank believed.
A central bank study showed that Thailand's Real Effective Exchange
Rate has gained 20 points over other export competitors as of
October.
Meanwhile, the world economic outlook remains uncertain. Analysts
and policy makers agree economic growth in Japan, US and the European
Union will be key factors in determining Thai export and currency
trends.
Two consecutive quarters of growth in the Japanese economy led
some to upgrade their projections for the world's second largest
economy.
A Japanese recovery helped buoy the value of the yen in the second
half. Investors also expected the US dollar to weaken, due to
a ballooning current account deficit.
A soft landing in the US economy in 2000 is expected to have
limited impact in Asia, offset by improved prospects in Japan
and the EU.
The euro, meanwhile, defied original expectations and weakened
steadily throughout 1999. Analysts also believed pressure of a
Chinese devaluation had eased for early 2000.
Interest Rates
New credit growth was depressed throughout the year, as banks
continued to grapple with the problems of non-performing loans
and capital constraints.
Liquidity in the money markets remained high, with interest rates
falling steadily throughout the year. As of December, overnight
interest rate on the bond repurchase market stood at 0.625%, with
one-month rates at 2.4%.
Around 300 billion baht of the banking system's liquidity revolved
in the repurchase market.
Benchmark rates for commercial bank deposits by year-end stood
at historic lows at 3% for saving accounts and 3.75% for three-
and six-month fixed deposits. Minimum lending rates by year-end
stood at 8.5-9%.
In July, the central bank signalled its willingness to pursue
an eased monetary policy by cutting its bank rate to 4% from 5.5%.
Interest rate spreads between lending and deposit spreads widened
to about five points. Progress in debt restructuring is expected
to help several banks to return to operational profits over the
next several quarters.
Net credit in the banking system posted 2.5% growth for the period
from July to October, a slight increase from the same period last
year.
Outstanding loans with Bangkok International Banking Facilities
fell considerably as customers repaid foreign loan obligations.
Despite the low credit growth, regulators insisted that liquidity
difficulties of bank clients was not as serious as many believed.
Loan approval rates stood at 76.8% of all applications in September,
a big improvement from 61% in May, according to the central bank.
Regulators said net liquidity in the private sector increased
by 234 billion baht through the first eight months of the year
due to new debenture issues, foreign direct investment, the current
account surplus and fiscal spending.
Bond Markets
Low interest rates helped fuel a surge in the bond markets, as
investors fled bank deposits in search of higher yields from corporate
bonds.
Financial regulators also continued work on developing the bond
market as a long-term funding source for the private sector to
supplement the staggering credit and capital markets.
According to the Thai Bond Dealing Centre, outstanding debt in
the bond market stood at 1.259 trillion baht as of September.
Private sector issues in the first eight months of the year totalled
about 80 billion baht.
Foreign companies, namely GE Capital and the International Finance
Corporation, petitioned regulators for permission to issue their
own baht-denominated bonds in the local market.
Regulators are expected to approve the applications, with conditions
attached on fund transfers to avoid impact on the currency and
international capital flows.
Securitisation
is also expected to grow steadily next year, another step for
the development of the bond market.
The state-owned Secondary Mortgage Corporation received approval
to securitise four billion baht worth of mortgage loans under
the August 10 stimulus package.
The SMC will buy mortgage loans from financial institutions,
funded through bond issues backed by the Finance Ministry. The
Government Housing Bank will fund a similar programme with 50
billion baht in planned bond issues.
The programme is aimed at giving homebuyers long-term, fixed
interest mortgages.
Securitisation
is also expected to grow steadily next year, another step for
the development of the bond market.
