Olarn: Weakening baht key to growth

Economic policymakers should aggressively intervene in the foreign currency and credit markets to help spur economic growth, says the economist and former deputy prime minister Olarn Chaipravat.

Pushing the baht down to 37 to the dollar could generate another 500 billion baht in export revenue, says Dr Olarn. WISIT THAMNGERN

Dr Olarn, speaking at an economics conference hosted by the Fiscal Policy Research Institute, said this year's budget deficit would almost certainly exceed 400 billion baht, considering the 350-billion-baht deficit set under the budget law and projections that revenues could fall short by at least 200 billion.

Running a budget deficit in the midst of a global economic contraction was a proper policy response, one that is being implemented by numerous countries.

"Raising oil taxes, however, is counter to the government's policies to stimulate growth," Dr Olarn said.

The central bank also should help lift exports in baht terms by aggressively intervening in the markets to push the baht lower against major currencies.

State-owned banks should also lift lending activity, he said. A 300-billion-baht new loans target for this year would help ease credit constraints faced by key industries, such as automobiles, electronics and property.

Government efforts to facilitate lending in the first half proved a complete failure, he said. Outstanding loans contracted 120 billion baht system-wide in the first quarter and 30 billion in the second. Banks have tightened lending criteria over fears of higher risk. And the recession has cut demand for credit to finance investment and spending.

Dr Olarn noted that the baht fell to 35.5 to the US dollar in the first quarter but has since appreciated to around 34.5 in the second.

"What we should be looking for is a rate of 36 baht to the dollar, weakening to 36.5 in the third quarter and 37 in the fourth quarter. If we can do this, it would generate another 500 billion baht in export revenues for the country," he said.

The Bank of Thailand has steadfastly refused to set explicit currency targets, and said it will only intervene in the markets to smooth volatility.

The baht has appreciated in recent months thanks to the country's growing trade surplus and portfolio inflows.

Most economists also expect the greenback to weaken in the medium-term as a result of a significantly weaker debt and fiscal position caused by the global crisis.

The Korean government and central bank have intervened in the currency markets to weaken the won, benefiting exporters and resulting in overall economic growth, said Dr Olarn.

The US and Chinese economies have also taken aggressive action to spur growth, with the Federal Reserve directly purchasing bonds from the market to boost liquidity and China directing large state-owned banks to boost lending to the real sector.

"Thailand faces fewer restrictions in currency policy if compared with China, which is too large to really sway the value of the yuan," Dr Olarn said.

But every 1% decline in the value of the baht would help create 50,000 new jobs and boost economic growth by 0.14 percentage points, he said. Inflation would also increase by 0.2 percentage points, as the cost of imports increase in local terms.

Dr Olarn said a weak baht policy would increase the cost of energy in local terms, but the government could choose to reduce oil taxes to lessen the impact on the public, although this policy could potentially widen the budget deficit.

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