Economist Sethaput Suthiwart-Narueput takes a thorough look at what can be done about the rising value of the Thai baht which threatens Thailand's export competitiveness.
Caught between a rock and a hard baht, Thailand is experiencing a flood of inflows. Not just of water, but of funds by Sethaput Suthiwart-Narueput
As a result of these inflows, the baht has appreciated by over 12% thus far this year. We usually try to comfort ourselves with the thought that our appreciation is "in line" with the region. But in this case, we have appreciated more than everyone else, except the Japanese. South Korea and Taiwan have appreciated by about 5%.
What to do? There are no easy options.
Each option has its drawbacks. We are caught between the proverbial rock and a hard place.
Doing nothing is not a good option.
Thailand remains an economy highly dependent on exports.
Firms hit hardest by a stronger baht are those that export a lot, but import little. They are the ones that will see their export revenue in baht drop, while failing to get much benefit from lower import costs.
These include sectors that employ a lot of labour and local content, e.g. rice, rubber, sugar, garments, footwear, and the like.
Unfortunately, firms in these sectors also tend to be smaller and less likely to hedge their foreign exchange risk for reasons of access or pricing.
What the Bank of Thailand does to try to limit the pace of appreciation is to intervene and buy up the incoming dollars.
That they have been doing this with gusto is evidenced by the very rapid increase in their foreign exchange reserves. In the last three months alone, reserves (including forwards) have increased by over US$21 billion.
By comparison, they increased by about 8 billion during the entire first seven months of the year.
But the rapid appreciation of the baht indicates that the intervention has not really worked all that well.
Which takes us to other options, such as capital controls or taxes.
The track record of such measures has been mixed at best. These can range from the very light (like the recent 15% withholding tax on bond yields) to the hugely draconian (like the 30% URR or unremunerated reserve requirement implemented in 2006). The former unsurprisingly has had little impact. Thai bonds are yielding about 2%. At 15% withholding, that means just 0.3% in yield foregone, compared to a foreign exchange gain from baht appreciation of nearly 8% in the last three months alone.
The 30% URR measure had the dubious distinction of causing the SET index to fall a record 15% in just one day.
South Korea, Indonesia, and Taiwan have all put on measures, but have not markedly slowed down the appreciation of their currencies.
The one exception might be Brazil, which charges a hefty 6% tax on bond investments. But such moves have big, long-term implications for the attractiveness of our stock and bond markets. It seems odd for our officials to go on international roadshows promoting our stock and bond markets to investors, and then slapping on taxes and controls when they do invest
There have been calls for more extreme options like pegging the baht at some fixed rate to the dollar. This is a non-starter. If we peg the baht to the US dollar - and still allow funds to flow in and out of the country - Thai interest rates must converge to US interest rates for macroeconomic stability.
This is not just theory. Hong Kong pegs its currency to the US dollar. Interest rates in Hong Kong are only 0.25%, pretty much the same as in the US. Such low, near-zero interest rates are hardly appropriate for Thailand and would be a sure-fire recipe for asset bubbles.
What if we instead pegged to the dollar but kept our interest rates high? Funds would then keep on flowing in because they can earn a higher interest rate here with no exchange rate risk. This should sound familiar. It is essentially what happened here in the years preceding the 1997 crisis, and we all know how well that turned out.
The short but unfortunate conclusion is that there is no easy quick-fix. If there were, someone somewhere would have implemented it already
This is really a global problem that requires a coordinated, global solution. South African Finance Minister Pravin Gordhan had it right when he said, "You have a burst pipe behind the wall, and the water is coming out. You have to fix the pipe, not just patch the wall.
The recent announcement by the US Federal Reserve to pump another $600 billion into the system means even more water will be coming out of the burst pipe. Any wall patching is not likely to stop the inflows.
But if we cannot stop the inflows, we can at least help with the outflows.
Boosting investment - e.g. through big ticket infrastructure spending - would help outflows by increasing imports of capital goods and reducing our current account surplus. It would do much to improve productivity. It is a win-win solution, but not a quick one. Which probably means it won't happen.
The analogy with the floods wracking the country is both telling and sobering. We know it rains a lot. We know we can't stop the rain. All we can do is help the outflows. But somehow we never get around to building really effective drainage and flood control. We might have to learn to live with both a stronger baht and getting wet.
The writer is with the SCB Economic Intelligence Centre. The views expressed here are his own and not necessarily those of SCB or its affiliates. He can be reached at
(Source: Bangkok Post, Caught between a rock and a hard baht, 9/11/2010, Thailand is experiencing a flood of inflows. Not just of water, but of funds, Sethaput Suthiwart-Narueput, link)
appreciation - when a country's currency becomes more valuable compared to the currencies of other countries (which makes goods exported from the country more expensive)
in line with - follows, agrees with, matches, is consistent with
flood - 1. a high level of water in a place making life very difficult, 2. a large amount of something entering a place (example: a flood of investment funds entered the country)
inflows - amounts of something (like money) coming into a place
funds - money collected for a special purpose (for investment in companies or projects) เงินทุน
options - choices, the different things that someone can choose to do ทางเลือก
drawbacks - things or features that make less acceptable, disadvantages
the proverbial Y - the well-known and typical Y
caught between a rock and a hard place - in a difficult situation
dependent - needing the support of something or someone in order to continue existing or operating ต้องอาศัย
exports - goods made in a country that are sold to people in foreign countries
import - to buy or bring in products from another country นำเข้า
revenue - income from business activities รายได้
benefit - to get help or an advantage from something ผลประโยชน์
employ - to have someone work or do a job for you and pay them for it ว่าจ้าง, จ้าง
local - in or related to the area that you live ท้องถิ่น
content - the parts of a good
garments - clothing
footwear - shoes
tend - to be likely to behave in a particular way or have a particular characteristic มักจะ
hedge - take action to protect from harm (by purchasing a risk in the opposite direction that offsets the risk that you have)
foreign exchange - money or "currency" of other countries obtained through exchange the currency of your country
foreign exchange risk - the danger of losing money because a foreign currency you are holding falls in value before you can change it back into your own currency
reserves - something kept for a particular purpose or time, a supply for future use สงวน
foreign exchange reserves - the amount of foreign currency or gold held by a national bank, which is used for dealing with the national banks of other countries เงินสำรอง
risk - the possibility that something dangerous or unpleasant might happen ความเสี่ยง
access - the ability to get something สิทธิหรือโอกาสในการใช้
Bank of Thailand - Thailand's central bank (See website)
central bank - the government's bank that controls all the other banks in a country, sets monetary policy, maintains the stability of the national currency and money supply, sets interest rates and inflation targets, saves failing banks as the bank that will lone to them when no one else will (lender of last resort) during times of financial crisis (See Wikipedia)
appreciation - when a country's currency is increasing in value (so the country's exports become more expensive and sales fall)
depreciation - when a country's currency is decreasing in value (so the country's exports become less expensive and sales rise)
limit the pace of appreciation - control and reduce the speed at which the currency increases
pace - the speed and rhythm of something, at which something happens ท่างทำนอง ย่างก้าว จังหวะ ที่สิ่งต่างๆ ดำเนินไป (See glossary)
intervene (verb) - when the government buys and sells in markets to influence prices and supply and demand
gusto - great energy
evidenced by - shown by
rapid - happening quickly อย่างรวดเร็ว
intervention (noun) - a situation in which someone becomes involved in a particular issue, problem, etc., in order to influence what happens การแทรกแซง (here: when the central bank buys and sells in foreign currency markets to influence the baht exchange rate)
capital - money invested in a business (See glossary)
capital controls - a government law that restricts the amount of money coming into a country (which Thailand had in 2006)
track record - performance over a period of time (how well it has done)
measures - actions taken to deal with a problem มาตราการ
range - a number of different things that are of the same general type ขอบข่าย, ประเภท
X ranges from X to Y - X has values from X to Y
withholding tax - money taken directly out of earnings (by the government as taxes)
bond - an investment that loans money to a company, in exchange for regular payments
yield - bond yields, the amount that the investor makes every year from owning the bond
draconian - a law with a very harsh and severe punishment
unremunerated - work done but not paid for
reserve - something currently not being used but that can be used when needed สำรองไว้
Unremunerated Reserve Requirement (URR) - the term used to describe the "capital controls" used by Thailand in 2006
implemented - when a plan is put into action, actually doing the things in a plan
impact - an effect or influence ผลกระทบ
foregone - going without something you need
measure - an action taken to solve a particular problem มาตรการ
dubious - questionable, believed to be not completely honest, safe, reliable or trustworthy อย่างสงสัย
distinction - an achievement that makes a person and special and different from others, importance, fame ความยอดเยี่ยม
X has the distinction of Y - X has achievement Y which sets X apart from others
dubious - seems to be not completely good or true, doubtful, questionable สงสัย
X has the dubious distinction of Y - X has achievement Y that seems to be good but may not be
markedly - in a way that is easy to see or notice
exception - something that does not follow the general rule, different so cannot be included in a general statement ข้อยกเว้น
charge (noun) - a payment requested from someone เงินที่เรียกเก็บ
charge (verb) - ask for a payment for something
hefty - large ใหญ่
odd - strange or unexpected แปลก
international - between countries ระหว่างประเทศ
roadshows - shows or events to encourage investors to invest in a company or a country, when a company or organisation travels to many locations to promote their products and services
extreme - much more severe or serious than usual ที่ร้ายแรงมาก considered unreasonable by many people ที่สุดโต่ง
peg - peg one currency to another currency
fixed rate - fixed exchange rate, never goes up and down in value in response to supply and demand
This is a non-starter. - the idea is not practical, so it is not even discussed
interest - payments made for the use of another's money for a period of time
interest rates - the price paid for borrowing money, as a percentage of the amount borrowed
converge - to come from different directions to reach the same point มุ่งหน้าไปยัง
macroeconomic - regarding the the whole economy of a country and the policy that affects it
stability - a situation in which things happen as they should and there are no harmful changes; when something is not likely to move or change ความมั่นคง, เสถียรภาพ
theory - one or more ideas that explain how or why something happens สมมติฐาน
currency - a widely used the money accepted for exchange of goods in an economy เงินตรา (See Wikipedia)
appropriate - what is right for a certain situation, suitable, fit, proper เหมาะสม, เข้ากัน, พอเหมาะ
hardly appropriate - not appropriate
X sure-fire way to Y - if you do X, then Y will happen, for sure
asset - something owned by a person, company etc., particularly money and property ทรัพย์สิน
asset bubbles - when asset prices rise to levels far beyond their long-term true worth, the bubble eventually bursts, a lot of people lose money, and then asset prices return to their long-term trend value
essentially - for the most part ที่สำคัญที่สุด
familiar - something that happens often so that you know it well ซึ่งเป็นที่รู้จัก, คุ้นเคย, เคยชิน
sounds familiar - what you just heard seems familiar, you've heard or experienced it before, so you know it well
crisis - an urgent, difficult or dangerous situation วิกฤต
unfortunate - unlucky โชคร้าย, เคราะห์ไม่ดี
conclusion - something that you decide is true after consider all the evidence and thinking about it carefully การสรุป,บทสรุป
quick-fix - take some quick action to repair something that is broken or that has failed
global - throughout the world ทั่วโลก
coordinated - working together to achieve a goal ทำงานร่วมกัน
patch - fix (in a temporary, not permanent way) ปะ, ชุน,
burst - breaking open or exploding suddenly ระเบิด, แตกออก
announcement - information given to public ประกาศ
boosting - increasing
investment - taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)
big ticket - expensive, costs a lot
infrastructure - the high-cost facilities that everyone in the economy shares (water, roads, electricity, trains) สาธารณูปโภค
surplus - a positive amount, an amount above the required or necessary amount
deficit - a negative amount, an amoujnt below the required amount
current account - exports - imports
current account surplus - when exports are greater than imports
improve - to make better ทำให้ดีขึ้น
productivity - producing more with the same amount of inputs (labour, energy, etc) การผลิตสินค้า
win-win - a situation in which everyone wins (no losers)
analogy - comparison, similarity, likeness การเปรียบเทียบกัน, อุปมาอุปไมย, ความเหมือน
wrack - destroy, devastate, ruin ความเสียหายอย่างมาก
sobering - causes one to be serious and thoughtful (reduces drunk-like enthusiasm)
effective - works well, gets the job done, does its job well, producing the result that was intended ได้ผลดี
drainage - the system of water or waste liquids flowing away from somewhere into the ground or down pipes การระบายน้ำ
affiliates - companies connected with in some way with a larger company
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