The Finance Ministry has blamed local commercial banks' offshore borrowing at low interest rates to be lent locally as a factor accelerating the baht's strength.
The baht has triggered lots of finger pointing, most recently at local banks. (Photo by Thanarak Khoonton)
Somchai Sujjapongse, director-general of the Fiscal Policy Office (FPO), said capital inflows in the first three months of this year came from four sources, and the US$2-billion borrowing by commercial banks was one of them.
The other three sources were offshore investments in the Thai bond market ($4.7 billion), current account surplus ($1.2 billion) and foreign direct investment ($106 million).
"Borrowing offshore loans by local commercial banks accounted for nearly half of Thai bond purchases by foreigners. While it seemed to have lifted the baht significantly, the activity has never been mentioned much," he said, without revealing the names of those commercial banks.
Even though the net amount of local commercial banks' borrowing was only $107 million, the hefty borrowing which was brought into the country helped strengthen the baht against the dollar.
The local currency's appreciation has gained momentum since early this year. It peaked to a 16-year high at 28.55 to the dollar around mid-April due to a flood of capital inflow prompted by money being printed on an unprecedented scale by the US Federal Reserve, the Bank of Japan (BoJ) and the European Central Bank.
However, the local currency retreated to 29.76/80 as of 6pm on Friday.
Bank of Thailand governor Prasarn Trairatvorakul last month said the baht at that time was somewhat beyond fundamentals.
The government has since pressured the central bank to introduce measures to curb the capital inflows and the baht's rise.
Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong has repeatedly said cutting the policy rate is his preferred choice. He made clear he wants to see the rate cut by as much as 75 basis points from the present 2.75%.
The central bank's Monetary Policy Committee is scheduled to meet on May 29 to decide on the policy interest rate.
Mr Somchai said the spread of interest rates between local and foreign markets has led local commercial banks to borrow abroad.
The Fed has kept its interest rate within a range of zero to 0.25% to stimulate the world's largest economy.
Chairman Ben Bernanke also said the Fed will maintain the rock-bottom rate until unemployment falls to 6.5%. US joblessness stood at 7.5% last month.
"It's only natural. As long as there is a wide gap between local interest rates and those abroad, commercial banks see an opportunity to make a profit," said Mr Somchai.
Apart from the spreads, local banks have also benefited from the baht's strength for their foreign-denominated debts.
Capital inflows into Thailand have escalated since the BoJ's announcement of the unconventional asset buying scheme last month, said Mr Somchai.
He also wonders how bad an economic slowdown must be to convince the central bank to slash the rate.
The central bank earlier said the rate cut would be adopted immediately once the economy begins losing steam.
However, Kittiya Todhanakasem, a first senior executive vice-president of Krungthai Bank, said it is unlikely that local banks will bring in their US dollar borrowing to be converted into baht for loan extension locally, given the excessive liquidity in the local financial market.
Besides, it could be a risky case of currency mismatch that lending banks generally try to avoid.
Typically, Thai banks raise funds in dollars to be extended in the same currency to finance transactions by their customers abroad, she said.
Thailand's second-largest bank in March issued $500 million worth of bonds to foreign investors with a maturity period of five and a half years to increase its loan portfolio.