It caught almost everyone by surprise when the baht strengthened past the psychological level of 30 baht per US dollar during the New Year holidays.
I was spending my holidays in Hakodate, Japan at that time. My immediate reaction was to buy Japanese yen right away as I knew the baht would be pushed back to be above 30 baht per dollar again as soon as the Bank of Thailand opened after the holidays. I was right, with about half a million yen in my wallet. That half a million yen will be put into good use like snow crabs when I go back to Japan in March and late April. Thank you, Bank of Thailand.
Under current circumstances, the 30 baht or so per US dollar is not the "free" market exchange rate for the Thai currency. The Bank of Thailand has been constantly intervening in the exchange market to keep the baht as weak as possible. In one week alone from Dec 27 last year to Jan 3, the central bank purchased US$4.3 billion into its foreign reserves to keep the currency above the 30 baht/dollar level.
Without intervention, we could have seen levels of 25-28 baht per dollar by now. I do not wish to cause panic or speculation, particularly through the media. But the level of activity in the exchange market is currently highly unusual. Traditional management of the exchange rate will eventually fail like it did in Thailand in 1997. No small central banks can outdo international speculators.
Despite the efforts of the Bank of Thailand, the Thai baht has appreciated by 8.9% against the US dollar and by 24.3% against our peers over the past five years. The appreciation has been particularly strong since the second half of last year. This has caused a public outcry as our exports have plummetted and our tourism income shrunk.
In a time when the domestic economy is sagging, export and tourism income is desperately needed. Furthermore, foreign investment flees the country as our strong currency greatly reduces international competitiveness.
The most noted opponent of the Bank of Thailand is Virabongsa Ramangkura -- one of Thailand's most respected economists. He was an adviser to former prime minister Gen Prem Tinsulanonda and is a former finance minister.
His railings against the Bank of Thailand are clearly understandable. In his view, the "right" exchange rate is critical to the country's economic success. The Thai economy was on the verge of a collapse when Gen Prem became prime minister in 1980. A key problem then was the too-strong baht exchange rate which was pegged to the US dollar. He was instrumental in changing the country's exchange rate system from a dollar peg to a basket of currencies peg. The Bank of Thailand resisted the change which led to the removal of the then governor. After the baht was revalued and the exchange rate regime was adjusted, the Thai economy took off.
In his view, resistance to change at the Bank of Thailand, again, led to the "Tum Yum Kung" financial crisis of 1997 as the value of the baht did not reflect economic fundamentals. After a change to the floating exchange rate regime the currency found its natural level at around 38 baht/dollar, and the Thai economy sprang back to life. He is afraid that similar mistakes arising from the incompetence of the Bank of Thailand are happening, which could lead to another economic collapse. He sees a baht exchange rate of 33-35 baht/dollar as needed to support the export sector and foster economic growth.
For those who follow my bi-weekly articles, they can see that I agree with Mr Virabongsa about the "wrong" currency value issues. I also agree that 33-35 baht/dollar might be the right baht valuation giving present Thai economic fundamentals. Even the governor of the Bank of Thailand admitted in public that the current baht value did not reflect economic fundamentals. However, he mentioned no appropriate value for the currency.
Question: Since everybody is in agreement, why are things not happening?
Answer: Because nobody knows how to effectively manage a currency under the floating exchange rate regime.
Under the fixed exchange rate regime of Mr Virabongsa's time, all one had to do was change the peg value. I believe that the baht/dollar rate was changed from 20 baht/dollar to 25 baht/dollar. Of course, the one-currency peg was also changed to a multiple-currency peg called a basket of currencies. However, the US dollar dominated at 70-80% of the basket so nothing changed much there.
Under the present-day floating exchange rate regime, there are only two text-book measures to affect exchange rates. One is to change domestic interest rates. Raising rates is supposed to attract more capital inflows while lowering them would do the opposite. The other way to affect exchange rates by a central bank is to intervene in the exchange market by buying excess inflows of foreign reserves or selling foreign reserves to counter outflows.
The Bank of Thailand has fully exploited the above two measures. The policy interest rate has been cut from 1.75% to 1.25%. The central bank is reluctant to cut the rate further as it would bring real interest rates to a negative level. But, out of desperation, do not be surprised to see more rounds of rate cuts this year, particularly before Chinese New Year. In terms of capital inflow absorption, US$17.5 billion of foreign capital inflows was mopped up by the Bank of Thailand last year. Wow. See the numbers. That amount for the entire year of 2019 but US$4.3 billion for only one week from Dec 27, 2019 to Jan 3, 2020. Giving the tsunami-sized inflows, I don't think the central bank can perform this operation indefinitely.
I am sorry I cannot say things in black and white here. But when "text-book" measures are exhausted, it is time for the central bank to think outside the box by looking at the root cause of excessive inflows. If the bank cannot do that, Mr Virabongsa's comments could become a reality.
By the time I finished writing this article, I decided to sell back my half a million yen. At this point in time, it is unwise to hold foreign currencies until the Bank of Thailand can think outside the box.
