No baht intervention expected from BOT

The strong performance of the baht, coupled with last week’s 7.5-per-cent correction in the Stock Exchange of Thailand, has intensified speculation about the possible imposition of capital controls. 

Comparing recent baht movements with what happened in 2006, the last time the Bank of Thailand introduced capital controls – including the “Unremunerated Reserve Requirement” (URR) – Tisco Securities said in a recent note that it believed such measures were unlikely to happen again. 

A large part of the baht’s appreciation this year appears to be due to the “catch-up effect”. Last year foreign investors had many doubts about Thailand’s economic recovery after the flood crisis of late 2011. After the economy achieved a strong rebound, particularly in the fourth quarter of 2012, investors regained confidence, resulting in a solid increase in capital inflows. Hence, on a longer-term horizon, Tisco believes the baht is just playing catch-up to its regional peers. 

In 2006 before the BOT imposed the URR, the baht had been outpacing its regional peers, particularly in the second half of 2006. 

The baht appreciated about 9 per cent from the beginning of 2006 to November that year. The rapid appreciation was the result of a one-way bet by currency speculators on the baht against the US dollar. This later forced the BOT to tighten regulations and employ tougher measures, Tisco said. 

This time around, the domestic bond market has been seeing larger capital inflows than the domestic equity market. Compared with the same period last year, net foreign purchases in the bond market have doubled while the SET has recorded only Bt2.7 billion in net foreign purchases year to date, compared with Bt75 billion in the same period last year. However, in 2006, hefty capital flows were seen in both the equity and bond markets. 

 

2006

Furthermore, in 2006, the BOT actively intervened in the foreign-exchange market, reflected by a continued increase in international reserve and net forward positions, coupled with a gradual tightening of its rules against baht speculation. In recent months the BOT has been less active in forex-market intervention. 

The BOT remains relatively quiet on exchange-rate intervention this time around probably because, in terms of price competitiveness, the export sector has not seen any significant loss. In fact there has been a benign increase in the real effective exchange rate (REER) in contrast to 2006, when the index rose sharply. This should provide room for the BOT to assess the situation carefully before taking any forceful action, the securities house said.

As advocated by the International Monetary Fund, capital controls should be used only when all other measures in the toolbox are exhausted. At the very least, the BOT should begin forex market intervention measures and then take a wait-and-see stance before considering other options, as it did in 2006. 

Various studies show that the effectiveness of capital controls is unclear. Based on recent data, the consensus view is that capital controls can help lengthen the maturity of inflows and temporarily allow greater monetary autonomy but are less successful in discouraging capital inflows or easing currency-appreciation pressures. 

In addition, Tisco does not expect the baht to rise further significantly, thus reducing the likelihood of the BOT reintroducing capital controls. It expects global events to curb the rate of baht appreciation. 

The US Federal Reserve is likely to start mentioning its plan to slow down its quantitative-easing programme the second half. There might also be a rise in risks from Europe stemming from the Italian political stalemate. 

The dollar should thereby appreciate somewhat, and baht appreciation should slow down by then. Tisco sees the baht trading in a range of 29.0-29.5 in the short term and looks for 29.0 at year-end.