Tempers rise over BOT rate policy
Play
The differences between the Finance Ministry and the Bank of Thailand (BOT) over baht management are reaching a critical point, amid growing calls from the private sector for harsh measures such as capital controls and a sharp cut in the policy rate.
After a meeting at Government House with government agencies involved, including the central bank, Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong yesterday complained of a headache as the central bank has so far ignored his suggestion for a rate cut. Prasarn attended the meeting at the Government House, along with Finance Permanent Secretary Areepong Bhoocha-oom and chiefs of Budget Bureau and the National Economic and Social Development Board. Before leaving to Brunei to attend the 22nd Asean Summit Prime Minister Yingluck Shinawatra instructed all units to closely monitor the exchange rate and gold prices.
In a separate event, Finance Ministry deputy permanent secretary Pongpanu Svetarundra said the BOT’s persistence has resulted in a huge loss to the country, and that this was sufficient reason to dismiss BOT Governor Prasarn Trairatvorakul.
Pongpanu said the BOT’s sterilisation process, absorbing excess liquidity on the back of huge inflows, has resulted in accounting losses of Bt600 billion as well as negative impacts on the export sector and asset prices. He said that while the accounting losses would inevitably be absorbed by the government, the strong baht will kill many exporters. If the policy rate is maintained at this level, it could also affect the government’s Bt2-trillion investment plan, which will be financed by domestic funds. Pongpanu said that damages are comparable to those witnessed during the “Tom Yam Kung” financial crisis in 1997. Without action, the economy would fall into a crisis and the BOT would be responsible, he said.
DIFFERENCE OF OPINION
“The BOT’s credibility is tarnished. If it were a private company, the business would be defunct. This loss can’t return to a gain quickly, due to monetary easing in the US, Europe and Japan. Without any action, the baht could hit 26-27 per dollar and this will result in prolonged losses for the BOT,” he said.
The BOT, on the other hand, is firm that it is doing its best to neutralise the impacts of capital inflows.
Alisara Mahasandana, BOT senior director for financial markets, said a rate cut would not slow capital inflows, particularly to the bond market, due to Thailand’s strong economic fundamentals.
“Bond yields have dropped sharply [due to inflows], but new money keeps flowing in even though our interest rate is quite similar to neighbouring countries’. It is fundamentals, rather, that are at play, as foreign investors are also concerned about the country’s rating outlook and default rate. These should carry more weight than bond yields,” she said.
In the first quarter, global funds’ bond investment reached Bt140 billion, pushing foreign bond holding to Bt850 billion or 12.6 per cent of outstanding bonds. According to the BOT, 60 per cent of the holding is in long-term bonds. The average maturity of bonds held by foreign investors is 4.6 years.
PRESSURE ON CENTRAL BANK
While monetary easing in developed economies, particularly Japan, spurs inflows and boosts the baht against the greenback, Alisara said the baht could weaken if the euro zone’s condition deteriorates and the US discontinues easing in light of economic improvements.
Another source of pressure on the BOT comes from the Federation of Thai Industries (FTI), the largest grouping of Thai businesses. The FTI yesterday suggested five harsh measures, including capital controls and a 1-percentage-point cut in the policy rate. Other proposals are to establish an emergency foreign-exchange management mechanism, switching from inflation targeting to exchange-rate targeting, and improving the central bank’s sterilisation mechanism. A capital control was proposed that would tax money that enters and leaves the Kingdom in a period of less than three months.
FTI chairman Payungsak Chartsutipol said that because of the cheap dollar, some export-oriented manufacturers have imported raw materials, and this affects local suppliers.
All five measures could be enforced at the same time, but without any action, he said, it is difficult for exporters to quote prices, and this will affect orders in the second and third quarters.
The FTI is seeking a meeting with the BOT governor next week. The BOT has so far refused to implement the measures, but the situation is far different than in January, when the FTI made its first round of requests, said federation vice chairman Vallop Vitanakorn.
Year to date, the baht has appreciated by 6.28 per cent against the US dollar, compared to a 6.10-per-cent appreciation in the Mexican peso, a 1-per-cent rise in the Brazilian real and a 0.16-per-cent gain in the Malaysian ringgit. Elsewhere in Asia, the Indonesian rupiah, Singapore dollar, Vietnamese dong, Philippine peso and Korean won have weakened by 1 per cent, 1.44 per cent, 0.4 per cent, 0.63 per cent and 4.28 per cent, respectively.
The baht fell to 28.89 at 3pm yesterday on fears of intervention. Earlier this month, it touched 28.58, the strongest level since 1997.
While Kittiratt is convinced that lowering the policy rate would deter capital inflows,
BOT Chairman MR Chatu Mongol Sonakul earlier this week suggested BOT to buy more dollar to weaken the baht. Yesterday, Chaoren Pokphand Group Chairman Dhanin Chearavanont said that BOT stands to lose in this fight. He sees both good and bad points in the strong baht.
“I would like to suggest that the BOT [Bank of Thailand] not allocate funds to fight against the baht’s appreciation. Thailand is now an attractive destination for foreign investors and the inflow of investment capital results in the strong baht.
“It is useless for the BOT to fight against the baht’s appreciation, [so it should] instead allocate money to assist those businesses impacted by the strong baht or support manufacturers in the local industrial sector to change their machinery or improve their production efficiency,” Dhanin said.
“It is useless for the BOT to fight against the baht’s appreciation, [so it should] instead allocate money to assist those businesses impacted by the strong baht or support manufacturers in the local industrial sector to change their machinery or improve their production efficiency,” Dhanin said.
Yet, former finance minister Thanong Bidaya rushed the central bank to launch an action. He said though price stability is the central bank's priority, the core inflation of below 2 per cent opens a chance for rate cuts. He suggested the central bank cut the policy rate by 25 basis point at each meeting from now and monitor the impacts on inflows.
He noted that if the policy rate won't be cut, the central bank needs to launch a new measure. He said that the central bank cannot just buy dollar and shoulder a higher loss.
"Controls could be imposed on activities driven by speculative purposes, to contain excessive gain and bubbles. Yet, controls may be unnecessary. The problem is the policy rate is too high. A lower rate will benefit the business sector. Meanwhile, savers now have other investment alternatives on top of bank savings. The sharp growth in the mutual fund industry shows that savers now are more knowledgeable," he said.
