Spectre of baht attack raised

A member of the central bank’s Monetary Policy Committee (MPC) has expressed concern over the country’s fiscal stance, which could set the stage for an attack on the baht, while the financial sector remains confident of its ability to cope with market volatility.

While the United States remains hamstrung by the failure to deal with its looming debt-ceiling issue, the Bank of Thailand expects capital to flow into the Kingdom in the short term, but possibly flow back out in the medium term if the US Federal Reserve ends its quantitative easing. 

MPC member Narongchai Akrasanee said  Thailand needed to proceed with caution with increases in its fiscal burden, which could be used by foreign investors for currency speculation in light of the volatility in money and capital markets that has resulted from the US debt-ceiling issue. He spoke on the sideline of a  seminar on “Investment in the New Global Imbalance” yesterday,  organised by MFC Asset Management.  

He expects US lawmakers to negotiate a solution to the current crisis, but even if the debt ceiling is raised, that won’t necessarily be a panacea.

Foreign investors and analysts are watching the Thai government’s non-investment expenditures, particularly the rice-pledging scheme, on whether these will affect the nation’s fiscal stance in the future, said Narongchai, who is also chairman of MFC Asset Management.   

He said some groups of foreign investors had indulged in currency speculation on the rice-pledging scheme in the past three or four months. 

On the planned sovereign wealth fund, or New Opportunity Fund, he said there had been no discussion with Ampon Kittiampon, the new chairman of the BOT board.

The government can use the nation’s foreign reserve to issue bonds to the public and exchange the proceeds with the central bank into foreign currency, he said. However, the BOT is not allowed to purchase the government bonds. 

Speaking at the seminar, BOT director Roong Mallikamas said such imbalances had started to affect money markets more. This was partly because of attempts to solve economic problems in countries like the United States by increasing the global money supply through monetary easing.

“Money-market volatility has increased along with more money supply. The baht has also been affected, as seen its depreciating from 28.5 per US dollar to 32 per dollar in a short period,” she said.

It was also possible for capital to move back to the region including Thailand after the Fed decided not to reduce its monetary stimulus and China’s economy saw improvement, she said. However, the US debt-ceiling deadline of October 17 needs to be watched.  

In the medium term, foreign capital may flow out of the region, as eventually the Fed will likely taper and then end its monetary stimulus, she said, adding that given Thailand’s sound economic fundamentals, capital could come back into the country. 

 

Heavy impact 

However, if the US cannot agree on raising or extending the debt ceiling and a default occurs, there will be a heavy impact on the global economy, Roong said, while adding that there was only a slight chance of this.

Kirida Bhaopichitr, senior economist at the World Bank’s Bangkok office, agreed there was little chance of a US government default, but if it did occur, there would be a colossal negative impact on the global economy, and Thailand’s.  

However, “if the US government does raise the debt ceiling, that does not mean the problem will end. Give the United States’ rising fiscal burden, the debt level will go up if the country has no restructuring and the same problem will occur again,” Kirida said.  

She expects the global economy to continue recovering, while emerging-market growth gradually slows. Major economies’ policies have lowered financing costs across the world, and emerging markets have used this to stimulate their economies with investment and consumption.