Too Little from BOT?

Economists and investors around the country anxiously awaits the dawn of 11 April 2007. Why? Not because we would celebrate any Thai economist day, but it’s the date scheduled for the next meeting of the Monetary Policy Committee. Thailand has been trying to battle the appreciation of its currency for many months, and it has not gained any ground. The slowdown of the economy does not in anyway help to project a better outlook for the Kingdom. Though the appreciation remains perplexed to Thai, given our weaker fundamentals and political instability in the past year, there is little time to contemplate too much of what to do amidst such an odd. And we all hope the BOT would feel similarly.

If there is anything to take from the state-of-art research on conduct of monetary policy in the past 20 years, it would be “expectation matters.” This precisely is the reason many central banks try to commit themselves to a rule rather than subjecting themselves to own discretion. To me, this tells the story of the BOT’s hesitation to change interest at will. But, again, I am not entirely sure if the story will work out beautifully as the BOT has intended.

It’s funny, really, that the BOT hesitates to alter its target interest rate, when back in 2006 it did not hesitate to impose capital control on foreign flows. Don’t get me wrong, I not taking a value judgement stance here, whether capital control is better or worst than usual conduct of monetary policy. However, the control imposed was and is a drastic measure. That alone threatens the credibility of the BOT more than anything else it could do under its sovereignty.

Today (April 11, 2007) is the day the BOT meet. Investors and economists alike have been calling for a drastic cut to move the economy in the “right” direction. God knows what that means. Afterall, none of them really have a clear reasoning of why Thailand finds itself in as the country with the strongest currency in the region. Nonetheless, they agree that a cut of more than 50 basis points will be necessary the achieve that goal. I think I have even seen a call for a drop of 100 basis point altogether.

The question is not reducing or not, rather what would be the rate cut. I personally disagree with large rate cut. However, if the BOT plans to have any impact from it’s action at all, it will need to look beyond its usual habit of the meager 0.25 change. The Kingdom expects a cut to happen. And a cut that would just make expectation true will virtually have no impact at all. But to go as far as 1 percent would be careless. The BOT will be risking a potential sudden stop or worst a sudden reversal of flow, which may trigger the baht melt down way too soon. And who would have forgotten the experience in 1997.

Finally, the news is out: 50 basis point cut it is. To me that’s a good choice actually. It should be enough to help the economy “slowly” (as all monetary policies are), not too drastic in either way. Deep down inside, I was hoping to see something more than 50 but less than 75, which would be ideal for the state of the economy today. Yet, that would be unrealistic, as most monetary measures are done in terms of 25 increments. So as for now, I’m happy.

Thai Baht Midlife Crisis

Thailand manages to surprise this informationally obssessed world twice in the past 12 months. First, the surprisedcoup d’etat on 19 September 2006 stunned the world out of the blue. Second, the capital control imposed on foreign capital on 19 December 2006 by the Bank of Thailand, and rightly by Pridiyathorn Devakula, the ex-minister of finance. The control measure introduced require a 30% witholding of any foreign exchange bought and exchange in all Thai financial institutions. The measure was meant to discourage against any speculative short-term flow against Thai baht, which has been peculiarly appreciating since the beginning of 2006. In fact, it has appreciated 20% against US dollars, its major trading partner.

The Situation
Why worry? Precisely the question many asked at the beginning of trend. Why be so worried about the appreciation of baht? Afterall, the US dollar withers against many currencies, particularly with Chinese economy stealing all the spotlights. The US economy started to stagger and this coupled with its huge budget and trade deficits, there was no question of why the appreciation. However, we still worry. Afterall, Thailand manages to pull itself away from the ghost of crisis purely through export. The export industries were Thailand’s economic battalion, and given its weak exchange rate after 1997 devaluation, this only makes sense. Yet, despite all exchange rate mayhem, Thai export remains strong throughout 2006. This is a good sign. It means many major Thai exports are not easily substitutable on the world market. But we must beware, this lack of substitutability is not indefinite. If things look too bleak, buyers will have to no choice but to shun away from even the most unique of Thai products.

Eventually, things turn even nastier for Thai exporters. Thai baht continues to appreciate, even after the capital control bonanza. Now we start to ask a more fundamental question: Why is Thai baht appreciating like crazy? Thai baht appreciates so strongly that it leaves many hardcore macroeconomists and international economists scratching their head. And those who think they might have the answer, here are some facts. Thai baht appreciate against all trading partners. Yes, that means, not only baht-dollar is working against us. It works against us more than any other countries in the considerations. If we look at just our trading partners, they will buy less from us and we will buy more. If we look at our trade competitors, they are gaining an edge ahead of us. Can we panic now? Sure, we can. But not all hopes are lost. BOT might be the white knights to come to our aid, eventually.

... (to be continued)