The BOT lost 170 billions THB in 2006 due to the “management of the foreign currency exchange”. And the central bank could loose 58 billions more in 2007.
This is the bomb released within the report “One Year of the 30 Per Cent Reserve Requirement” published by the BOT (read here).
“The Bank of Thailand is expected to suffer losses of more than Bt58 billion from its management of the baht volatility this year, according to Assistant Government Spokesman Chotichai Suwanaporn.
The central bank had experienced losses and debts from its efforts to cope with the baht appreciation through the capital control measure and interventions in the currency movement.” (TNA)
At current exchange rate, that would make a total of 6,7 billions USD.
Quick reminder : since 2006, the BOT is manipulating (sorry, “managing“…) the currency market in order to curb the appreciation of THB vis-a-vis the USD. This policy (that consists grossly to buy USD and sell THB) has of course a high cost, when the global trend of the USD is clearly downward.
But there is something even more disturbing.
“As for debts incurred from the intervention in the baht’s movement in the past one to two years, he said, the bank had already borrowed Bt1.5 trillion onshore through issuing bonds and the repurchase market to intervene in the baht. The bank had also planned to issue additional bonds of Bt500 billion if needed.
So, the bank is likely to incur total debts of Bt2 trillion or 20 per cent of Thailand’s gross domestic product (GDP).
Given the fact that the US dollar tends to continue weakening and that outstanding debts of over Bt1.2 trillion incurred by the Financial Institution Development Fund from the economic crisis in 1997 remains unsettled, the central bank is in a difficult position to service debts in the next 15 years.“
This process is called “sterilization” : when the BOT is buying the USD of thai exporters, and exchange them against THB, that creates liquidities on the market. By issuing bonds (debts), the BOT is able to take back part of those of THB, and “sterilize” them (otherwise that could trigger inflationary pressures).
So to summarize :
-the BOT accumulates USD (foreign currency reserves, growing every month, read here)
-and issues bonds (in local currency) with interests to be paid (in local currency)
We could think : no problem the foreign currency reserves could offset in a way the debt and interests to be paid in the future… But what if the value of USD continues to decrease vis-a-vis the THB ? Cisor effect.
Therefore, the BOT is making a dangerous bet on the future. In order to save exports now, the BOT is playing with the future.