Since a few weeks, we hear calls for the BOT to use its foreign currency reserves, in order to boost the domestic economy. People don’t understand why the government should borrow billions of USD… when the BOT has a total of 122 billions in “reserves” (+ 6 in foward positions).
This discussion is not new actually. It started with the Samak government, last year.
(Here is an update of the chart, source BOT)
Let’s start with the official opinion of the BOT : it’s an absolute no-no. And this is not new. Here are some interesting quotes from Tarisa (the BOT governor), published last week.
Recently, Dr Narongchai Arkasanee, a well-known economist, and other academics, called on the central bank to use US$200 million (Bt6.82 billion) to $300 million of its international reserves of $120 billion to help stimulate the sagging economy as the government is cash-strapped.
Tarisa vigorously defended the central bank’s international reserves management, saying that in economic theory it is not an appropriate policy to use international reserves to prop up the economy.
“We have already talked it out with the prime minister and the finance minister that using international reserves to stimulate the economy is not a good option.
Apart from the US dollar, there are other currencies in the reserves. If we sell the dollar from the reserves, the value of the baht will jump, which would complicate the problems. And if the Bank of Thailand were to push out the baht by converting the US dollar in its own account, this would also amount to printing money,” Tarisa said.
“No country in the world is spending money from its international reserves directly. If we were to use the reserves to buy up some oil reserves, then this matter can be put to rest because it would not affect the domestic economy.” (Nation)
Not an appropriate policy ? That’s a very interesting wording. But she’s right : very few countries are tapping into their reserves…
So why it wouldn’t be appropriate ? Let’s explore a few possible reasons.
For a country like Thailand, with a growth driven mainly by exports, the issue of the exchange rate USD-THB (the other currencies are totally irrelevant as I showed in this article) is the core issue.
Selling USD, and converting them into THB, would lower the value of USD relative to THB (offer and demand). And then a higher THB would make like difficult for thai exporters.
Inflation could be another concern. All this cash, would be converted in THB, and then would flow the domestic economy. If liquidities are already at high levels, then it could produce an inflation of prices.
The honey pot syndrome
Tarisa is probably shy. But I see a third factor : thai politicians.
Who can trust thai politicians ? Nobody of course. And Tarisa knows that very well… She’s a member of the state apparatus. To give to the politicians the keys of the coffer would be in a way suicidal. This mountain of money could have very negative effect on their sanity… And their own bank accounts
It would be like giving the keys of the fridge to a pack of hungry wolfes…
So maybe the BOT wants to keep an adamant position against this idea, to prevent any breach. To accept to give even a few hundred of millions of USD could create a dangerous situation.
As Tarisa says, tapping into foreign currency reserves is not a conventional policy. Central bankers are naturally reluctant to such an idea, because it doesn’t fit with their text books.
Especially in Thailand, where weight of “traditions” and lack of creativity are a heavy burden. However, we should note that the FED with Bernanke was not afraid to take “unconventional” decisions (very unconventional…).
Overall, those are the 4 reasons that could explain the BOT’s refusal.
But I think Tarisa is not telling us everything.
I would like to add a fifth reason, a fifth factor : the fear factor.
The fear factor, the conspiracy of the idiots or the MAD policy
There is a very fragile equilibrium right now in the world, about the USD. We all know that the US is doomed, but nobody who could have an influence over the USD want to take any action that could accelerate the move.
Yes, I’m speaking about central banks… who continue to buy (like there is no tomorrow) US Treasuries (my article here)… therefore USD.
If one central bank starts to getting out of the USD… even on a small scale, it could have huge consequences… and put the equilibrium in serious danger.
I’m not speaking about a conspiracy (albeit…) … but rather a “converging and common interest” between most of the central banks around the world… like a non written agreement if you prefer…
During the Cold War, there was the MAD concept : Mutually Assured Destruction… It’s exactly the same now with the USD…
So what to think ?
As for my own opinion… Should Thailand use its foreign currency reserves ?
I would definitely answer yes. At 122 billions USD and counting, the reserves are just too high (regarding conventional theory, and Tarisa should start to worry about the way she will justify an ever growing reserves…).
A fraction of this money could definitely be used to boost an investment program. A real one.
Thailand needs heavy infrastructures. And those wouldn’t be luxury (like to build a new stadium… interest = zero as far as economy is concerned)… but could really fuel future growth.
And the sector we are looking at is obvious : transportations.
But… of course once you have set up a principle, then politics catch you back.
It would be utterly unimaginable to give a large amount of money to the current thai government… I mean can you imagine a guy like Newin, whose gang controls the Transport Ministry, and such money ? It would be obscene.
That’s one of the main burden of the country : the dirty “politicians” (included bureaucrats and military).