Thailand Crisis

The Bank of Thailand (BOT) was selling off US dollars yesterday (June 19th) due to the depreciation of Thai baht. Meanwhile, the Thai currency yesterday was traded at 33.44 baht per US dollar, the lowest value in the last five months.

The BOT Deputy Governor, Mrs. Atchana Waiquamdee, insisted that the central bank will not utilize the baht as an instrument to alleviate the inflation problem. She says the BOT will intervene once the currency fluctuates. (PRD)

How ironic. Until a few months ago (march read here)… it was exactly the contrary. The BOT was buying USD like crazy to curb the THB versus the US currency. A weak THB was necessary to boost exports.

And this policy costed a huge amount of money (read here).

Today, the story is different : the black swan of inflation, the energy bill that widens the trade deficit, the global financial correction/crisis (foreigners are selling their assets in THB like stocks. Before they were buying), etc.

A very interesting article about the international reserves and the way the Bank Of Thailand manages them.

Interesting because of course the composition of those reserves are top secret.

For that matter, it’s necessary to take with a pinch (a big one) of salt what the central bank is saying.

The Bank of Thailand is considering gradually readjusting the currency blend of its international reserves again - after it had first done so in 2002 - for long-term objectives, not short-term trends.

“We would not change it [the reserve structure] because of the currency trend - by unloading the dollar when it depreciates and hurrying to buy it when it is stronger,” senior director Pongpen Ruengvirayudh said last week.

The remix will be based mainly on economic fundamentals rather than the fluctuating value of the greenback, she said.

A rather idiotic reasoning. The trend of USD is everything. USD is an economic fundamental. If like many other institutions and individuals around the world, the BOT thinks that the USD is likely to continue its decline… for core reasons, then the BOT will do like other : unload.

If not, then the BOT should shut up and continue to buy USD…

It’s like if they want to say that they believe that the USD is doomed, but their actions would not be linked to the faith of USD, but to some “long term objectives”.

It’s political correctness applied to the matted world of central banks.

The US dollar will be progressively reduced and other currencies increased to fit with Thailand’s trading partner structure. The Kingdom’s exports to the US have declined, while trade payments in dollar terms have fallen.

The central bank will act in accordance with long-term prospects, not depending on the cycle of the dollar, she emphasised. The dollar trend has only a slight impact on the decision.

The central bank has steadily unweighted the dollar in its foreign reserves since 2002 after it dropped the fixed exchange rate in 1997.

Another blatant lie. In 2006-2007, the BOT bought dollars on a massive scale ! To curb the appreciation of the THB, and to save the Private Exports. Look at the chart… There is no discussion. And this policy was heavily critisized because of its huge cost (plus the bond problem, “sterilization” process, read here).

The central bank no longer needs to hold lots of dollars under the current floating exchange rate regime, unlike during the era of the basket of currencies, when it needed to collect dollars in large amounts.

“We’ll change it in accordance with the country’s economic structure. Don’t expect that when the dollar is up, we’ll turn back to hold the dollar like we did before,” she said.

Earlier, Governor Tarisa Watanagase said the central bank has been steadily dumping the dollar until now it is lower than other central banks’ average level of about 60 per cent.

Shipments to the US have slumped from 21 per cent to 17 per cent of the Kingdom’s total exports after traders turned to other markets. (Nation)

Again, what are they trying to say ? This idea that international reserves must be linked to the structure of exports and the trading partners is… rather new.

So if Thailand exports products to Zimbabwe and is paid in Zimbabwe Dollars, then Thailand should keep a stash of Zimbabwe Dollars in its international reserves ?

My analysis : it’s PR bullshit packed into confused rhetoric. The BOT wants to stop buying USD (at last !), but like other central banks if they say it too loudly then there is a risk that the USD would go down even quicker.

And meanwhile, the oil (paid in USD) is going to make a huge hole into the trade balance of Thailand (it started already, with a trade deficit of 3 billions USD in the first four months)

Bottom line : THB could go up. But the trade deficit could alleviate the upward pressure…

The game remains open.

” The Monetary Policy Committee decided to keep the policy interest rate at 3.25 per cent per annum“.

It’s not a surprise (3,25 % since july 2007).

“In the first two months of this year, domestic demand continued to expand, from both private consumption and private investment. At the same time, the government’s budget disbursement met its target. Exports continued to expand well, but the slowdown in the global economy could affect export growth going forward.

Risks to inflation increased from the previous meeting. Headline inflation accelerated in the first quarter due to the prices of oil and commodities in world markets, as well as greater pass-through of costs to domestic prices. However, the MPC assessed that these pressures were likely to moderate in the latter part of the year in tandem with the slowdown of the global economy. ” (official statement)

I love those official statements. “Risks of inflation” ? Sweet. At that point, it’s not risks. Inflation is here.

As for the “likely to moderate” in the second semester… it would be just technical. The growth of inflation rate will indeed decrease (because of the base effect)… but that doesn’t mean that the prices are going to decrease (chart here). And to this point, there is not proof that the current slowdown has an effect on cost inflation (oil, agriculture products, and other raw materials).

The push of the prices we had and that we continue to have… will continue to pressurize common people.

And 2 months and 10 days ago, Tarisa (BOT governor) said: “the bank was ready to count on using applied interest policy to stimulate the Thai economy now expected to be affected by the looming possibility of a United States economic recession and a consequent slowdown in Thai exports“.

So stimulation ? No stimulation ? Growth or recession ? Inflation ? No inflation ? That’s the good point with thai authorities : you can find a little bit of EVERYTHING in their statements.

The BOT, like many other central banks in the world, is just paralyzed. They don’t know what to do and where they’re going.

[next meeting of the MPC : 29 may]

The thai central bank continues to send conflicting signals… like a headless chicken running amok.

Bank of Thailand (BoT) assistant governor Suchada Kirakul on Tuesday warned exporters and importers of the baht’s continuing vulnerability to volatilite movement, and advised the business community to hedge their transactions against the currency fluctuation risk.

The central bank conceded it is difficult to predict the direction of the baht movement.

In addition, the BoT is not in a position to stabilise the currency exchange rate due to a variety of internal and external risk factors.

Included are the sub-prime mortgage lending crisis in the United States, worldwide oil price rises, and the yen-carry trade. (TNA)

So a few weeks ago, everything was under control, it was easy to remove the capital control (read here), the BOT was buying USD and issuing bonds like crazy to mop up the liquidities… the international foreign reserve continue to grow…

And now, the BOT “is not in a position to stabilize...”.

Good to see that they start to wake up… And start to warn people that a USD crisis is maybe not behind us : but could be in front of us.

The US dollar is free falling.

Weakest against Yen since 1995 !

Lower against Yuan at 7,1

Historic low against Euro at 1,5540 !

And meanwhile, against THB… almost unchanged.

I mean what a joke : the BOT must be buying on a massive scale, and issuing bonds also on a massive scale (to absorb the liquidities).

For what ? To go against the global trend ? To wait and see ? To gain a few weeks ? It’s insane.

And meanwhile, oil is going to the moon : so a stronger THB would reduce the oil bill…

Save the thai drivers ? Save the thai exporters ? Save the foreign currency reserve ? Save the government ? Reduce or increase inflation ? Cut or increase interest rates ?

Cornelian choice. Conundrum. Check mate. You name it.

Logical consequence of the never ending intervention and “currency management” from the Bank Of Thailand (in order to curb the appreciation of THB versus USD)… the international reserves explode.

Thailand’s net international reserves, which jumped by US$5.1 billion within a week before Feb 29, have soared to a new high of US$123.8 billion (Bt3.91 trillion), including forward positions.

Gross international reserves, which are currently less than the net international reserves, amounted to $100.5 billion as of Feb 29 due to the central bank’s intervention in the market to rein in the baht.

The net reserves have risen sharply because of the BOT’s unwinding position of swap agreements to manage liquidity. It bought back the US dollar and sold the baht to counter upward pressures, causing the net forward position to drop to $23.3 billion, from $24.1 billion in the previous quarter.

And it’s important to note : it was before the 30 % reserve requirement (capital control) was lifted (on monday march 3).

And we know that since march 3, the BOT has intervened even more (read here) … Therefore, it’s easy to forecast the future…

A very important information (apparently) is given by Nation.

The rising reserves also resulted from valuation change as the euro, a main component of currencies in the BOT’s portfolio, has appreciated against the dollar, says a market source.

The exact composition of foreign currencies reserves is kept secret of course… So what does mean “a main component” ? How many euros the BOT has ?

Exchange Rate EUR-USD :
22 february = 1,47410
29 february = 1,51270
= +2,6 % in 1 week

Let’s assume that the whole international reserve of the BOT is in Euros (absurd of course).

A 2,6 % increase of the exchange rate would mean a hike from 95,4 billions USD (position on february 22) to 97,9 billions USD (I’m talking net, excluding forward positions)…

But, the total actually reached… 100,5 billions on february 29 (datas here)…

Therefore, the explanation of the valuation of Euro against USD as the cause of the sudden hike in total BOT reserves is pure bullshit.

It’s a factor of course (because the BOT does have Euros in its international reserves) but minor compare to the simple fact that the BOT continues to buy USD, again and again.

I’ve updated the chart, with the total international reserves (including forward positions) per week and the exchange rate USD-THB (right scale).

You can see the cisor effect.

The BOT is accumulating more of something that is loosing value (USD).

And the pace is increasing…

I wrote on march 2, before the capital controls were removed : “So, overall, I think the BOT is going to play… exactly the same game than before (buying USD and then issuing bonds). With just higher limits, thanks to new regulations. And… that it will pray and hope.“

The day after, Nation wrote : “the BOT plans to issue Bt130 billion worth of bonds in the first two weeks of March to absorb liquidity in the market caused by the baht intervention.”

And today, what do we read… ?

Meanwhile, the BOT is to issue Bt60 billion of BOT bonds today after already selling Bt165 billion over the past few days.

The central bank will issue Bt225 billion in all for the first week of the lifting of official capital controls.

The issue was aimed at absorbing liquidity in the system after the BOT stepped into the foreign-exchange market to rein in the baht as the Finance Ministry has gradually bought dollars to refinance its foreign debts. (Nation)

Again so predictable… And so dangerous (read my article).

130 billions in 2 weeks. And now 225 billions in 1 week… You start to understand the problem ?

You certainly noticed that this week the exchange rate THB/USD was… flat… Very small movements.

Meanwhile, the USD is CRASHING versus Euro and other currencies (look at the chart of USDindex !, it’s amazing)…

What the BOT will do next week ? Issuing 225 billions THB more of bonds ? And the week after ? And the freaking week after ? Again and again ?

What are they waiting for ? The Virgin Mary saving the US Dollar ?

They are running toward the reinforced concrete wall, with a stupid smile on their face.
It’s really scary.

They are so predictable !

This monday, the USD fell to a 3 year low versus Yen (at less than 103)… Plus new record for the Euro (1,5274) ! … but in Thailand the USD is going up !

It’s a miracle. Thank you Holy Tarisa.

On the first day with capital controls removed (30 % reserve requirement), it was expected that the BOT would intervene... to save face.

Check the rates at SCB Bank… USD opened at 31,27-31,37, higher than friday. And, then up 31,39-31,49…

It’s ridiculous… Anyway. That’ s the game, at least for the first day… Not very relevant.

Let’s see what the BOT will do… if the USD continues to plunge (check the chart of USDindex, it’s really ugly).

Exactly like I predicted, “the BOT plans to issue Bt130 billion worth of bonds in the first two weeks of March to absorb liquidity in the market caused by the baht intervention. ” (Nation)

Question : what will happen… after 2 weeks ?

Tarisa Watanagase, the central-bank governor, told Nation Channel yesterday that the new BOT Act would go into effect tomorrow [monday] and the Finance Ministry had a new public-debt management law to rein in the baht. (Nation)

This is a bombshell. The new Bank Of Thailand Act is in discussion since the 97 crisis ! … It was reactivated by the Junta.

During 2007, we had drafts and amendments, discussions… You can check on Google… the last public news we had about it (along with the Currency Act) is dated from november 2… The NLA (National Legislative Assembly, appointed by the Junta) was about to consider this bill.

After this date… nothing. The NLA rushed -apparently- other bills… December elections were coming fast… The political confusion was increasing.

Then this friday, the BOT announced the end of capital controls (abruptly, when 2 weeks ago, the bank was saying that it would be a bad idea, that it was “too early”).

And now, the BOT’s boss says, with a certain ingenuity, that the new Bank Of Thailand Act will go into effect this very monday ! And that this new Act will help the Bank to manage the currency movements…

But help how ? Well, it’s a rather technical issue. At that point we can wonder if the new Currency Act will also come into effect monday ! Thanks to it, the BOT wouldn’t suffer anymore accounting losses… due to its interventions on the forex market.

Tarisa doesn’t like to speak about it, and she even denied that it was important, saying that those losses were only “accounting losses“.

Since a few years, the BOT is buying USD in order to curb the appreciation of the THB. Meanwhile, the USD continues to fell. Consequently, the BOT is buying something that is loosing value. Continuously. Therefore, those interventions have impacted the financial results of the Bank.

Check the annual report of the BOT (page 139).

Almost 100 billions THB lost in 2006… What about 2007, when the BOT intervened heavily ? Read my article on the issue of “currency management” (228 billions lost since 2006, and 2 trillions of debt).

Anyway. The point is : The Bank of Thailand Act is an important piece of law. And the current Act was enacted 66 years ago !… It should have been publicized.

It’s astonishing that nothing (the vote for instance by the NLA, then the publication in the Royal Gazette) was published in the international medias.

Back to the Nation piece.

Both laws let the central bank and Finance Ministry issue an unlimited amount of bonds to manage the demand for and supply of foreign exchange as a means to stabilise the baht, which will likely shoot up after the 30-per-cent reserve requirement is lifted.

“Since we held an election and got a new government, the policy direction has become clearer. The Finance Ministry has also taken action to support the BOT in overseeing the baht via its public-debt management office,” Tarisa said.

Again, curiously the speech has totally changed since a few weeks… With the new Act, the BOT would have more freedom to manage the THB, by issuing “unlimited” amount of bonds…

This process is called “sterilization” : when the BOT is buying the USD of thai exporters for instance, 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). (read my article).

There is I believe a lot of confusion right now over the currency issue. Here are my guesses (but… I’m confused too )

-the BOT has eventually understood that it couldn’t fight the global trend about the USD (aka : a continuous fall)

-the inflation factor (that can’t be hidden anymore) has certainly played a large role in the U-turn of the bank about capital controls. Inflation is a burning political potato. The government has certainly increased its pressures over the BOT. A stronger THB would be usefull to curb imported inflation (oil, commodities…).

The best proof is the fact that the BOT didn’t cut interest rates last wednesday (on hold at 3,25, read here).

-but meanwhile, the BOT will try anything to gain time… to slow the process… a sharp and fast increase of the THB would be bad for exporters. And bad for the bank’s image.

-the foreign currency reserves are already ballooning

-So, overall, I think the BOT is going to play… exactly the same game than before (buying USD and then issuing bonds). With just higher limits, thanks to new regulations. And… that it will pray and hope.

-Tarisa said that the “timing was good“. She couldn’t be more wrong (oil prices are going insane, the USD index is falling, etc.)

-Be ready for a nice roller coaster. And -at least on the short term- massive interventions from the BOT.

UPDATE 3 MARCH

Exactly like I predicted, “the BOT plans to issue Bt130 billion worth of bonds in the first two weeks of March to absorb liquidity in the market caused by the baht intervention. ” (Nation)

Question : what will happen… after 2 weeks ?

The governor of the Bank of Thailand said Friday the central bank will remove the controversial capital controls on short-term capital inflows effective March 3.

Removal of the controls is justified by several factors, including a strengthening economy and a greater balance in the foreign exchange market, Tarisa Watanagase told a press conference.The central bank implemented a one-year, 30 per cent withholding requirement on many types of capital inflows in December 2006, in part to help maintain the competitiveness of Thai exports by restraining the value of the baht.

But the immediate effect of the measure was to trigger a massive sell-off on the Thai stock market, and critics charged that the measure discouraged foreign investment.

The reversal was announced just one day after ex-prime minister Thaksin Shinawatra returned home Thursday morning, ending nearly one and a half years of self-imposed exile.

Finance Minister Surapong Suebwonglee said Thursday afternoon that he might consult with Thaksin on the capital controls.

Speculation that the controls would be scrapped have already pushed the baht higher this week. The unit closed Friday at 31.96-98 baht to the dollar.

(Nation)

What a roller coaster ! Before the announcement, exchange rate THB/USD was at 31,86. A few minutes later, the THB shot up at 31,20 !

Almost 3 weeks ago, the central bank was reluctant to remove the 30 % withholding requirement… And even had “secret datas” to give to the new finance minister.

“If the ministry receives more information, it may not waive the requirement because of the negative impact which could occur thereafter, said Mrs Pongpen.“, a senior member of the BOT.

Meanwhile, Miss Tarisa, BOT’s boss, stays right in her boots : “I will not quit, because I am a working person. I insisted it would continue to work. I have not been pressured as reported. We considered it was time to remove supporting measures“. (Nation)

Sure. No pressures at all. Today was a good time. And three weeks ago, it wasn’t.

Maybe it’s something related to astrology ?

Bomb shell ? Pathetic propaganda in order to create fears among people who are betting on a continuous depreciation of the USD vis-a-vis THB (AKA almost everyone) ?

Or just a bravado from a lunatic Prime minister ?

We can read this strange quote in an article of Nation, about the new record of THB versus USD.

Deputy Prime Minister and Finance Minister Surapong clarified that Prime Minister Samak Sundaravej, by noting of the possibility of reviving the fixed regime, just wanted Bank of Thailand to conduct the feasibility study.

I’ve never heard Samak talking about “reviving the fixed regime” for exchange rates.

I seriously doubt that Thailand would have the means (financial and political) to do it. We’ll see.

And here, another article from TNA :

Deputy Prime Minister and Finance Minister Surapong Suebwonglee today refuted press reports quoted Prime Minister Samak Sundaravej as saying that Thailand may change its current floating currency exchange system as has been implemented following the financial crisis that hit the country in 1997.

He said Mr. Samak only said Monday that monetary officials should study the currency exchange systems adopted in Thailand’s neighbouring countries.

It did not mean that Thailand would switch to using fixed exchange rate system in which the Thai currency, the baht, was pegged to US dollar, he said.