End of capital controls and currency : confusion and risks

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).

bot.jpg

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 ? 😉

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Thailand Crisis

Coup, Economic slowdown, Terror In the South... The situation is worsening in Thailand. Bumpy road like often before.

But this time, it's different.

The key to understand the present turmoil is the inevitable... succession of King Bhumibol.


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