The mystery of the THB value and the BOT’s foreign currency reserves

People are baffled : many currencies are droping like stone versus the USD (Euro, AUD, GBP etc.)… but the thai currency doesn’t move a lot versus USD. The THB seems in “levitation”.

I wrote already about this issue, and I showed that USD and THB were in a way… tied.

Furthermore, Thailand suffers from an acute political crisis,and starts to feel the pinch of the global financial crisis (stock market is crashing like everywhere else, and GDP is going down... like everywhere else too)… that reinforces the mystery.

If one currency should drop, think many people, it should be the THB ! ๐Ÿ˜‰ Right ?

I’ve explored some hypothesis (read here) : basically, capital controls have protected Thailand from the hot money, exactly at the peak of hot money [end 2006 to beginning 2008], therefore the THB was a small market, it has been ignored by speculators, therefore less leverage… therefore easier for the BOT to “manage” currencies exchange rates.

I would like to go further by looking at the famous international foreign currency reserves of the Bank Of Thailand.

First a few facts :

-the reserves = 101,33 billions USD as november 14 2008 (or 108,99 billions if we include the “net forward positions” = the commitments from the BOT to buy in the future contracts of foreign currencies)

-it puts Thailand on rank #14 in the world ! (see list here)

-in january 2006… the total was 55 billions…

-the peak was reached in march 2008, with 128 billions.

-US Dollars compose “less than 60 % ” of the reserves (according to Tarisa, BOT governor). We don’t know for sure, it’s a secret of course…

-how the BOT increases of decreases these reserves ? Simple : by buying and selling. When a thai company receives a payment in USD from a customer abroad, the company will convert those USD (sell) against THB (buy). Don’t laugh, it was compulsory (read here)… But this rule has been scraped first in july 2007, and then in february 2008.

-It happened on a large scale between end 2006, 2007, until beginning 2008. The BOT was buying like crazy the USD… to curb the fall of the USD and minimize the increase of the THB.
The official motto was “Save The Exports”. If the THB increases too much, then exports can suffer (thai products become less competitive).
Let’s remember that during this period of time the USD was CRASHING versus virtually all the currencies in the world.

Here is a first chart, with the total reserves and the exchange rates USDTHB.

botres1

You can see that something happened in march 2008 (the yellow line) : the trend changed. At this date, Thailand scraped the…. capital controls that were imposed in december 2006.

Since then, the situation has reversed ! The USD is gaining strength. And the BOT’s reserves… are going down ! It’s even more obvious if we look at the % of change year on year.

botres2

How can we explain this ? Here are a few ideas (without any order) :

-the BOT doesn’t buy anymore USD… on the contrary, it sells some USD in order to curb its increase, and to support the THB. The BOT tries to manage the trend, at its own pace, in order to avoid a rapid depreciation of the THB. This could explain the “mystery” : many other currencies are falling much more quicker than the THB, versus USD.

-But… but… maybe it’s not so simple. If we believe the BOT, the reserves are composed of “less than 60 % of USD“… Let’s assume that the other 40 % are composed of Euros… Because the Euros is falling versus USD… the total amount of the reserves (expressed in USD ) would… decrease ! Right ?

Of course it’s an absurd example, but you get my point. ๐Ÿ˜‰

-in any case why the BOT is so obsessed by the exchange rate USDTHB ? Because USD is the main trade currency. Who pay in Euro ? The UE countries (10 % of total exports). But the bulk of exports (and imports) are paid in USD of course.

-Now, something bothers many people : a lower THB would boost the exports. And it would be perfect because the dark clouds of a crisis are coming fast. So why the BOT doesn’t allow the THB to depreciate versus USD (following the global trend), like many thai politicians are asking for ?

-well, maybe they want it but they prefer to do it slowly, because they are still afraid of inflationary pressures, what we call the “second round effects” (let’s not forget that until august, inflation was a big problem, with the oil crisis).

-maybe they are afraid… of the amount of imports and the trade deficit. Yes, we have a trade deficit (3,3 billions USD, since january). A lower THB would of course make the problem worse.

-maybe, they were betting on huge spendings/imports thanks to the famous “mega-projects“. To keep the THB strong would have helped.

-maybe they think that if they let the THB go it would be compounded by the natural flows (foreigners are leaving the stock market, therefore they sell THB to buy foreign currencies, and get out of Thailand) leading to a depreciation TOO FAST and TOO STRONG.

-maybe, it’s political. It could sound ridiculous, but the BOT is not really a friend of the current gvt. Tarisa was nominated under the Junta… The current gvt wants to boost the economy with lower interest rates… The BOT has resisted this in the past… They could drag their feets, in order to put the gvt in a difficult position.

-maybe, there is a calendar problem : they’re waiting to cut interest rates, before to let the THB go downward frankly. (An interest rate cut is scheduled for beginning of december, read here).

-maybe it’s just poor analysis. The BOT is a follower. The people at the BOT are conditionned, like all central bankers. They follow patterns. So confrontred to a crisis never seen, they just don’t understand the scale of the problem and continue to apply the same patterns to analyse the situation.

So as you see, the problem is complex. And it’s very difficult to make any forecast (I know you are disappointed ๐Ÿ˜‰ ) because we have too many variables, plus a global environment never seen before.

However, on the short term, I think the BOT won’t resist the temptation to let the THB going down versus the USD. Because exports start to suffer, and it’s going to get worse. Many countries will choose this path.

But after… with the risk of a collapse of the dollar (yes I’m a member of this sect)… plus the political situation in Thailand… it’s impossible to “envision” the thai currency’s future.

Better to buy lottery tickets and light some candles at the temple (as far as accuracy is concerned). ๐Ÿ˜‰

6 Responses to “The mystery of the THB value and the BOT’s foreign currency reserves”


  1. 1 Bangkok Pundit 26 November 2008 at 4:40 am

    Interesting. It seems the government wants to stimulate the economy both with fiscal, but also an expansionary monetary policy. However, the BOT is kicking in its heels on the later. I don’t know enough about expansionary monetary policy in a developing economy. What are your thoughts on the fiscal and monetary policy clash?

  2. 2 ThaiCrisis 26 November 2008 at 6:39 am

    Monetary policy effects ? NIL.

    For the moment…

    Repurchase rate (BOT) is one thing, but the important point is the real rate for people and companies. Much higher (eventhough it’s possible to negociate).
    https://thaicrisis.wordpress.com/2008/11/13/chart-real-interest-rate-and-minimum-lending-rate/

    Currently we are at 3,75 for repurchase. Okay, let’s say they cut to 3. Will it make any difference ? I’m not convinced. First because of lag effect. Then, and that’s the most important point, lend… lend… but to who and to do what exactly ?

    In other terms : why the banks would be willing in the current environment to lend more at cheaper price ? To please the government ? Yeah sure.

    The global economy is going down (although the pace can be different within each country)… but the trend is undeniable. And it seems that it’s going to last… some time.

    In those conditions, the banks won’t lend more and/or squeeze their margins. On the contrary.

    The only good point in Thailand is that the banks are not as fragile as the banks in the US/Europe.

    But in any case, recession times = less. Less consumption, less lending.

    That’s the insanity of the current debate : the politicians worldwide want to AVOID the slowdown. It’s like to say “no” to a hanghover after a night of heavy drinking : you don’t want it, but eventually you have it.

    After excesses, we must pay the bill. A recession is GOOD.

    It allows to cut the rotten trees, heal the wounds, and cure the imbalances of the system.

    Enough of this “dildo” rethoric, shared by the whole freaking planet : STIMULATION, STIMULUS, BOOST, CONSUME, MORE, BAILOUTS, TRILLIONS DOLLARS.

    It’s insane.

  3. 3 paperback 26 November 2008 at 9:55 pm

    Thank you TC for this insightful explanation. I really wondered why the THB’s exchange rate did move in the way it did.

  4. 4 ray 27 November 2008 at 12:16 pm

    the all mighty dollar will collaspe!! as more bailouts are approved the deeper the fall. dont forget the us is in deficit in trillions of dollars.

    they are broke and will be printing money in overtime. and yes it will drag down the world. why? because the us is the biggest customer of the world. they but on credit. imagine yr biggest receivable goes bust. i have personal experience it aint pretty.

    the us is borrowing to lend to the bankrupt financials.throwing good money after bad money. if u have time check out peter schiff and ron paul clips on youtube. they called this collaspe in 2006 and were laughed at by the pundits.

    when people are getting fired all over the usa next year we are going to have alot of defaults of credit card payments. and the 700 billion dollars will not be enough. very few americans have savings. everything is on credit.

    as for thai banks they really dont give a damn about the central bank. i talked to my bank manager and she says the interest rate will be stable or go higher not lower.

    as for lending they have already slowed down since third quater. thai banks dont have to lend to make profit because their spread is so wide, margin is good for profits.

    in us the banks go hat in hand to beg money from the feds here in bkk the central bank have to beg the banks to reduce the interest rates. the could care less.

  5. 5 ThaiCrisis 27 November 2008 at 12:20 pm

    [Ray, could you use blank lines, in order to ease the reading of your comments, thanks. I took the liberty to do it myself on the previous one]


  1. 1 Bling Bling boy and of course more politics - what else? at The FARANG Speaks 2 Much Trackback on 27 November 2008 at 11:07 am

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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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