The 122 billions USD question : should Thailand use its foreign currency reserves ?

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.

First, if you don’t know what are the Bank Of Thailand reserves, read the official definition and my article.

(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.

Exchange rate
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.

At 34 THB for 1 USD, exporters, businesses are already complaining. They all want a weak THB, to (artificially) boost their income (it’s the “beggar thy neighbor” policy, read my article here)

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 ๐Ÿ˜‰

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).

8 Responses to “The 122 billions USD question : should Thailand use its foreign currency reserves ?”

  1. 1 Fonzi 26 June 2009 at 5:40 am

    I agree with your analysis.

    Theoretically, I see no problem with it, but handing billions of dollars to Newin and company to steal the country’s foreign reserves would be the biggest con in the history of Thai politics–and there have been some huge cons.

    I don’t know if you caught it but Abhisit went hat in hand to China begging for billions from the Chinese to develop Thailand’s infrastructure.

    Ironic, isn’t it, Abhisit goes into nationalist epileptic fits over Arabs owning Thai rice fields, but welcomes Chinese ownership of Thailand’s infrastructure.

  2. 2 antipadshist 26 June 2009 at 5:55 am

    Olarn: Weakening baht key to growth

    … every 1% decline in the value of the baht would help create 50,000 new jobs and boost economic growth by 0.14 percentage points, he said. Inflation would also increase by 0.2 percentage points, as the cost of imports increase in local terms.

    Dr Olarn said a weak baht policy would increase the cost of energy in local terms, but the government could choose to reduce oil taxes to lessen the impact on the public, although this policy could potentially widen the budget deficit.

    well, at least he is honest about inflation.

  3. 3 ratherbefishing 26 June 2009 at 8:01 pm

    Why not start using reserves to acquire access to strategic commodities, such as oil. The chinese have been very good at this game…

  4. 4 George P Tuckeer 26 June 2009 at 11:34 pm

    I’ve said it before: buying US treasuries is money down a black hole, because you can never actually sell a significant amount once you’ve bought it.

    On the other hand, Dollars earned from exports and tourism have to be recycled by buying something from the US. Buying treasuries was the wrong choice.

    The strengthening of the baht over too short a period would cause more problems and unemployment than spending the money would solve.

  5. 5 Charles 27 June 2009 at 9:51 am

    The dollar is a floating cadaver in the water. I’d stay well away from it and we can come back to this comment in a year or so because the only thing that hasn’t squeezed it off the default currency is that China isn’t brave enough. They only copy systems and have little success creating their own. But they will when the shame of buying more junk debt dawns on the Congress and the people. Just a matter of time.

    I’ll be here in that time so you can call me out on it if it hasn’t happened.

    Oil prices may well precipitate the collapse.

  6. 6 Lothar 27 June 2009 at 7:03 pm

    The majority of money they are getting from exports or tourists are not dollars (thats only around 25%). So they were changed Pound Sterling and Euro notes into treasury trash.

    And they are still doing so because even if much smaller they have a trade plus right now.

    For the question about the bonds. I agree with TC that it is critical because of the corrupt political system. With a well running government i would say: Lets go dump this green toilett paper.

  7. 7 antipadshist 28 June 2009 at 1:41 am

    now, here comes the real part of Abhisit’s visit to China :

    Chinese seek greater say in Thai banks

    I wonder though : don’t they already ? ๐Ÿ˜‰
    (coz anyway most if not all local bankers are ethnic chinese)

  8. 8 George P Tuckeer 28 June 2009 at 4:44 pm

    The Thai reserves aren’t all in Dollars. Though you’re probably right that they’re converting some of the other currencies earned into Dollars. God knows why they would do that. Perhaps they believe this pathetic pissing into the wind will help keep the Dollar a little stronger.

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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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