BOT admits forex market intervention
April 6, 2001
AS if in a middle of a poker game, MR Chatu Mongol Sonakul has admitted to playing a bluff hand.
The Bank of Thailand Governor surprisingly admitted publicly yesterday for the first time that the central bank had intervened in offshore foreign-exchange markets to stabilise the baht.
Under a floating exchange-rate system, the central bank seldom defends the currency. If it is forced to defend the baht, it will only do so in a very precarious situation. The action must be decisive, and the outcome effective. The situation was indeed precarious on Tuesday, the first day of Prime Minister Thaksin Shinawatra's trial in the Constitution Court.
On the day, the baht was losing value in a hurry, hitting Bt45.40 to the US dollar. If nothing had been done, the baht would have broken through the resistance level of Bt45.60 to the dollar. Then the next target would have been difficult to contain.
Market players believed the central bank stepped into offshore markets on Tuesday to stabilise the baht, which managed to close at Bt45.25-Bt45.30.
Chatu Mongol declined to cite the amount the central bank spent in the intervention, hinting only that the amount was not that large. It was poker game because the financial markets know the central bank does not have ample reserves to spare.
As of March 30, central bank reserves stood at US$32.3 billion, compared with US$32.6 billion a week earlier. If all the debts are offset, net reserves stand at around US$15 billion. By law, the central bank is required to maintain at least US$10 billion at all times to back the baht in circulation. That leaves the central bank only US$5 billion at its disposal. But in the floating-exchange rate regime, the central bank won't lose its reserves from a need to defend the exchange rate if it keeps those reserves tightly in its pocket.
However, Chatu Mongol admitted that intervention to stabilise the baht took place both in the spot and swap markets. In the spot market, where transactions take effect immediately, the central bank sold the dollar for baht. By doing so, it lost dollars from its reserves. But it succeeded in sucking the baht out of the market and at the same time giving the big market players, who would like to sell the dollar for baht, some breathing room to unwind their positions.
Baht interest rates rose as a consequence because there was less baht in the market. Short-term baht interest rates in the Singapore market have shot up dramatically to more than 16 per cent for a one-month deposit. The implication is that it would be costly to borrow the baht to speculate against it, unless the market players bet that the baht value would sink substantially beyond the borrowing cost.
In the foreign-exchange swap market, where transactions made today are due for settlement at a certain time in the future, the central bank aimed to get the dollar back from its spot market intervention. It did so by selling the baht for the dollar with obligations to buy back the baht and deliver the dollar at a certain time and specific rate in the future.
As a result, the forward rate for borrowing the baht in the futures market has also risen. A one-year forward premium is now quoted at Bt2.50. At a spot rate yesterday of Bt45.30, the baht/dollar exchange rate for settlement over the next one year is quoted at Bt47.80.
Buoyed by the stronger yen, the baht eased yesterday to Bt45.24-Bt45.27 after peaking at an intra-day rate of Bt45.48.
The baht has had a tough time in recent weeks. On February 2, the currency was quoted at Bt42.15 to the dollar. Yesterday it closed at Bt45.21. Losing more than three baht in slightly over two months is a big drop for the Thai currency.
The prime minister's acknowledgement for the first time yesterday that he might lose his Constitution court hearing after his defence team's 'poor showing' added to financial market concerns over stability of the Thai political scene. Thaksin said if he were to leave office, there would be someone to replace him. But the future of the country would be plunged into great uncertainty.
Dealers said financial markets have been concerned over the country's rising public debt, the high level of bad loans, the deteriorating trade balance, and the export slowdown. Adding the political uncertainty over Thaksin's trial has further soured sentiment for the baht to fall further.
However, the central bank has largely refrained from intervening in the foreign-exchange market to prop up the baht. This can be detected by the weekly announcement of central bank's foreign exchange reserves and net forward obligations.
Net forward obligations in the foreign-exchange market stood at US$2.2 billion as of March 30, a rise from US$2.1 billion on March 23. These figures have slightly changed, implying that the central bank rarely makes an intervention.