July 13, 2001
Though his appointment was in late May, MR Pridiyathorn Devakula might need a bit more time to really settle down into the governorship of the Bank of Thailand. He had been a dealmaker throughout his commercial banking career. Now, as a top central banker, his role is to formulate monetary policy and guard the stability of the financial system.
Pridiyathorn has yet to go through a self transformation into a bona fide central banker. But he really does have the willpower.
He was picked as governor by Prime Minister Thaksin Shinawatra through the virtue of his pragmatic skills and easy personality. Unlike his predecessor, MR Chatu Mongol Sonakul, who was recognised as an organisation man, Pridiyathorn is known more as a practical man.
Neither is a firstrate economist. Chatu Mongol is an engineer, while Pridiyathorn is an MBA type. Chatu Mongol spent most of his career at the Finance Ministry before becoming central bank governor in mid1998. During his three-year tenure, in spite of his difficult personality, he rebuilt the reputation of the central bank.
Chatu Mongol was credited for bringing down interest rates in August 1998 without sacrificing foreign exchange rate stability. Apart from modernising the central bank and creating more transparency in the way it was run, Chatu Mongol should also be held in high regard for his contribution to corporate debt restructuring. Through the process of the Corporation Debt Restructuring Advisory Committee, corporate debt, which peaked at 47 per cent of total debt in the banking system, has fallen substantially.
After clashing with the Thaksin government over a series of policy differences, Chatu Mongol lost his job. It was widely reported that the prime minister fired him because of what became known as the “email affair”. Chatu Mongol was branded as acting uncentral bankerlike by sending an email to institutional investors worldwide to lobby for their support of his continuing low interest rate policy. At that time, the prime minister and his advisers viewed that shortterm interest rates should be raised to stem capital outflow or to deter a currency arbitrage arising from the discrepancies between domestic and offshore interest rates.
It emerged that the real reason behind his dismissal was even more serious. In late May when the IMF mission was visiting Bangkok, Chatu Mongol was alleged to have tried to mobilise the IMF officials to his cause by asking them to lecture the prime minister on the central bank’s independence. That was a crime liable for capital punishment.
Pridiyathorn, who started his banking career at Thai Farmers Bank, was eager to take on a higher profile role as central bank governor because his seven years at the Export and Import Bank of Thailand were no longer a challenge. As an expert in the foreign exchange market, he had witnessed currency arbitrage and felt uneasy about capital outflow. Foreign banks took advantage of the low baht interest rates by entering into currency swap contracts to get cheap baht funding for their lending. Part of the baht acquired through the swap contracts could also be used for currency speculation.
This was probably in his mind all along. Pridiyathorn also had support for the unorthodox macroeconomic view of Virabongsa Ramangkura. Virabongsa views that baht interest rates, which were well below US dollar rates, should be raised to stem capital outflow or otherwise macroeconomic stability could never be achieved. Without macro-economic stability, the economy would never recover.
So no sooner had Pridiyathorn settled into the job than he nudged up the 14day repurchase rates by one full percentage point. This controversial monetary tightening is a big gamble to achieve greater baht stability at the expense of economic recovery. The policy shift has effectively turned Thailand into the first country in Asia to raise interest rates since the 199798 crisis.
The rate hike was his doing alone. Most of his staff tried to distance themselves from the policy shift, which they did not support. So they would like to make it clear that the rate increase was the work of the governor so that if anything goes wrong they should not be blamed. They have learnt from a dear lesson. In 1997 all central bank staff were blamed over the baht crisis, although only a small circle of officials were involved.
Pridiyathorn did not handle the PR well enough with his rate hike, which might be good from the macro viewpoint. The bond market plunged into a collapse not from that single rate increase but from fears of higher rates to come. It was a fiasco as far as Pridiyathorn was concerned. The prime minister’s daily comments on interest rates and currencies further fuelled confusion.
Pridiyathorn’s second blunder was his comment that he would watch the financial markets for two months to see how the rate hike worked. If it did not work, he would be willing to change his policy. By sending a signal about his target, Pridiyathorn violated a practice of central banking. For monetary policy should be treated as a tool – not a target.
Most recently, Ammar Siamwalla, the respected economist, criticised him for speaking out too openly about the exchange rate movements. His frequent comments kill the element of surprise in the financial markets. Ammar would prefer Pridiyathorn to become more economical with his words on exchange rate movements like Chatu Mongol.
Looking down the road, there is a threat of greater macroeconomic stability due to growing pressure on the country’s current account or the deteriorating trade balance. If the baht fails to cling to 45 to the US dollar, it can quickly jump to 48. Maybe Pridiyathorn might have to alter his target of more sustainable exchange rates at a level he would like to defend. And of course he can always do it quietly.