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BOT remains opposed to devaluation


Even if the Bank of Thailand is forced at gun point to devalue the baht, it won't, Thanong Khanthong explains.

THE last thing on earth the Bank of Thailand will do is devalue the baht. The foreign currency speculators who have been challenging Thailand's sovereignty by attacking the Thai currency from offshore understand perfectly the BOT's position, yet they have continued to spread false rumours of a possible baht devaluation.

The BOT cannot come out every day to deny it will devalue the baht. Understandably, Thai investors, who have witnessed a meltdown of their assets in the stock and property markets, are caught in a nerve-wracking situation where the slightest rumour will scare them off. Yet they have no choice but to have faith in the BOT's ability to withstand the assault against the baht and to restore confidence in the Thai currency.

Why do the foreign currency speculators, who are riding on the back of the dollar's rally, continue to spin talk of a baht devaluation from their rumour mills?

Simple enough. They have bought forward positions by selling the baht short for the US dollar, with settlements due at a specified time in the future. Backed by their seemingly academic research which of course questions the government's ability to restore the country's macroeconomic stability the speculators spread the devaluation rumours to scare off the markets.

Then panic moves onto the scene. This drives up the premium of currency swaps, the speculators just unload their forward positions say, US$100 million, US$200 million or US$500 million to pocket the premium profits by as much as Bt30-Bt50 million in a single transaction.

The currency speculators, most of whom are in their late twenties, thirties or early forties, do not care if the Thai economy collapses if the baht is knocked to its knees because they are in the business of making money and then moving away to other markets after their mission is accomplished. It is exactly this kind of behaviour by foreign speculators that Dr Amnuay Viravan, the finance minister, vehemently denounced last Thursday during a radio broadcast.

The Singapore authorities won't allow speculators to get their hands on the Singapore dollar and speculate against it. Malaysia has also blacklisted speculators who have set out to hurt the ringgit. Thailand is so free a country as to allow baht speculation to the point that its sovereignty is being breached.

Why is baht devaluation kept off the BOT's agenda? The answer is that a baht devaluation is a prescription for financial disaster on the scale of the Mexico financial crisis. Mexico devalued its peso in late 1994 by 10 per cent but the financial markets said 10 per cent was not enough so they dragged the currency down further, by 50 per cent, at the height of the turmoil. The baht would suffer a similar catastrophic fate if the BOT devalued it.

There were stupid remarks among some ignorant people in financial circles that the baht should be devalued to Bt27 to the dollar, otherwise it might tumble to Bt30 per dollar. Were the BOT to devalue the baht now by 15 per cent, would the markets be satisfied? Definitely not. They would simply say thank you and then dump the baht further to Bt45 or Bt50 per dollar.

The spectre of a baht devaluation would not only drive inflation up sky-high but would also send interest rates to the stratosphere. In the case of Mexico, inflation shot up to 30 per cent following the peso devaluation and the government was forced to peg interest rates at 50 per cent to keep capital in the home market.

The spill-over effect of a baht devaluation would cost hundreds of thousands of jobs in the country. Workers from the bankrupted factories in Samut Prakarn and neighbouring Bangkok regions would take their welfare demands to the streets and create political and social turmoil. More than half the financial institutions in the country would go bust.

Thai corporations now account for about 87 per cent of the country's total external debts of US$89-US$90 billion, or Bt2.34 trillion which is around 50 per cent of the gross domestic product (GDP). At a time when they are already having a tough time servicing their interest burdens, a devaluation would hit Thai companies as the last straw on the camel's back.

A local mutual fund manager, who disagrees with the idea of devaluation, said: ''This year's pre-tax profits of listed companies on the Stock Exchange of Thailand are expected to reach Bt160 billion and a devaluation by two or three baht would more than wipe out the entire corporate profits in the stock market."

Nor is devaluation a cure to the current economic ills. For example, Thai electronics exports depend heavily on imports of semi raw materials for assembly, so they end up with only a small value-added component. Thai footwear and textile exports have already lost out to Indochina and China.

There is not a single reason in support of devaluation at this point. The last time the baht was devalued, in 1984, the currency fell to a record Bt27 to the dollar before climbing back to the Bt25 per dollar range. Now the baht is testing the Bt26 to the dollar range, yet it still has a long way to go before reaching Bt27 to the dollar.

By the way, the BOT still has almost US$40 billion in international reserves to defend the baht. This amount is equivalent to 6.5 months of import cover.

By fiercely defending the baht, the BOT is buying time until confidence in Thailand's macroeconomic stability is restored. Amnuay should be given credit for his fight for a radical cut of Bt99 billion in the 1997 fiscal budget, which will result in a narrowing of the current account deficit to slightly more than 7 per cent of the GDP.

Bringing down the current account deficit the gap between domestic savings and investment demand would send a convincing signal that Thailand is willing to live within its means. Without drastic fiscal spending cuts, disaster will strike the economy, for Thailand can no longer afford to spend borrowed money as in the past due to the sharply slowing economy and the seemingly unsustainable external debts.

Under the circumstances, the only sensible policy around is to reduce the aggregate demand in the economy to bring economic growth down to a more manageable level. Dollar-sensitive imports must be curbed, public sector spending radically cut, and private consumption drastically reduced.

A sharp slowdown in imports should automatically narrow the current account deficit. Inflation will be a dead issue this year thanks to a sharp fall in demand and the high interest rates aimed at protecting the baht and attracting capital inflow.

With the economy heading for a hard landing for the second time in a row this year, one can expect the economy to grow in the five per cent range. Forget the earlier 6.8 per cent projection.

Once all the economic destabilising factors, including the uphill task of cleaning up the bad debts in the financial institutions and the property companies, have subsided, only then will Thailand win back confidence. Then there won't be a reason to attack the baht.

By that time the window of opportunity will be open for the Thai banking authorities to unpeg the baht from the US dollar-dominated basket of currencies. ''If the BOT is forced to the rope, it will opt to float the baht rather than devalue it, but that is the last thing it would do," said a foreign exchange expert.



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