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Pegged baht wrong for Thailand


While Thailand will not adopt a currency board regime, it must still find a way to make the baht more stable, report Thanong Khanthong and Vatchara Charoonsantikul


WHILE Indonesia is seriously pursuing the idea of adopting a currency board regime, Thailand has ruled out the prospect of pursuing that risky path. On top of this, the Thai authorities have gone all out to present a strong case that Thailand is in no way in a similar position to Indonesia.

Finance Minister Tarrin Nimmanahaeminda Monday informed the Council of Economic Ministers that he would not recommend a currency board system, effectively laying to rest speculation that Thailand might consider fixing its currency again, this time through a more rigid system that has been adopted by Hong Kong, Argentina and a handful of newly-born states in Eastern Europe.

A currency board system essentially pegs the local currency to the US dollar, or other hard currency, at a fixed exchange rate. Any local notes issued must be backed by the equivalent amount of foreign exchange reserves. This effectively makes central banks obsolete because monetary policy is determined by capital inflows and outflows.

By backing the currency board system, Indonesia is desperately attempting to create a floor for its plummeting rupiah, which has lost more than 75 per cent of its value since July of last year. However, given the depth of its financial crisis, it is doubtful that Indonesia would succeed in convincing the financial markets with its controversial plan to use a currency board, which could peg the rupiah to, for example, 5,000 against the US unit.

Initially, the currency board system would have to be backed by massive reserves and interest rates would also have to be kept sky high to encourage holdings in the local currency. It would be a true test of political will to follow through with this system.

But since Indonesia is already facing a presidential crisis, not to mention social unrest, the odds are that it would fail miserably if it were to launch a currency board. The IMF's reading is that Indonesia will not succeed in this big gamble, which is likely to create further panic by driving Indonesians and corporates to go for the safer currency -- the US dollar.

And that is why the IMF's managing director, Michel Camdessus, has threatened to withdraw the US$40-billion support programme for Indonesia if the embattled President Suharto decides to go ahead with the currency board. Since the international financial markets have been trained to look for the IMF's signal, it would be a no-win situation for Indonesia to go astray from the IMF's financial and economic reform programme.

In Thailand, debate over the currency board system has been limited because the idea is exotic and the risks are high. ''If we were to adopt the currency board system, interest rates would initially skyrocket to 200 per cent. Could we hold on to this?'' Thanasak Chandrarovat, director of the Bank of Thailand's Banking Department, recently said.

Another senior central bank official, Siri Garncharoendeee, did not like the idea at all, saying: ''I personally don't think the currency board system is useful, for it aims to fix the baht at a certain level when in fact its exchange value will be determined by economic fundamentals''.

Hubert Neiss, the IMF's regional director for Asia-Pacific, also said last week that things were improving for the baht due to Thailand's ability to satisfy the IMF's support programme and a restoration of confidence, and that there was no need to alter the foreign exchange system. ''The trend is encouraging, but we have to see more before making a judgement. If the trend continues, Thailand will not have to make any changes in its currency exchange arrangement,'' he said.

Asked whether the currency board would work for Indonesia, Neiss cautioned that it was a two-part question. ''Because, if at any time anybody can exchange the baht for the US dollar at a fixed exchange rate, there would not be an exchange, that is, if they believe the system works. The rupiah is then worth as much as the baht. This is a risky system.''

Why then, did Indonesia propose the system? ''There is a chance this could put an end to inflation, and depreciation if it worked perfectly. This is only a judgement,'' Neiss said.

The rupiah has recently dragged down the baht in a contagion effect, even though fundamentally, Thailand is sounder than Indonesia. Central bank governor Chaiyawat Wibulswasdi has urged investors to differentiate between the baht and the rupiah. He said a strong support level for the baht was at Bt45-Bt48 against the greenback.

''Any reaction to developments in Indonesia is likely to affect us as well, but I still want to ask the markets to differentiate between the two countries,'' he was quoted as saying.

But other financial experts warn that a floating exchange rate system is not appropriate for Thailand because the baht will never easily attain an equilibrium. ''Somehow, they must find a way to re-fix the baht, otherwise it will keep on floating,'' one expert said. Another banker was quoted as saying that since the baht was managed under a float system, it could theoretically float to Bt60 or Bt70, or Bt100 -- or to any level it likes.



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