The Bank of Thailand is expected today to announce massive losses of about Bt360 billion from its general account in 1997 as a result of its build-up of US dollar liabilities to defend the baht, sources said.

However, the currency reserves account, which backs up the baht issue in the market, would post huge profits from foreign exchange gains, they said.

Governor Dr Chaiyawat Wibulswasdi is scheduled to chair a Court of Directors meeting today at which the annual report of the central bank will be approved after the auditor-general has gone through its books.

For the first time in its history, the BOT will report losses from its general account for 1997, a year that saw the free fall of the baht from Bt26-Bt27 to the US dollar to Bt47 by year-end. Since the central bank's general account had about US$18 billion in foreign exchange swap obligations as of 1997, it is safe to assume that this account would post losses of at least Bt360 billion ($18 billion multiplied by Bt20).

The amount of gain for the currency reserves account, which received US dollars from the general account as a result of an accounting trick to back up the note-issuing, is not known. This account, however, should post significant foreign exchange as well as interest gains from pumping the baht into the system.

The BOT manages two separate accounts -- the general account and the currency reserves account -- while the Exchange Equalisation Fund, set up as an legally independent body from the central bank to manage the exchange rates, runs its own EEF account.

In a gruelling defence of the baht last year, central bank officials juggled with the general account, the currency reserves account and the EEF account for the dual purpose of keeping the baht stable and improving liquidity in the money market.

When the baht was attacked in the spot market, the EEF, which acts as a window for foreign exchange intervention, intervened by selling US dollars to shore up the baht and prevent interest rates from shooting up.

Fearing that its reserves would drain significantly from the attack and cause panic among the investors, the BOT entered into foreign exchange swap contracts, from its general account, to rebuild its reserves. Through this tactic it bought US dollars and sold the baht with an obligation to deliver the dollars and get the baht back at some future time, say three months.

The US dollars in the general account, received from the swap contracts, were transferred for booking in the currency reserves account, which required a minimum $16 billion at all times to back the bank notes worth Bt400 billion in circulation at the time.

By law every baht printed into the system must be backed by reserves of 60 satang. In practice, however, the BOT tends to be conservative, matching every baht it pumps into the system by a 100 per cent reserve back-up.

Yet the costly intervention of the baht drained the reserves below the minimum limit, forcing the Banking Department to create a smoke-screen to cover the BOT's reserves position.

As of Feb 13, 1997, the BOT had free reserves of $21.32 billion in the Note-Issuing Department, $690 million from the EEF and $4.59 billion from the Banking Department (the general account).

Scrambling to rebuild reserves from the loss of US dollars fired out in defence of the baht, the Banking Department bought back the dollars by selling the baht in swap contracts whereby it could delay settlement until a future date.

Since the swap contracts were liabilities, the reserves the BOT got from this transaction were considered borrowed reserves. As of the same period Feb 13, 1997, the BOT posted borrowed reserves of $11.45 billion from the swap contracts and another $600 million from the repurchase contracts.

Financial experts said that in theory, the profits and losses of the BOT mean nothing because the institution has a far more important role to play in defending the integrity of the financial system as a whole. However, the mistake BOT made was that, through a series of mishaps and capital outflow, it created liabilities with swap contracts, combined with the capital outflow, until the BOT's free reserves hit a rock bottom of $1.34 billion in July-August before Thailand was forced to seek a bailout from the International Monetary Fund.