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Baht REER just an index, say officials


April 21, 1999 -- BANKING officials have argued strongly that no matter what base rate is used to calculate the real effective exchange rate (REER) of the baht, the result is still the same.

This follows a remark by Dr Supachai Panitchpakdi, deputy prime minister and commerce minister, that the Bank of Thailand should scrap the June 30, 1997, base used to calculate the inflation-adjusted baht value compared with neighbouring currencies, because at that time the baht was already overvalued. His point was that to rely on the base rate of the overvalued baht, quoted at Bt25.79 to the US dollar on the last official trading day before the baht was floated, would result in a misreading of the real value of the baht.

But banking officials say the REER, which measures the inflation-adjusted baht against the inflation-adjusted currencies of Thailand's competitors, is simply an index, which by itself does not have any meaning. To use any base rate, they argue, produces exactly the same result.

''For instance if we start from point A at 50 to point B at 60, we get a growth rate of 20 per cent, and if we start from point A at 100, point B has to be 120 to get the same growth rate of 20 per cent,'' a banking official said.

According to a Bank of Thailand report to the Cabinet yesterday, the REER of the Thai baht was 17.5-per-cent weaker than those of competitor currencies as of April 5, 1999, using June 30, 1997, as the starting base rate. Although this competitiveness had been eroded from 22.2 per cent in June 1998, the baht had depreciated significantly compared to the period between 1990 and 1994, when it was only 6- to 7-per-cent more competitive than neighbouring currencies.

At the end of June 1997 the baht, which had been pegged to the US dollar since 1984, appreciated by about 8 per cent against neighbouring currencies in an uptrend that started in mid-1995, when the dollar began a rally against the yen. Since the baht was pegged to the dollar, it depreciated against the dollar but rose against some 20 other currencies in the index. The higher value of the baht in real terms, coupled with the structural problems of the Thai export industries themselves, led to an attack on the baht on the assumption that the authorities would need to devalue the baht to jump-start exports and turn the economy around.

From a REER of about 108 per cent (overvalued by 8 per cent, with 100 per cent as the equilibrium) in June 1997 to a REER of 82.50 (undervalued by 17.50 per cent) on April 5, 1999, the competitiveness of the Thai currency could be quantified at about 9.50 per cent (17.50 per cent minus 8 per cent).

Despite the significant depreciation of the baht, there have been calls from other local economists, such as Dr Virabongsa Ramangkura and Dr Kosit Pampiemras, for the Thai banking authorities to pursue a more ''appropriate'' foreign-exchange policy to boost exports, which are the engine of the economic growth and account for about 45 per cent of Thailand's gross domestic product.

Although export volume has increased steadily, the dollar value of exports contracted by 6.6 per cent last year. In the first two months of this year exports dropped 5.4 per cent compared to the same period in 1998. A preliminary estimate put the export figure in March at a growth rate of 1.5 per cent, making the overall exports in the first quarter of this year fall by 3 per cent. This was a stabilised rate compared with a fall of 10 per cent in the final quarter of 1998.

The message from the Bank of Thailand is that the export slump is caused largely by weakness of demand from Thailand's trading partners and the foreign-exchange rate issue is simply a secondary factor.

Its report clearly stated that assuming a baht weakness of another 10 per cent and all the other competitors' currencies remaining unchanged, the REER of the baht would drop 8.4 per cent, which would improve export value in dollar term by only 2.5 per cent.

It said a weaker baht would not help Thai exports because of weakness in demand from importing countries, and since the Thai exports, particularly in the automotive and electronics industries, contained 80 per cent imported materials, the weaker baht would drive up the cost of imports, so that the baht's weakness might trigger another round of competitive devaluations as neighbouring countries needed to maintain their competitiveness.

The central bank's report also pointed out that the export slump since 1996 could be traced largely to the loss of competitiveness of Thai industries, which had yet to undergo a wholesale restructuring. With the benefit of the weaker baht, it said, there is also less incentive for the export industries to restructure and improve their productivity.




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