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Baht hovers as Fed, BOT pull in opposite directions 

July 22, 2000

HAS the US Federal Reserve Board's tightening cycle come to an end? If it has, it will be good news for Thailand as well as for other emerging markets which have tended to perform rather poorly during the Fed's tightening process.

August 22 will feature prominently on Thailand's calendar, as this is when the Fed will meet for the last time under the Clinton administration to determine monetary policy. It is still uncertain whether the Fed will once again nudge up its short-term interest rates, having done so six times since June last year.

In his testimony to the Senate banking committee on Thursday, Alan Greenspan, the master of ambiguity, said it was "much too soon to conclude" that inflationary threats have receded, implying that Fed officials will continue to study economic data before deciding whether to raise the rates again on August 22.

But after August 22, any uncertainty about interest rate movements will be removed until after the US elects its new president.

If US rates are kept unchanged, it will apply less pressure on the interest rate differential between the US dollar and the baht. Several research houses have already suggested the baht will slip to Bt41-Bt42 to the dollar.

It also implies that the Thai authorities are willing to let the baht fall, diverging from the previous trend which saw the baht holding at Bt37-Bt39 for quite a long period. 

Bank of Thailand governor MR Chatu Mongol Sonakul is pursuing a monetary policy in the opposite direction to Greenspan. Last week, the monetary policy committee of the Thai central bank decided to keep its 14-day repurchase rate unchanged at 1.5 per cent, suggesting that Thai monetary authorities are continuing to pursue an expansionary monetary policy to accommodate the economic recovery.

In attempts to boost the economy, the M1 money supply continued to expand at 7.5 per cent year-on-year in May after 15.7 per cent year-on-year growth in April. This monetary expansion policy is being pursued despite credit demand remaining sluggish. This suggests a desperate attempt by the Thai authorities to keep the fragile recovery on course.

It also implies that the Thai authorities are willing to let the baht fall, diverging from the previous trend which saw the baht holding at Bt37-Bt39 for quite a long period. As MR Pridiyathorn Devakul, president of the Export and Import Bank of Thailand, has suggested, the exchange rate of Bt40-Bt42 to the dollar is rather appropriate for the Thai economy, helping the export sector while deterring imports.

Greenspan's concerns and Chatu Mongol's concerns are different. The real sector of the US economy is exceptionally strong, buoyed by a record rise in productivity made possible by the IT revolution. The US financial system is also very strong, having gone through a period of consolidation and restructuring. The only problem is the uncertain nature of the stock market bubble, which has translated into the "wealth effect" and subsequently higher consumer spending. This has fuelled price increases and created jobs, tightening the labour markets.

If Greenspan can tame the US stock markets without bursting the bubble and succeed in bringing the US economy to a soft landing, he'll go down in history as one of the greatest monetary policy-makers of all time. If the US economy remains strong, global economic growth will also expand in a healthy manner, thus supporting Thai exports.

Meanwhile, Chatu Mongol is confronting a more aggravating set of problems. The Thai banking system is in shambles. The capital market is not functioning. Thai assets are worthless. And banks are sitting on Bt1.2-Bt1.5 trillion of bad assets, equivalent to 24-30 per cent of the GDP, that are unrestructurable and therefore candidates for liquidation, according to Merrill Lynch Phatra Securities Co.

Quick liquidation is likely to be constrained by the legal infrastructure and lack of political will - not to mention the social implications of widespread bankruptcies, as most of these bad loans are tied to personal guarantees. Only government assets or a small number of blue-chip companies are of some value.

But these problems won't unravel until Thailand goes through its next election before the end of this year, to clear any political uncertainty. This is another key domestic factor weighing down on Thailand.





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