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Dealers downplay revelation on reserve


DEALERS yesterday interpreted the International Monetary Fund's revelation that the Bank of Thailand may lose US$11.5 billion to $15 billion in international reserves from its outstanding forward foreign exchange obligations as a ''potential reserve outflow" rather than ''outright financial losses".

AP-Dow Jones reported Hubert Neiss, the IMF's Asia-Pacific director, as saying from Singapore that the Bank of Thailand may lose about half to two-thirds of its $23.4 billion (Bt796 billion) outstanding forward foreign exchange obligations over the next two months due to its failure to defend the baht. This figure initially shocked most people, who thought the entire amount was lost.

But dealers said it is impossible that the BOT had lost $11.5 billion to $15 billion from its forward contracts because during the period running up to the baht devaluation on July 2, the BOT's cost of defending the currency was at around Bt26 to Bt28 per dollar.

''The speculators who snapped up the contracts from the BOT would still need to deliver the baht at Bt26 to Bt28 per dollar to the BOT when the settlement is due," said a dealer at a foreign bank. ''Now the baht has depreciated to Bt34, so we may say that the BOT ends up losing about Bt6 for every dollar it has spent to defend the baht.

''I would suggest that the $11.5 billion to $15 billion in foreign exchange losses, as indicated by the IMF, should rather be interpreted by the potential outflow of reserve."

On Tuesday, Bank of Thailand governor Chaiyawat Wibulswasdi told the Cabinet that the baht defence had incurred losses to the BOT of not more than Bt100 billion. This figure, dealers said, should be the actual loss once the forward contracts are settled over the next 12 months.

The $11.5 billion to $15 billion in potential outflow is possible because the BOT, which came under tremendous pressure to bolster domestic liquidity and to defend the integrity of the fixed exchange regime, artificially built up its reserves by spending the baht from its coffers to buy up the dollar. Sources said the BOT did so at the beginning of this year after capital had begun to flow out of the country, hence putting pressure on liquidity and the baht.

In its dual role to improve domestic liquidity and to prop up the baht, the BOT bought the dollar in the spot market, using the baht from its coffers. It then sold dollars for baht in the offshore forward markets to square its foreign exchange positions, thereby bolstering the value of the baht. The higher reserve cushion, albeit artificially built up, would also make it possible for the BOT to print money into the system.

This ''off-balance sheet" activity soon grew in size and became longer in maturity to cope with the growing liquidity crunch in the financial system.

The BOT said its foreign exchange reserves stood at $37.3 billion in April, $33.3 billion in May, $32.4 billion in June and $30 billion in July. This steady decline reflected the cost of defending the baht in the balance sheet that the BOT was willing to report.

But dealers said these figures had not taken into account the off-balance sheet activity, which could have been gigantic.

''The BOT said as of Aug 19 it had outstanding forward obligations of $23.4 billion over the next 12 months. However, before that, it could have much larger forward obligations that nobody except the BOT would know about," the dealer said.





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