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Fear, rumours, paranoia and the baht

Offshore baht trading in Singapore is putting tremendous pressure on the baht's stability, Thanong Khanthong explains.


Some US$10 billion (Bt250 billion) in offshore baht trading in Singapore sent a shockwave through the Thai foreign exchange market last Thursday, sending the baht plunging to a five-year low against the greenback as currency speculators played on fears of a baht devaluation by dumping it down to Bt26/$1. The $10 billion figure was an estimate by a Bangkok-based currency dealer, who said offshore baht trading in the island republic is twice as large as the Thai foreign exchange market and is putting tremendous pressure on the stability of the Thai currency. Singapore's forex market is about 14 times larger than Thailand's. ''If you let me guess the amount of offshore baht trading that flowed into Thailand from Singapore last Thursday, I would put it at $10 billion. The amount was gigantic and might scare people off," the currency dealer said.

The Thai baht has been coming under sporadic attack. Currency dealers in Singapore are increasingly taking speculative aim at the baht, the confidence in which has been shaken by deteriorating macro-economic conditions.

There are about 10 major baht players in Singapore. They are the Bank of America, Chase Manhattan Bank, Citibank, Standard Chartered Bank, Banque Indosuez, Deutsche Bank, Hong Kong and Shanghai Bank, JP Morgan, Bankers Trust, NatWest Bank and the Union Bank of Switzerland.

The volume of offshore baht trading has grown significantly over the past four to five years following Thailand's move to liberalise trade, investment and the financial sector. This liberalisation has allowed the baht to flow freely out of and back into the country, beyond the jurisdiction of the Bank of Thailand.

The hectic pace of offshore baht trading last Thursday illustrated how vulnerable Thailand is to an attack on its currency. With the stock market heading for a free fall, the collective wisdom of foreign currency speculators said that something was fundamentally wrong with the Thai economy.

There were even rumours about the deteriorating asset quality of Finance One Plc. The Bank of Thailand was set in the afternoon to release its monthly statistics for December, which should give a more complete picture of the Thai economy in 1996.

As it turned out, there was confusion over the interpretation of the key economic data, particularly the current account deficit and international reserves. At 2.39 pm, the currency speculators that wanted to sell the baht all along, began their attack against it.

In the morning, the Bank of Thailand's Exchange Equalisation Fund (EEF) fixed baht/US dollar trading at a mid-rate of Bt25.87. This meant that the EEF would sell the dollar at Bt25.85 and buy it at Bt25.89 a two-satang differential in either direction.

As a normal practice, the deal date for a currency transaction is two working days. In this particular case, the deal date for the Thursday transactions was Feb 3, a Monday (Saturday was a holiday). The swap point, derived from calculating the short-term baht interest rate (15 per cent or more) and US interest rate (5.5 per cent), was four satang.

So the ceiling for the baht/US dollar settlement should have been Bt25.93 (the BOT's buy rate of Bt25.89 plus four satang). Yet the devaluation rumours circulating among currency speculators and the panic it caused, sent the baht nose-diving to Bt26/US$1 seven satang higher than the ceiling. The objective of the speculators was to force the baht down (short on Thai baht and long on US dollar) and then buy it back later for profits.

(This type of situation is commonly seen in the European Monetary System, where currencies are floated against a basket of currencies until specific limits are reached. Attacks occur when major external forex players think that a currency is overvalued and can no longer be supported. They then launch raids on the market, selling the currency heavily to force the corresponding central bank into devaluation. After readjustment against the basket, they close positions at much lower prices, generating a substantial profit.)

The next day saw the forex market recovering from Thursday's turmoil. Yet this kind of incident will continue to occur as long as Thailand's macro-economic conditions do not improve and confidence in the Thai baht wavers.

Baht trading in Singapore will not affect Thailand if it is limited to the players there. But when they over-build their exposure and need more baht from the Thai market to close their net positions, the cross-border selling spree puts pressure on the Thai currency.

Increasingly in monetary circles, questions are being raised about the wisdom of promoting the Thai baht as a regional currency and whether the financial liberalisation policy is beyond the capacity of the Thai economy to absorb.

''I am not sure about the policy of promoting the baht to become a regional currency," said a monetary official at the Bank of Thailand. ''There is really no jurisdiction to control it. The Singaporean monetary authorities allow offshore baht or ringgit trading, but they won't allow offshore trading of the Singapore dollar."

Added a former Thai central bank official: ''We have liberalised the banking sector by creating offshore banking through Bangkok International Banking Facilities, yet little do we realise that Singapore's foreign exchange market is 14 times larger than Thailand's. How can we promote offshore banking when we have barely developed the foreign exchange market."



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