Foreign reserves dwindle as BOT defends the baht

THE Bank of Thailand's expedient battle to stabilise the baht has reached gigantic proportions, forcing it to spend as much as US$4 billion (Bt104 billion) of its foreign reserves in recent weeks defending the currency, a Singapore-based equity sales director of a foreign brokerage house said.

In town to get a first hand impression of the state of the Thai market, the equity sales director, who asked not to be named, said currency dealers in Singapore have estimated that the BOT has increased its odds of victory by defending the baht so staunchly, but the price has been the depletion of its foreign reserves to somewhere around $34 billion today from $38.7 billion in December.

But Dominique Julien Maire, associate director and researcher at UBS Securities (East Asia) Ltd, cautioned that this figure should be qualified although he would not be surprised if the BOT had shelled out at least $2 billion in just a few weeks to defend the baht against speculation and the dollar's steady climb.

Maire wondered how it was that the BOT could have spent a huge sum of money defending the baht, and yet see its foreign reserves rise to $39.3 billion at the end of January, compared to $38.7 billion in December.

He suspected that this could be explained by capital inflow in January, which amounted to more than $2 billion, as subsequently confirmed by BOT governor Rerngchai Marakanond.

At issue, however, is the BOT's increase of its odds of victory in defending the baht as a measure to maintain investor confidence in the economy.

Yesterday, the BOT let the baht slip to its lowest level in six and a half years by fixing its mid-rate at Bt25.99/USD, but trading of the baht in the spot market was, again, way off the target at Bt26.07 to Bt26.09.

Maire explained that the BOT's high stakes game revolves around heavy buying intervention in the spot market to prop up the baht. The trade-off effects are a drain of the BOT's reserves, a squeeze on the economy, a crunch in the money market and skyrocketing short-term interest rates.

To accomplish this, Maire said, the BOT moves immediately into the swap market by selling the baht for the dollar, with delivery due at a specified time in the future, at the equal sum of its intervention in the spot market.

Having squared its positions, the next step sees the BOT attack the forward market by buying baht forward in order to build up anticipation of baht demand in the near term and to prevent the premium or margin from rising too high, which at one point shot up to 6.5 per cent, he said.

''The BOT aims to reduce the pressure on the forward premium and hopes that market demand for the baht is stronger or gets cheaper," Maire said. ''But at the end, this effort will contract or deplete the BOT's reserves."

Maire said this entire scheme, which is aimed at buying time while the government struggles to bring macroeconomic instability under control, is a high risk enterprise ­ for if it fails it will force the BOT to double its stake to prop up the baht.

There is also the risk of a negative perception about the depletion of the BOT's foreign reserves to fight a currency war, although the BOT's foreign reserves, which cover 6.4 months of imports, rank among the 10 highest in the world.

In comparison, Malaysia's reserves stand at only $27 billion, Indonesia's at $19 billion and the Philippines' at $11 billion (see table).