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11 May 2013
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TDRI: Make foreigners hedge

Authorities should use capital flow management to address baht appreciation rather than wait for an interest rate cut by the Monetary Policy Committee (MPC), because foreign capital inflows are going to persist, says Ammar Siamwalla, an economist at the Thailand Development Research Institute.

He said measures to rein in short-term capital inflows are appropriate, considering a scenario in which the offshore interest rate remains significantly below the local interest rate.

Among the policy alternatives, a requirement for foreign investors to buy currency hedging for investment in the local bond market is the most effective to stem short-term speculation on currency appreciation, said Mr Ammar.

“The Thai economy does not need short-term capital inflows. If high-income countries increase their interest rates, the flows can quickly reverse. We cannot change their low interest rates, but we can ask investors to hedge against baht appreciation, which will reduce the need for an interest rate cut,” he said.

Mr Ammar said the central bank should keep the baht in line with regional currencies and increase the MPC’s oversight of baht management.

The central bank issued a statement yesterday to clarify its position following continuous pressure from the government to slash the policy interest rate from 2.75%.

It said the objective of monetary policy is to ensure economic stability, and baht appreciation should not have a significant effect on the economy, as exports grew on a par with our trading partners’ economies in this year’s first quarter.

A joint study by the central bank, the Fiscal Policy Office and the National Economic and Social Development Board found in a worst-case scenario, in which the baht rises rapidly this year, economic growth would remain close to potential economic growth.

But baht appreciation retreated from a peak of 6.5% in mid-April – still the strongest currency in the region – in part due to investors expecting Thai authorities to implement capital controls.

Regional currencies have started to gain including the South Korean won as tension on the peninsula eases and the ringgit as political uncertainty recedes following the national election.

The baht has appreciated about 4% this year.

Ariya Tiranaprakij, an executive vice-president of the Thai Bond Market Association, said global sentiment from interest rate cuts by the European Central Bank, the Bank of Australia and the Bank of Korea has led investors to expect the MPC will cut the policy interest rate, reflecting the decline in global yields these past couple of weeks.

The demand for one-month bonds has decreased as investors looked for longer maturities in expectation of a rate cut.

Local yields increased slightly in recent weeks, as investors are wary that authorities could implement capital controls.

Ms Ariya expects the bond market will record net foreign sales for Thursday and Friday.

Foreign holdings in the bond market increased by 150 billion baht during the first four months of this year to 861 billion baht, nearly equal to the year-on-year increase in the same period of 2012, she said.

First published by the Bangkok Post, 11th May 2013, article written by Parista Yuthamanop


Ammar Siamwalla, Ph.D.
Distinguished Scholar