ASIA FOCUS : LONG VIEW

In defence of the Bank of Thailand

Retaining edge is the name of the game

ISAAC SCHWARTZ

There are no popularity contests for central banks, but if there were, the Bank of Thailand would have been a loser in 2006, when its unexpected imposition of currency controls spooked foreign and domestic investors.

Thailand competes with its neighbours for business and exports. Some of these neighbours - China and Malaysia, for example - manage their currencies. They want weak currencies to help them sell more goods to other countries.

Although the apparent targets of the BoT's currency controls were speculators, since it was their accounts that would have been penalised by withholdings, the true targets of the controls were Thailand's neighbours.

Although the neighbours' policies aren't accepted - the whole world cries that China competes unfairly - they are expected, which Thailand's new policy had not been.

The surprise caused quite a hubbub. If Thailand's goal is to promote the long-term success of its "heavy" (capital- and labour-intensive) industries, then it's smart to encourage a weak currency.

When China instituted dollar pegs decades ago, it wasn't to create a weak currency; the yuan was already weak. It was to create a ludicrously weak currency. That way, more experienced manufacturers in other countries would have a tougher time competing with Chinese manufacturers even if they operated more efficiently. With a cheap enough currency, it would still be more affordable to buy from a bloated and inefficient Chinese corporate bureaucracy than from a lean manufacturer elsewhere.

Thailand's recent currency controls had nothing to do with creating an absurdly cheap currency to flood the world market with Thai goods. The controls were simply a means of addressing its competitiveness with its neighbours.

Since the 1997 crisis, Thailand had allowed freer trading in the baht than many of its neighbours allowed in their currencies. Recently, in the wake of renewed global interest in the Asean region, this had caused the Thai baht to become a conduit for speculation that was disallowed by more aggressively managed currencies, such as Vietnam's or Malaysia's.

The Bank of Thailand should find a less confusing method for instituting currency controls, but it's good to seek protection from foreign speculators who will trade in and out of a currency, disrupting the relationships that Thai companies forge with foreign firms.

When the baht appreciates, Thai goods become more expensive to foreigners if prices are kept the same. For a Thai merchant who uses his income to import foreign goods, his loss as a seller will be his gain as a buyer.

But for the Thai merchant who uses his income to buy goods locally, his loss as a seller will not be recouped. He will simply sell less and have less real income.

Because of their success in the global marketplace, many Asian countries have been dealing with the problems of currency appreciation. As one solution, Korea dismantled some restrictions on Koreans who make investments abroad. Easing foreign investment rules encourages Korean won to be sold in exchange for other currencies (to invest in assets denominated in other currencies). This causes the won to weaken.

At the moment, Thais remain subject to many restrictions on investing abroad. Perhaps amendments to these policies could be a resource for the central bank in its struggle.

Isaac Schwartz is a New York-based analyst and portfolio manager at Robotti & Company, an investment adviser established in 1983. Robotti & Company (http://www.robotti.com) invests primarily in the US, but also in Norway, Canada, Thailand, and Korea. He can be reached at longview@bangkokpost.co.th

Bangkok Post
Sunday January 28, 2007