Strategy will cause economic problems
The Thaksin government’s plan to dip into the US$49 billion (Bt1.9 trillion) in foreign reserves held by the Bank of Thailand will create a current account deficit, complicate the central bank’s management of macroeconomic policy and cause serious economic problems in the future, economists warn.
Prime Minister Thaksin Shinawatra’s chief policy strategist, Pansak Winyaratn, on Wednesday floated the controversial idea that the Bank of Thailand (BOT) was holding too much in foreign reserves and some of these reserves could be used for other purposes.
He said an appropriate amount of foreign reserves for Thailand was $32 billion, implying that if $17 billion was taken out of the reserves and used for productive investment, the economy would be better off.
“I don’t know how they plan to spend the money from the reserves. But if you just go ahead and invest lots of money, you’ll face a current account deficit and foreign reserves would fall [further] automatically,” a former BOT official said.
“Then you would face foreign-exchange problems.
“You just need to ask Mom Oui [BOT Governor MR Pridiyathorn Devakula] whether he wants to see the current account run into a deficit. I don’t think any governor or finance minister would allow this to happen,” the former official said.
The new Thaksin administration realises that it needs to increase investment to drive economic growth over the next four years. This is because Thailand will no longer be able to rely on the exceptional performance of the export sector as it has in the past.
To spark an investment boom, which is crucial to continued economic success, the government plans to spend Bt2 trillion over the next four years on mega-infrastructure projects.
But where will this money come from?
Pansak’s controversial idea to take $17 billion (about Bt680 billion) from the foreign reserves would amount to a transfer of the central bank’s macroeconomic management to the executive branch, said an economic analyst.
Moreover, he added, it would create a precedent for subsequent governments to turn to foreign reserves any time money was needed to top up a budget shortfall.
“If the government wants to use the reserves to pay for huge imports at one time, that would not create pressure on the exchange rate,” the analyst said.
“An amount of $17 billion should be enough to finance the government’s investment drive over the next four years. But I am not sure how they are going to do it legally.”
Thailand’s foreign reserves defend the baht’s stability. In 1997, Thailand spent virtually all of its reserves as the central bank sold off the dollar to defend the baht. After the baht was floated, Thailand started to rebuild its reserves from exports. Standby credit from the International Monetary Fund also helped to strengthen Thailand’s reserves.
By law, all baht in circulation must be backed by foreign reserves, mainly the US dollar.
The former Bank of Thailand official also warned that $49 billion in foreign reserves was not high because Thailand’s current account is deteriorating due to growing imports.
Foreign portfolio investment in the stock market is around 25 per cent – worth Bt1 trillion, or about $25 billion. This is short-term money that can be moved out of Thailand quickly in the event of an economic shock.
“The money that is flowing into the foreign reserves is mostly capital inflow, or short-term investment in the stock market. You can’t treat this capital inflow as long term,” the former BOT official said.
At the end of last year Thailand’s foreign debt was $51.78 billion, of which $10.9 billion was short-term debt.
Other bankers expressed shock at the idea of using the country’s foreign reserves to finance the government’s mega-infrastructure projects.
Usara Wilaipich, a senior economist with Standard Chartered Bank, said yesterday that using official reserves to finance investment was risky.
“We have other, better options to choose from if we need the money for investment. For example, the government may go for securitisation, privatisation or bond issuances,” she said.
“Using international reserves isn’t the way to go because it is the riskiest option.”
Also, Usara said, foreign reserves reflected the country’s credit rating on external accounts. International credit-rating agencies have raised the Kingdom’s credit rating because foreign reserves have increased significantly since the 1997 crisis.
Usara said another factor was that using foreign reserves would boost liquidity in the financial market, which is already high. This would make it difficult for the Bank of Thailand to manage its monetary policy.
An official of a large bank said no country would spend its international reserves on investment.
“The international reserves are for keeping in reserve. Not for spending,” he said.
Published on February 11, 2005
Thanong Khanthong, Somruedi Banchongduang