Bank Of Thailand Deliberately Created “Uncertainty”, To Help Tuna Industryff

The Bank of Thailand deliberately created “uncertainty” in the foreign exchange market to drive out speculators from Japan and the U.S. when it imposed curbs on investment, Governor Tarisa Watanagase said. The bank also acted on prompting calls for central bank action by companies including Thai Union Frozen Products Pcl, the world’s second-biggest tuna canner, for the central bank to stem gains that were undermining their competitiveness.

”It was important and necessary for us to put a brake on the sentiment, to create some uncertainty,” Tarisa said in an interview in Bangkok Monday. Investors had signaled that earlier measures “were nothing” to them, she said.

The Bank of Thailand triggered a slump in Thai stocks, bonds and the currency when it imposed penalties on early withdrawals by investors in Thai assets on Dec. 18. The reversal of some of the measures a day later raised concerns that the bank's handling of the economy will drive away investors.

”What we market players hate the most is inconsistency,” said Minoru Shioiri, senior manager of the foreign-exchange trading and credit division in Tokyo at Mitsubishi UFJ Securities Co.

”Thailand is making the regulations really unclear and that's leading to a loss in investor confidence in the nation.”

On Dec. 19, sellers wiped out about $23 billion of market value from Thai stocks, sending the benchmark SET Index down 15 percent. More than half of the losses were recovered the following day when the regulator exempted equities.

Credit Quality

Credit-default swaps based on $10 million of Thai bonds trade at about $37,500, according to BNP Paribas. That’s up from about $24,000 on Dec. 15, according to prices supplied CMA Datavision in London. The contracts allow traders to bet on the government’s ability to repay its debt. An increase suggests declining credit quality.

”What they have done is to really put questions over their ability to manage the economy,” said Nizam Idris, a currency strategist at UBS AG in Singapore. “What the Bank of Thailand has done is create uncertainty and volatility.”

Thailand’s stock index, while partially recovered, is down 10 percent since Dec. 18. The baht has lost 1.3 percent to 35.99 against the dollar.

Tarisa said the bank had to act when the baht came “precariously close to breaking the 35 mark” against the dollar, and that controls will stay as long as speculators threaten to drive the currency higher.

”The restrictions continue to undermine the baht and it’s probably the case the central bank actually wants the baht to weaken a bit more,” said Steven Chang, global markets vice president in Hong Kong at State Street Bank & Trust Co. “There could even be some more measures aimed at curbing baht strength.”

Fund Lock-Up

Investors in bonds, real-estate mutual funds and foreign- currency borrowings have 30 percent of their funds locked up, interest-free, for a year under the capital controls.

With “one-way momentum” the baht surged as much as 17 percent last year, prompting calls for central bank action by companies including Thai Union Frozen Products Pcl, the world’s second-biggest tuna canner, for the central bank to stem gains that were undermining their competitiveness.

Buying of the baht came mainly from Japan and the U.S., Tarisa said. There was no fundamental economic reason to justify the increase, she said.

”I’ve been criticized for taking the market by surprise by taking unconventional methods, especially capital controls,” Tarisa said. “Conventional wisdom works only when you are in a conventional environment.”

’More Uncertainty’

Speculators had shrugged off earlier measures designed to ward off “hot money”, including a Nov. 27 rule change allowing Thai stock brokers to invest abroad directly, and a Dec. 4 request that local financial institutions stop trading debt repurchase agreements with non-residents, she said.

”On certain days all currencies in the market were depreciated but the Thai baht kept going up,” Tarisa said, adding that comparable regional currencies gained between 7 percent and 8 percent last year. “Now investors see more uncertainty, I think we’ll see less volatility in the currency.”

The central bank had considered introducing a withholding tax and even an unexpected, sharp cut in the benchmark interest rate to deter speculators, before finally opting for the capital controls, she said.

Regardless of the messages the bank sent to investors, the baht continued to rise.

’Slap in the Face’

”It was like a slap in the face,” Tarisa said.

Tarisa became central bank governor on Nov. 15, replacing Pridiyathorn Devakula, who accepted an appointment as finance minister in Thailand’s junta-installed cabinet. The military seized power in a Sept. 19 coup.

The capital controls were “my idea,” Tarisa said. “It’s not the job of the Bank of Thailand to talk to the government, so whether it’s a military government or not it doesn’t matter.”

She has never spoken to junta-installed Prime Minister Surayud Chulanont, and dismissed perceptions she and former boss Pridiyathorn “may have a too dependent relationship,” saying the minister knows ‘the independence of the central bank is the most important thing.”

Protocol demanded she report the 30 percent reserve requirement to the minister ahead of announcing it, Tarisa said.

”But it was the Bank of Thailand’s decision, in fact it was my decision,” she said. “I pushed for the staff to come up with a measure that should be more effective than what we did before.”

’Precarious’ Baht
 

When the Thai currency closed at 35.09 on Friday Dec. 15, Tarisa instructed her team to keep working all weekend so she could announce an effective policy on Monday Dec. 18. She would have preferred to unveil details ahead of a weekend to give investors time to digest the measures, but the baht had moved to a “precarious” level.

”We did not have the luxury of waiting for another weekend,” she said.

The capital controls are “not a long-term solution,” Tarisa said. The curbs will stay “up to a point when we see that the baht has really stabilized, then we’ll lift” them.

To ease some of the unintended effects of the controls, the central bank is in talks with local commercial banks on how it may relax requirements for local subsidiaries borrowing money from overseas parents to fund expansion, and on some foreign borrowings used to finance direct investments in Southeast Asia's second-largest economy, Tarisa said.

Exceptions

”If there are certain activities that are bona fide, that won’t cause ripples to the exchange rate, then we are willing to take some exceptions,” she said.

The central bank won’t accommodate companies speculating on the currency by transferring funds to and from their Thai subsidiaries, as detected in December and November, Tarisa said.  â€œCompany loans that came in for a day left the next, came back again the next day,” she said.  â€œCertainly it looks like speculation on the exchange rate.”

Nor is the Bank of Thailand ready to ease controls for Thai companies borrowing money overseas. Liquidity generated by investors’ recent stock sales that remains in Thailand could finance domestic companies funding needs, Tarisa said.