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BoT: Fixed exchange rate ‘dangerous’

Posted by arnon_k On October - 15 - 2010 ADD COMMENTS

The Bank of Thailand will not reintroduce a fixed exchange rate policy as it would be harmful for the country’s exchange rate system, BoT governor Prasarn Trairatvorakul said on Friday.

The 1997 financial crisis occurred because the then government tried to fix the exchange rate, Mr Prasarn added.

The BoT chief was responding to suggestions by former deputy prime minister and finance minister Virabongsa Ramangura that the central bank should cut its policy rate and reintroduce a fixed exchange rate to curb the baht’s appreciation.

“The central bank is now using a flexible exchange rate, to avoid distorting the money market mechanism,” Mr Prasarn said.

The BoT governor said cutting the policy interest rate was a matter for Monetary Policy Committee to decide. It would meet next Wednesday.

The baht’s value and related issues, including the exchange rate, will be considered at the meeting.

BoT board chairman MR Jatumongkol Sonakul said on Friday that he personally felt the need to raise the central bank’s policy rate had lessened, because strengthening baht had slowed down inflation.

“The repurchase rate cannot be immediately cut, as was called for. Any change in monetary policy must be done gradually, to prepare for dealing with any possible negative impact,” he said.

MR Jatumongkol said even though he is the BoT board chairman he has no authority in setting the policy rate. That authority rests with the Monetary Policy Committee.

Panel considers 5-baht price reduction

Posted by arnon_k On October - 12 - 2010 2 COMMENTS

The proposal to reduce the sugar price by five baht a kilogramme will likely be opposed by sugarcane planters at a panel meeting next week, says an Industry Ministry source.

A panel chaired by Deputy Prime Minister Trairong Suwannakhiri will discuss the situation with the Cane and Sugar Fund, with the main topic being the five-baht reduction in price.

The Cane and Sugar Fund is scheduled to complete its debt repayment to the Bank for Agriculture and Agricultural Co-operatives (BAAC) next month, and the Commerce Ministry wants the price reduction made at that time.

The Samak Sundaravej government in 2008 approved a five-baht increase in sugar prices to help cane farmers repay their debts, as the price hike went to the fund.

“The issue of sugar price reduction has come up because the cane price for the 2010-11 season is expected to fall from last year if the baht strengthen further below 30 to the US dollar,” said Prakit Pradipasen, co-chairman of the dialogue and chairman of the Three Sugar Millers Associations.

Kamthorn Kitichotisub, president of the National Federation of Sugarcane Planters, said the baht appreciation has made a serious impact on cane planters, as they will hardly see sugar priced at 1,000 baht per tonne in the new harvest season.

“Someone should do something about this,” he said, adding that talks have begun with the Cane and Sugar Fund about whether to provide loans to sugarcane planters.

The Industry Ministry source said sugarcane planters do not want to scrap the five-baht levies and also do not want the fund to provide more loans. Instead, they want an extension of debt repayment terms.

Meanwhile, the source said the Thai Beverage Industry Association supports the idea of scrapping the levy, but the panel is expected to support cane planters, who have gained political support.

Two-thirds of sugar produced in Thailand is exported and priced in dollars. Therefore, the strengthening baht will cause sugar exporters to earn less.

The Thai Sugar Millers Corp (TSMC) is also concerned the stronger baht will affect sugarcane planters, as 70% of their income is generated from sugarcane sales.

“Every one baht rise against the dollar will cause the selling price of sugarcane to decline by about 23 baht a tonne,” said Mr Prakit, who is also the TSMC chairman.

If the baht is at 30.50 to the dollar, initial prices of sugarcane in the 2010-11 season are estimated to be 977.56 baht a tonne. If it strengthens to 29.50 to the dollar, the price will drop to 954.01 baht a tonne. And if the currency rises to 29 baht to the dollar, the price will fall even further to 942.24 baht per tonne.

The initial price of sugarcane in the 2009-10 season was 1,102 baht a tonne on average.

Bond yield tax weighed

Posted by arnon_k On October - 12 - 2010 ADD COMMENTS

Levy on foreigners likely to slow inflows

The Finance Ministry is studying the pros and cons of scrapping a long-standing waiver on capital gains taxes for foreign investors in the local bond market, says Deputy Finance Minister Pradit Phataraprasit.

If completed in time, a package of measures aimed at assisting businesses adversely affected by the appreciation of the baht, together with new tax measures to deter speculative inflows would be considered by the cabinet today, he added.

The study follows reports Finance Minister Korn Chatikavanij may propose to the cabinet a new measure to control foreign capital inflows to slow the pace of the appreciating baht, coupled with tariff measures to ease the burden on Thai small and medium-sized business entrepreneurs (SMEs).

Mr Pradit said one idea being considered is to scrap the current exemption on capital-gains taxes for fixed-income investments for foreign investors, and unify tax rules with the 15% capital gains tax paid on investments by Thai individuals.

In any case, the government this week is expected to announce a plan of assistance measures to help SMEs with limited resources to hedge against currency risk or who have been particularly affected by currency movements due to low import content.

“We still have a lot of topics that need to be discussed as there are pros and cons to each tactic. Any group of measures can provide a different outcome,” said Areepong Phucha-oom, permanent-secretary for the Finance Ministry.

The baht and other regional currencies have gained strongly against the dollar this year due to trade surpluses and capital inflows as investors seek to take advantage of higher yields in Asia’s high-performing economies.

With interest rates in the US and Eurozone near zero, investment capital has poured into the region to profit from higher interest rates as well as stronger prospects for capital gains and currency appreciation due to stronger economic fundamentals.

Imposing a capital gains tax would effectively reduce the yields on investments and the attractiveness of local debt. Government bond yields yesterday corrected sharply on reports that authorities are considering a capital gains tax, with the five-year bond yield jumping 16.69 basis points to 2.71594% and the 10-year bond up 12.22 points to 3.12437%.

One hundred basis points is equal to one percentage point. Bond yields move opposite to prices.

The baht has become a political flashpoint in recent months, with industry groups warning that the stronger currency will hurt the country’s export competitiveness over the next several months.

On the other hand, a strong baht reduces the cost of imports, in particular oil, and also eases inflationary pressure within the economy, giving leeway to the central bank to maintain lower interest rates.

Mr Pradit said authorities would co-ordinate programmes with state-controlled banks to develop hedging instruments for private businesses.

Dusit Nontanakorn, chairman of the Thai Chamber of Commerce, said local businesses were having trouble setting export prices due to the volatility in currency rates.

“When you set the selling price today, the actual delivery won’t be for another two months, and who knows what the baht will be then,” he said.

“[An exporter] might profit 5% or 10% from a sale and be happy. But if the baht appreciates 10% over the same period, it means a loss. Sometimes you can only accept the loss, just to help maintain the customer relationship.”

How much should workers earn?

Posted by arnon_k On October - 11 - 2010 1 COMMENT

Most people agree minimum wages should rise but say a single nationwide rate is impractical and could have negative consequences.

Prime Minister Abhisit Vejjajiva’s proposal to raise the daily minimum wage to 250 baht nationwide – 21% higher than today’s rate in Bangkok – continues to provoke a lively debate among employers and economists.

Employers say it would be impossible to maintain one minimum wage nationwide, citing different wage structures in each province. Labour unions strongly support the idea, with some saying 420 baht would be a more appropriate rate.

The economic intelligence centre of Siam Commercial Bank (SCB) said that if 250 baht was the final rate, entrepreneurs in 39 of the 76 provinces would be hard hit, because they now pay their workers much less than that.

It said a rate of 250 baht would be 66% higher than the lowest daily wage now paid – 151 baht in remote provinces including Mae Hong Son and Phayao.

The centre’s labour force survey in the first quarter showed the average wage in Bangkok, Nonthaburi, Pathum Thani and Phuket was already higher than 250 baht. Thus, paying 250 baht a day would affect entrepreneurs in those areas only slightly.

Much more heavily affected would be entrepreneurs in Mae Hong Son, Phayao and Si Sa Ket, where the proposed rate would mean a wage increase of 99 baht per day per worker, said the research centre.

Mr Abhisit said that what he proposed was not yet final but insisted the minimum wage must increase. By how much is what agencies must study, and he has asked the Finance Ministry to look into the matter.

Mr Abhisit voiced concern about foreign labour being paid less than the minimum wage.

But critics say the prime minster’s idea of a flat 250-baht rate nationwide is merely another populist policy from the Democrat-led coalition government in case a general election is called. Fugitive former prime minister Thaksin Shinawatra also promised once that the minimum wage would rise to 300 baht if the Puea Thai party that supports him won an election.

“So whether it’s 250 baht or 300 baht, it’s just the same thing – a tactic to win popular support,” said one critic.

Payungsak Chartsutipol, chairman of the Federation of Thai Industries (FTI), said the circumstances in each province were different, such as the ability of employers to pay and the cost of living.

In the end, the issue is up to the tripartite Central Wage Committee, which includes government, employer and labour representatives, and this would depend on various factors, he said.

“People have been saying the rate could rise by seven to 10 baht in Bangkok, but it’s really up to the committee,” said Mr Payungsak.

“However, a single rate for the whole country is inappropriate. We need to consider both the employers and the employees – if employers cannot survive, then neither can their workers.”

The private sector has proposed a wage system based on workers’ skills.

Mr Payungsak said that not only should business operators improve their workers’ efficiency, workers should also improve themselves.

For the long term, the FTI plans to reach out to provincial areas and co-operate with various agencies, he said.

“We want to create a supply chain for business operators in regional areas and for different sectors. We could also provide them with technology,” he said.

Surapong Paisitpatnapong, spokesman for the FTI’s Automotive Industry Club, said labour-intensive industries would face a sharp increase in costs, in turn lowering their ability to compete with neighbouring countries.

“However, in the automotive sector we already provide a considerable amount of bonuses and overtime pay,” said Mr Surapong, adding that increasing workers’ skills is an important element.

Kampon Adireksombat, a senior economist at SCB, said not all occupations should even have a minimum wage, as that would distort the market. It should be left to the market to decide.

Sethaput Suthiwart-narueput, a chief economist and executive vice-president at SCB, called the move “too aggressive and inappropriate”.

He said growth in Thailand’s labour force averaged only one percent over the past decade, lower than for the region.

In the next 10 years, the average will drop to 0.2% due to the ageing population, said Mr Sethaput. “That would be okay if we upgraded skills [among the labour force], but we have not been doing that.”

Out of Thailand’s population of 67 million, 38 million are in the labour force – 17 million salaried workers and 21 million self-employed.

Dr Sethaput said 9 million workers are receiving daily wages, while 8 million earn monthly salaries.

“This way, the willingness of employers to invest in people is going to be quite slow for those receiving daily wages,” he said.

Labour Minister Chalermchai Sri-on said the wage committee had received proposals from each province and would finalise a decision this month, with rates to take effect on Jan 1.

He expressed hope for a “quantum leap” in minimum wages, not just a one- or two-baht increase.

Next year, wages will be based on skills as proposed by the private sector, said Mr Chalermchai.

“The most important issue will be development of human resources. Workers will have to pass a standard skills test,” he said.

Srithai Superware said an increase in the minimum wage to 250 baht a day would add to to its already heavy burden.

At a rate of 250 baht, Srithai would face an extra 2 million baht in salaries for monthly-paid workers or a 10.5% increase.

At a rate of 420 baht as proposed by some unions, the increase would be 41.7 million baht or 40% per month.

For daily-paid workers, the company would have to pay 2.6 million baht more or a 31% increase at the 250-baht rate and an additional 10 million baht or 122% more for the 420-baht proposal.

Srithai currently pays 8,000 to 8,500 baht a month for a 12-hour workday to low-income staff and more for skilled workers.