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Central banks face daunting challenges

Posted by arnon_k On October - 18 - 2010 ADD COMMENTS

Central banks in emerging economies are facing a big challenge as they strive for a balance between controlling price increases and mitigating the effects of unstable financial markets in light of a surge in capital inflows, say economists.

Their concerns are based on the premise that interest rate increases to curb inflation could induce more capital inflows that in turn fuel a runup in asset prices.

Prasarn Trairatvorakul, the governor of the Bank of Thailand, said it was studying whether banks’ loan-to-collateral ratios should be cut in order to curb asset prices.

The current loan-to-collateral ratio for Thai banks is 80%. Singapore has just lowered its ratio to 60% from 70% to reduce risk stemming from increasing liquidity, he said.

Barry Eichengreen, a professor of economics at University of California, Berkeley, said the inflation-targeting framework used by many central banks placed too little weight on foreign exchange and capital flows.

“Sterilised intervention can influence foreign exchange rates over a very short horizon. We are talking about macro prudential measures as standardised advice does not seem to work,” Dr Eichengreen said at an international symposium held by the Bank of Thailand on Friday.

Sterilisation describes actions taken by a central bank to manage foreign-exchange swings. For example, if it buys foreign currency to counteract appreciation of the exchange rate, base money will increase. Therefore, to sterilise that increase, the central bank must also sell government debt to contract the monetary base by an equal amount.

Dr Eichengreen also said central banks could diversify their reserve holdings away from the dollar sooner than expected. But the US and Europe need to fix their public debt problems, while China needs more credible public policy.

Eswar Prasad, a professor of trade policy at Cornell University, said central banks in emerging economies faced a complex balancing act between inflation, growth and flexible foreign exchange.

“Foreign capital inflows will remain an issue for developing economies. In the short term, they have a more positive growth prospect than advanced economies. In the medium term, they have better economic structure,” he said.

The fact that both the US and China link their currency policies to protecting employment would make the foreign capital inflow issue difficult to resolve, he said.

Karl Habermeier, assistant director for the International Monetary Fund, said taxes and other capital controls were legitimate tools to curb capital inflows that could create unsustainable increases in asset prices.

But the public should not misunderstand that the measures were aimed at taking care of currencies, he added.

Ong Chong Tee, Monetary Authority of Singapore’s deputy managing director, said regional central banks could co-operate in terms of research, surveillance and development of markets to complement any global efforts to resolve the foreign-exchange deadlock.

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.”

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