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Korn reasserts inflation priority

Posted by arnon_k On October - 19 - 2010 ADD COMMENTS

Inflation and international reserves remain the priorities of the government as it seeks to maintain economic sustainability amid fluctuations in the global financial system and ballooning cross-border capital flows, says Finance Minister Korn Chatikavanij.

The global financial market has increasingly fluctuated and different parts of the world have felt the impact, he told a sustainable development symposium hosted by Siam Cement Group (SCG) yesterday.

Cross-border capital flows amount to US$11 trillion or 20% of the world’s gross domestic product, compared with only $1 trillion or 5% of global GDP in 1990. This has been partly caused by a 350% rise in free trade agreements over the past 20 years to 450 at present.

“To maintain economic sustainability, we have to cope with inflation. Once inflation rises, prices of goods will surge and a large majority of Thai people will be affected, especially low-income consumers,” Mr Korn said.

The Bank of Thailand’s inflation policy has proved a success in the past decade in curbing the impact of inflation on the economy, said the minister.

Maintaining adequate international reserves is also the focus of the government, he said.

“Although the status of the country’s international reserves is not worrisome at the moment, we have learned once the problem [of inadequate reserves] occurs, confidence in our country will be seriously affected,” Mr Korn said.

As public debt remains at a high level and the government continues to invest in infrastructure, participation from both local and foreign private sectors is welcome, including an agreement with China to build high-speed trains in Thailand.

As Thailand’s aging population is increasing at a faster pace than the global average, the kingdom has to increase the efficiency of its workforce to sustain its competitiveness, he said.

He also warned that Thai business operators have neglected sustainable development despite global threats from rising world temperatures and non-tariff barriers related to the environment imposed by trading partners.

SCG president and chief executive Kan Trakulhoon said green demand posed both threats and opportunities for Thai companies.

“I think Thai companies can develop green products and we can be the first mover on this global trend,” he said.

SCG, which was top of the building materials sector in this year’s Dow Jones Sustainability Index, has invested 5 billion baht per annum in sustainable projects. This is comprised of 3.6 billion baht for key environmental projects including a waste heat generator, 400 million baht for corporate social responsibility and 1 billion baht for upgrading machinery for a cleaner environment.

Speaking about the effect of the strengthening baht, Mr Kan said the impact on SCG has been less than expected as the group’s core petrochemical business has benefited in terms of imported raw materials and spare parts.

He estimated that an appreciation of one baht against the US dollar results in a loss of less than 700 million baht for SCG’s bottom line, less than a previous projection of 800 million.

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.