The Bank of Thailand is the central bank of the South-East Asian country of Thailand. Thailand is one of the most important nations of South-East Asia, and has a huge contribution towards the development of the zone. The bank was established on the 10th December of the year 1942. The Governor of Thailand is the head of the institution and he is ably supported by four deputy Governors. The Central Bank of Thailand was earlier known as the Thai National Banking Bureau. The first governor of the Bank of Thailand was His Holiness Prince Vivadhanajaya. Now the governor of this institution is Tarisa Watanagase. He has taken the post since Pridiyathron Devakula, the earlier Governor, had to take the responsibilities of the finance minister of the country (Rajan 2008).
As the head financial institution of the country, the Central Bank of Thailand has a lot of responsibilities. They basically are responsible for a stable financial environment of the country, and also look for the financial growth of the country. As a developing country, there are a number of economical challenges for the economy of Thailand, and the Central Bank of Thailand is solely responsible to face the problems and create a financially improved Thailand. There are some definite roles of the Bank of Thailand, like:
- One of the most important works of the Bank is to promote monetary stability of the nation and they are also responsible to formulate the monetary policies of the country.
- They supervise all the financial institutions of the country and also try to promote the stability of the institution.
- They are the main authority of the country to issue and print the currency notes.
- They handle the international reserves of the country.
- They also look after the banking facilities of all the businesses and financial institutions of the country.
- Recommending financial strategies to the country is one of the most important aspects of the institution.
- They also determine the interest rates of the country. They have a Monetary Policy Committee for this and it comprises of four members one from the bank and other three from other top official experts (Sufian 2009).
Before starting our discussion about the particular case we first look on the impact of foreign exchange intervention on emerging economics, such as Thailand we look on the total scenario.
One of the major problems in this case is there is not much data available for the research of the case. And there is a notable difference in the exchange rates too in the countries. The intervention of foreign exchanges in the emerging economics has greater exchange rate volatility, and they are also affected by the fluctuations of the greater economy. The policymakers, in this case gradually differ from the industrial economics.
Actually we can term the exchange rate as an asset price, and in this perspective, the current exchange rate of a country depends on the present and future fundamentals of economics. According to the economists, the central bank of any country(in our case the Central Bank of Thailand) have a better understanding of the domestic market conditions than the domestic or the international participants(in the case of markets like Thailand, where it is not very developed) and they can remain highly segmented throughout.
In our case, we can see that the Central Bank of Thailand have announced that from 19th December 2006, they will impose a 30% Unremunerated Reserve Requirement of capital inflows that will exceed $20000 for a yearly period. This decision has created significant impact on the market of Thailand along with other markets. Under this provision, the investors have to ensure that they get the 30% as return in the business (Nuntiyagul 2009).
Before the capital controls by the authorities in Thailand in December 2006, both the onshore and offshore markets in Thailand were in order. It reflected the full convertibility of the Baht, the currency of Thailand, and the market participants were active in the market.
The financial system of Thailand was in a state of shock in the 1990s, but later it recovered and in the 2000s it was quite stable and one can say that it was changing into an emerging economics. It has upgraded the regulatory systems and also improved the macroeconomics management. Both the banks and private companies are getting good businesses from the financial strategies of the country. But, the Bank of Thailand always remained vulnerable to a significant slowdown in the domestic economic growth, and the Bank of Thailand was really closely monitoring some vulnerable banks in Thailand. And the URR imposed by the Government was a policy to tackle the economic meltdown they believed was coming (Rajan 2008).
Impact of URR provision on the exchange rate of Thai Baht with other major currencies such as US$ and local currencies:
As financial liberations happened in the economy of Thailand in the 1990s, Thailand, along with some other Asian countries, became attractive location for the international capital flow. To be very frank, the investment atmosphere in South-East Asia was favorable for a long time, but it was the boom time for foreign investors, and countries like Thailand really took it for their own sake. The foreign investors were intelligent enough to understand that this sector has high returns and they heavily invested here. It gave rise to “asset bubbles”, and ultimately these inflows along with weak fundamental macroeconomics of the country gave rise to a period of financial instability in the country along with the collapse of currencies in a number of countries (Sufian 2009).
The Central Bank of Thailand never wanted that this period again return to the economy of Thailand and they imposed the URR to stabilize the economy. One has to keep in mind that Asian economies started to recover from the financial crisis in the recent decade. At that time United States were facing the dotcom problems. They also had a subprime mortgage crisis too, and it significantly weakened the value of the dollar. At this time the Thai Baht rose by 16.6% against the United States dollar. And it is in this time, the Thai Government, under heavy pressure from the exporters, took its capital control policy in order to restore the dollar influx. In the first half of 1997, 1$ was equal to 25 Baht, which later changed to 54 Baht in the month of January in the year 1998 (Rajan 2008).
The economical policy of the Thai Government had caused socio-political turmoil along with it had shocked the financial markets. During the 1980s Thailand adopted a liberal treatment of the direct foreign investments in the country and also the portfolio investment. Even, “cross-border borrowings” were allowed only after authorization of the authorities in the Government. And in the last part of the 1980s, Thai authorities lessened the taxes on the inbound portfolio investments by the residents too. Thai mutual funds grew enormously at that period of time along with stabilizing the economy of the country. But later as the fever of globalization gripped all over the World, Thailand joined the bandwagon (Nuntiyagul 2009).
But, Global “financialization” requires some new modes of operations and they country lacked that thoroughly. In the year 1996, the total asset in all the banks of Thailand was counted on $640 Billion, which was never an adequate amount. There were several wrong policies taken by the Bank of Thailand that might have triggered the situation. Bank of Thailand always defended the Thai Baht and it was once reported that $23 Billion was sold for defending the Baht. This generated $8 billion loss (one can recall in this aspect that the British Government once used $ 10 billion to defend the pound) (Limpaphayom 2009).
Bank of Thailand wanted to maintain high interest rates to boost up the domestic savings and also on the other hands to counter the inflationary pressures. There were more capital flows for quick profit and ultimately it crashed the economics of the country. Thai economy came under huge burdens of foreign loans and ultimately all the problems arose. To counter the problems, the Thai Government resorted to the URR.
Impact of URR on Thai Financial Markets
Capital Control in Thailand was one of the most discussed financial issues in recent economical context of South-East Asia. The imposition of capital control by the Government and the Central Bank of Thailand generally had a negative influence on the asset pricing among other very important things. The Stock Exchange of Thailand measured the adverse effect very precisely. On a general day, it has a return of -0.17 %, but after the day of announcement of the URR, it recorded -0.79%. The appreciation of Thai Baht has adverse effect on the competitive position of Thailand in the global economy. And the domestic inflation was ignited by the rising of the oil prices. After the announcement of capital control Thai Stock Exchange fall by 16% and the Thai Baht was weakened by 2%. The burden of URR fell more heavily on active investors, and it might be believed that the URR was a policy tool for the Central Bank of Thailand for short term a capital inflow that is generally called as “hot money” (Limpaphayom 2009).
The neighbors of Thailand
Burma, Cambodia, Malaysia are the neighbors of Thailand, and the financial decisions made by Thailand also affect the countries too. But we can mention that Thailand is most peaceful and advanced country of all these countries. All of the countries are brimming with political unrest, which ultimately takes a heavy tool on the development and the financial condition of any country. Burma is under a military rule and there are constant protests and violent activities by both people and other social clans. There is Laos, where the last seen election was held in the year 1958, and still there is no development in any aspect. Cambodia, another country, is still suffering under the dictatorship and Malaysia which is having troubles maintaining democracy. By the conditions of all the neighbors of Thailand, we can say that the country is far better placed in terms of economy and other aspects. All the countries generally look forward to Thailand for business, and the URR might have caused problems for them. But mostly, it was targeted towards the big players in the market only (Nuntiyagul 2009).
To be very precise, in the early 1990s, the wages in Thailand rose very fast, (it was better than all of its neighboring countries, and even better than Southern China and Vietnam). The government officials were concerned that the big foreign companies might shift their business to different countries, they gave the investors many financial offers, and it was a great place to make profit. Even they helped their neighbors grow economically too. From March 1997, the Central Bank of Thailand increased all the requirements of a financial company and they also singled out some weak financial corporations too. They were also concerned about the fact that the higher reserve requirements would create panic in the business of everything in Thailand. The prices of Thai Baht fall rapidly. “In June 1997, 1$ was equal to 25 Baht, which changed to 54 Baht in the month of January 1998” (Limpaphayom 2009). Ultimately, the shortage of credit affected the economy in many ways like:
- It changed the types and also the working aspects of financial institutions and many were forced to close down.
- Borrowers and lenders, the two most important aspects of a business where money in the very beginning is financed, were at loggerheads as the quantity of profit gets shortened.
- Trust between the people was less.
- The government wanted to created financial intermediaries (Nuntiyagul 2009).
But still with the international help and other aspects the country faced the financial crisis and recovered from it. The new financial policies of the country are still being discussed in the Bank of Thailand and the bank is more concerned about the development of the country than ever.
Limpaphayom, P. (2009). Bank Relationship and Firm Performance: Evidence From Thailand. Journal of Business Finance & Accounting 31(9-10), 1577-1600.
Nuntiyagul, A. (2009). URR on Thai Financial Markets. Banking Intelligence 23(1), 28-44.
Rajan, R. (2008). Does devaluation lead to economic recovery or contraction? Theory and policy with reference to Thailand. Journal of International Development 16(2), 141-156.
Sufian, F. (2009). The impact of the Asian financial crisis on bank efficiency: The experience of Malaysia And Thailand. Journal of International Development 17(3), 122-134.
Thai Baht and USD exchange rate