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Thailand Wrestles With Possible Currency War



Bank of Thailand Governor Prasarn Trairatvorakul maintained that the Monetary Policy Committee was under no pressure, despite the renewed attempt by Finance Minister Kittiratt Na-Ranong to force a cut in the benchmark interest rate.


BANGKOK—Thailand risked becoming the latest front in the global currency war as signs mounted that the country might soon introduce selected capital controls or cut interest rates to stem the strength of its baht currency and boost its flagging economy.


Finance Minister Kittiratt Na-Ranong Tuesday said government officials are working on new regulations that, among other things,

Finance Minister Kittiratt Na-Ranong

could limit foreign purchases of short-term government bonds and require foreign investors to hedge some of their baht-denominated investments. He stopped short of saying that Thailand would introduce capital controls, but stressed that the country will be ready to implement them if needed.


“The amounts of inflows and outflows are now three times more than they were during the 2008 global economic crisis,” Mr. Kittiratt said, referring to a surge of investment in Thai government bonds this year. “The current influx has been excessive and led to a stronger baht.”


Several countries, notably Japan, have taken decisive action in recent months to weaken their currencies in order to help lift exports. This has fueled worries that the world could be heading toward another outbreak of competitive devaluations after the earlier quantitative easing programs in the U.S. and Europe. Other nations such as Vietnam, South Korea and Australia already have cut interest rates, potentially leaving Thailand exposed to baht-strengthening inflows attracted to the comparatively higher interest rates available in Bangkok.


In recent months the baht gained as much as 6% against the dollar from its level at the beginning of the year, although it has come off its highs in recent weeks, worsening Mr. Kittiratt’s concerns that Thai exporters could be undercut by competitors from neighbors such as Vietnam and even Malaysia if Thai authorities don’t take action.

Late Tuesday, the baht slipped to 30.05 baht to the dollar from 29.86 baht the previous day on fears that Thailand could soon limit inflows and outflows of foreign funds.

Capital controls aren’t the only tools available to Thai policy makers, however. The Thai central bank’s monetary policy committee also meets on Wednesday for a hotly-anticipated decision on interest rates.

Mr. Kittiratt and Bank of Thailand governor Prasarn Trairatvorakul have been locked in a frequently-testy dispute for weeks over what’s the best policy stance for Thailand, with Mr. Kittiratt urging the central bank to dump its cautious approach and sharply cut interest rates. Mr. Kittiratt told reporters Monday that the Bank of Thailand should cut the current policy rate of 2.75% by half a percentage point to spur growth, saying that “this is serious and not about who will win the game (of words).”

Mr. Prasarn said on Monday that he wasn’t concerned about the growing clamor from businesses and government leaders to cut rates, and that the bank’s monetary policy committee was ready to explain its decision. In previous interviews the central bank chief has argued that Thai businesses need to get used to a stronger currency.

Indeed, in recent years Thai governments have tried to prepare their economy for a stronger baht by attempting to strengthen the local consumer economy. Since coming to office in 2011, Prime Minister Yingluck Shinawatra‘s government has introduced rebates for first-time car and house buyers and has spent billions of dollars on a populist program to boost rice prices and raise rural incomes.

However, exports still account for around 60% of Thailand’s economy, meaning that the country’s fortunes might rely more heavily on the baht’s value than authorities would like. Mr. Prasarn recently indicated that the central bank is willing to cut rates if the economic picture justifies it, while some economists say that Thailand’s relatively low inflation at 2.4% in April means that the bank has some room to cut rates.

Introducing capital controls, though, could cause more disruption. Analysts say it could damage market sentiment toward Thailand, which also has one of Asia’s best-performing stock markets so far this year. The last time the country attempted to control capital flows to slow the rise of the baht in 2006, the benchmark stock market index slumped 15%.

Authorities quickly reversed the policy, which required foreigners to park 30% of the value of incoming funds in an interest-free reserve at the central bank for one year.

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