ASIA HAND Credibility crisis at the BoT
By Shawn W Crispin
BANGKOK - Bank of Thailand (BoT) governor Tarisa Watanagase cuts a
controversial profile, from her surprise decision to slap capital controls on
foreign equity, bond and currency trades, to her counter-intuitive low interest
rates during high inflationary times.
While her breaks from market orthodoxy have kept investors on their toes, her
unconventional policies have raised concerns about central bank independence
and raised substantially the risk of a run on the Thai currency, which despite
Thailand's rich store of foreign reserves has recently come under heavy foreign
selling
pressure. Thai inflation hit 8.9% in June, the highest rate in over a decade.
The BoT's monetary policy committee earlier this month failed to assuage market
concerns when it raised the benchmark interest rate by a mere 25 basis points
to 3.5%. Foreign-currency traders are on the look-out for policy mismatches to
exploit and several have tuned into Thailand's out-of-whack real interest
rates, which apart from the Philippines are Asia's highest at a negative 5.4%.
Many attribute that unusually wide spread to political interference in the
BoT's workings, where politicians have apparently weighed against the more
substantial hike in rates the market has anticipated in the short-term interest
of protecting economic growth. Minster of Finance Surapong Suebwonglee said in
mid-July that inflation is expected to ease in the second half of this year, a
projection at odds with what the BoT and most private economists have forecast.
Concerns about central bank independence and the future direction of monetary
policy were heightened last week with the appointments and new powers granted
to the BoT's 12-member board of directors. Half of the board's seats were up
for grabs and final appointments disproportionately favored ministry of finance
bureaucrats, including the ministry's current director of the budget bureau,
over candidates recommended by the BoT.
That discreet overhaul included a new separation and sharing of the BoT's
leadership and management between the chairman of the central bank's board and
governor Tarisa, which some analysts estimate will give the finance ministry
more authority over the BoT's day-to-day operations. "The new board members are
closely aligned with the finance ministry and with the current government in
what gives the appearance that the finance ministry is trying to constrict the
independence of the Bank of Thailand," said Cem Karacadag, an economist with
investment bank Credit Suisse.
Tarisa reaffirmed those perceptions to some during a recent presentation to
foreign reporters in Bangkok when she intimated the recent heavy foreign
selling of the baht was inconsistent with the country's underlying economic
fundamentals, including low unemployment and high factory usage rates. She also
noted that the Thai bourse has been one of the region's least sold (the main
Stock Exchange of Thailand index is down more than 20% so far this year) and
highlighted the country's recent strong accumulation of foreign reserves of
over US$100 billion, or more than twice the amount it held at the end of 2005.
Personality conflict
Yet the emerging crisis of confidence in the BoT is in many ways a matter of
Tarisa's own leadership style. Asked about Thailand's negative real interest
rates, Tarisa responded they were "obviously bad for the economy because no-one
was willing to save", but she failed to indicate how or when the central bank
would close the gap. Queried about the BoT's waning credibility, Tarisa replied
that the bank had been "attacked for no good reason".
The contrarian governor also said she had "no regrets" about her controversial
decision in December 2006 to impose capital controls on foreign capital flows
to stem what was then a fast-appreciating baht. That policy was wildly
unpopular with foreign investors, who were required to put up a 30%
non-interest-bearing deposit on all currency and bond transactions, and
investor resentments linger.
Some now see an element of revenge in the recent short selling of the baht,
which became easier after the newly elected government earlier this year
removed the remaining controls on bond and currency transactions Tarisa had
left in place.
She insisted at the press club that she had "no other choice" against a
"one-way bet situation" that was making the appreciation of the baht vis-a-vis
the US dollar "self-fulfilling" and creating unnecessary volatility in the
exchange rate. She also said several financial analysts in retrospect agreed
with her capital controls policy, though one tongue-in-cheek currency trader
jabbed she must have meant "psychoanalysts".
Others say there are still many unanswered questions about the BoT's erratic
response. Upon its announcement, investors drove the Thai stock market down by
15% in a single day, the largest such drop in the bourse's history. The BoT
immediately backtracked and removed the controls on foreign equity transactions
while keeping them in place for currency and bond trades.
Some contend that political insiders with foreknowledge of the policy made out
like bandits by shorting Thai equities in anticipation of the market's
collapse. The BoT's credibility has yet to recover from that schizophrenic
episode, which undermined confidence in the country's stated commitment to a
free floating exchange rate and raised more troubling questions about economic
and financial nationalism at the central bank.
"At this moment we view the BoT has one of the less credible central banks in
Asia," said the head of foreign exchange and rates research at a major
multinational investment bank who requested anonymity. "[Tarisa's] policies
have created enmity and resentment among foreign investors which could take
many years to unwind. We're surprised she has survived her many mistakes."
The BoT's credibility crisis comes at an unfortunate time for Thailand, as
investors view central bank competence and predictability as a key benchmark in
their capital allocation decisions. In recent meetings, currency traders say
BoT monetary officials have demonstrated a lack of understanding about how
financial markets work and often asked more questions than they answered,
probing into why the market has reacted so negatively to its recent policies
and pronouncements.
Reform shift
Renewed questions of BoT independence mark a significant shift in reform
direction. After the BoT disastrously mishandled the run-up to the1997-98 Asian
financial crisis, where central bank officials depleted the national reserves
in a failed defense of the then fixed-rate baht, the once august institution's
market reputation was in shambles.
BoT credibility was rapidly restored under the uncompromising leadership of
Chatumongkul Sonakul, who beginning in 1998 ushered in tougher accounting
standards for banks and later locked horns with the finance ministry over which
institution should ultimately bear responsibility for bad debts carved out of
the ailing financial system.
Chatumongkol, a second-generation prince, was also an outspoken critic of
government use of state banks for political purposes, which quickly put him on
a collision course with former prime minister Thaksin Shinawatra.
He was replaced in 2001 with another minor royal, Pridiyathorn Devakula, who's
erratic monetary policies and softly-softly regulatory practices, including
changes in accounting rules that allowed banks to write down the amount of
non-performing loans on their books, initially raised market concerns that he
was overly pliant to Thaksin's pro-growth economic agenda.
However, Pridiyathorn strongly reasserted BoT independence in 2004 when he
called into question nearly $1 billion worth of politically motivated lending
channeled through state banks, putting him at loggerheads with Thaksin but into
the good graces of many investors who feared the then premier was dangerously
ramping the economy for short-term political gains.
The makers of the military coup that ousted Thaksin in 2006 appointed
Pridiyathorn as finance minister and he handed the central bank's reins to
Tarisa, previously a BoT deputy governor and one of his loyal confidantes. That
immediately raised new questions about central bank independence, which came to
fruition with her imposition of capital controls, a policy Pridiyathorn
strenuously defended and one in line with the military government's moves
towards more economic nationalism.
Nearly two years and a change in government later, Tarisa is still hounded by
perceptions that she is not calling the central bank's policy shots. Whether
those market concerns will grow strong enough to start a 1997-style run on the
baht is unclear, though many currency traders interviewed for this article
indicated their intentions to continue shorting the baht, even with the BoT's
recent upward revisions to its 2008 and 2009 inflation forecasts.
Market rumors are now circulating of Tarisa's imminent demise, with speculation
mounting she may be removed as part of a Cabinet reshuffle expected to be
announced in the coming days. Analysts note that finance minister Surapong took
hard aim at Tarisa's leadership last year on the campaign trail, where he vowed
if elected to dismantle her capital controls and hinted at her possible
dismissal.
With characteristic defiance, Tarisa told foreign journalists that she has
never felt that her job was at risk and insinuated that a change in leadership
now would likely do more harm than good to the BoT's market standing. Her
capital controls have gone, market confidence in the BoT has vanished, and yet
so far the unconventional and some say compromised Tarisa has remarkably
remained.
Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be
reached at swcrispin@atimes.com.
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