Theory of Lion’s Roaring: A Resolution on Baht Appreciation

The current value of the Thai baht has appreciated steadily. Baht appreciation to many people, especially exporters concern that if the government and the Bank of Thailand (BOT) do not yet manage the problem promptly, baht currency will be appreciated to 29 baht per U.S. dollar and may cause crisis in the Thai industry.

Expectations of society and business to solve the problem of baht appreciation in recent years have focused on the Bank of Thailand, or BOT. Due to BOT is responsible for the care of foreign currency exchange rates directly. However, the currency will be appreciated or depreciated are determined by supply and demand of currency. The agency that may have a part to help solving this problem is the Ministry of Finance that has tools to lead changes of demand and supply of currency.

Although the Ministry of Finance has given some helps by many measures such as the encouragement of the Thai private corporations to invest more overseas. But those measures were not enough, and too late because before the Ministry of Finance hands over to manage this problem, the baht has appreciated a lot already (Baht has appreciated the most in the past 13 years since 2540).

I think there are several ways that the Ministry of Finance may help weakening the baht so that the baht will not be too strong as it is. In particular, the "Roaring" that the Ministry of Finance has not been used much.

"Theory of Lion’s Roaring," that I want to suggest based on a concept of economics which called, "Rational Expectations" which explains that when people recognize the changes in the economy, they will forecast events expected to occur in the future. If people have complete information, they will adjust their behavior to match their expectations reasonably.

By this principle, if the government is sending signals by announcing policies that people believe that the government will actually follow and these policies will have an effect on future economic conditions, people will change their behavior. This will result in changes in the economy without the government actually doing anything. This is like roaring of a lions that can cause animals scattering flee without the lions physically chasing.

Now, investors expect the baht appreciation. So demand for the baht increase which have aggravated the baht appreciation. Therefore, I suggested that to weaken the baht, the Ministry of Finance may "roar" like a lion, or send out signals about the policies seriously and clearly. Also announce policies that strong enough to change the expectations and beliefs of investors that will allow the baht to weaken.

Besides the “roaring” by the Ministry of Finance, I propose that the government should take some measures to confirm the seriousness of the government to solve Baht problem and support changes to the market's expectations as follows;

Accelerating public investment

Investment in mega projects and government and state enterprises’ project will help stimulating the economy as well as weakening the baht because investment in mega projects has import content for 30-40 percent. That is strong enough to allow investors to believe that the baht will be weakened. However, the caution is to consider funding in countries with lower costs. Because when projects are carried out by foreign loans, it may increase the pressure to the baht appreciation. In addition, the government has to announce the projects that clear and reliable enough to establish trust to investors that these projects are likely to occur.

Accelerating payment of public debts
To finance debt of the government and state enterprise’s is possible and extremely effective in making the baht to weaken because current public debt is high. Total foreign debt of the government in June 2553 amounted to more than 11,552.7 million dollars (with direct government debt of U.S. $ 1,713.9 million and state owed enterprise debt that government guarantee of U.S. $ 5,363.2 million and state owed enterprise debt that government did not guarantee of U.S. $ 4,475.6 million) (Public Debt Management Office).

However, paying debt ahead of schedule should be financed by lower interest rates loan to reduce the interest burden of higher interest rates debt. If domestic interest rate is higher than the interest rate of the government debt (foreign loans of government usually has a very low interest), domestic loan to repay foreign debt may result in more government debt in the future. To consider whether to repay debt ahead of schedule or not, benefit from the currency appreciation should be more than the interest burden that may increase.

Setting rule to manage currency
I agree that there should be specific rules and conditions to manage or intervene into the market exchange rate and open up and allow the government and BOT to use more measures from weak to strong level of policies more and more quickly.

To set rules for each type and each severity level to stabilize exchange rates will guide the market to predict into the direction that the government plan without the need to take measures form BOT or the government. If the market knows that BOT will intervene at what level of the currency fluctuations, the market will adjust itself before BOT doing any intervention. This causes a confidence of the government policy and will help prevent currency speculation in an extent.

On the other hand, the measures that the market is not expected before may cause panic of in - out flow of funds too quickly and can cause unreliability to the government policies and economic conditions of the country.

This is an example of a "Roaring" that sometimes the Ministry of Finance could use. It only signals, people will change behavior without any real policies are taken into action. The Ministry of Finance, however, must create confidence among the people to believe that the Ministry of Finance is the "lion", not a "cat."

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com