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Constructive Thoughts for the Day


The Cap on Short-Term Capital Flow—From the Fire to the Frying Pan?
 

30 March 2007

Dear friends,                                       

                 The rapid appreciation of the Baht currency has made difficult the Bank of Thailand (BoT)’s conduct of currency exchange rate policy. The situation is not different from being placed between hell and high waters—as the absence of control on capital inflow will result in excessive appreciation of the Baht with serious impacts on exports, while the use of control on shot-term capital flow will affect investment with equal severity.

The above situation begs an interesting question: which target should Thailand place more emphasis on—“export” or “investment”?

In my view, the BoT decision to curb short-term capital inflow and prevent excessive appreciation of the Baht was the right policy move due to the following reasons:

Export is more important to the overall economy

          When one considers the impact on the overall economy and on the Thai people, the BoT decision to prioritize the export sector was the right approach. During the past several years, exports have been more important to the Thai economy than foreign investment. Exports during the first nine months of 2006 were valued at 95,617.36 USD, while the inflow of investment in the form of debt securities equaled only 2,533.09 USD. Even if one looks at all types of securities combined, the amount of total portfolio investment still stands at only 31,265.75 USD.

The impact of currency exchange rate on exports also has a direct effect on employment and the people’s lives, whereas investment has a more indirect and lesser impact on jobs and people’s welfare as those involved in the stock market are the well-to-do minority which makes up only a small fraction of the population.

Investment in the stock market accounts for only a small part of overall capital.

                In the context of impacts on foreign investment, while measures to control short-term capital inflow may have serious impacts on investment, the Thailand Stock Exchange Market accounts for only 20 per cent of the overall capital sources. This is because the majority of investment capital comes from commercial banks. Therefore, although capital funds from the stock market are faced with limitations, capital loan options from alternative sources remain widely available to the business sector.
 
 

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