StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

International Finance: The Bank of Thailand - Research Paper Example

Cite this document
Summary
This research paper "International Finance: The Bank of Thailand" discusses The key motivation of the BOT which introduce the URR to control the strong inflow of short-term capital that was leading to its currency appreciation. The Paper aims to study the impact of URR on the Thai financial markets…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.9% of users find it useful
International Finance: The Bank of Thailand
Read Text Preview

Extract of sample "International Finance: The Bank of Thailand"

?Introduction A fast appreciating Thai Baht and the ineffectiveness of capital market interventions led the Bank of Thailand (BOT) to unexpectedly announce the imposition of the Unremunerated Reserve Requirement (URR) of 30% on most types of capital flows excluding FDI and amounts not exceeding $ 20,000. The announcement came as a surprise to many investors on December 18, 2006 as the URR was to be effective from the next day (December 19, 2006). This paper aims to study the impact of URR on the Thai financial markets. Motivation behind introducing URR The key motivation of the Bank of Thailand (BOT) to introduce the URR was to control the strong inflow of short-term capital that was leading to its currency appreciation. Since early 2006, The BOT tried several policies to curb the phenomena but to no avail, and in the end, in December 2006, it introduced this policy. Below is a more detailed discussion of this. After 2004, as access to credit became easier in developed countries due to lower interest rates, investors began to look for opportunities to invest in developing countries where the interest rates were high. As a result, nearly all East Asian countries had high inflows of foreign investment, as did Thailand. While this investment can help in the development of countries, they can be equally discouraging and even disastrous if bulk of these investments are short-term and speculative in nature. The reasons for this are explained below: 1) Local currency appreciation: With more inflow of foreign investments, the local currency tends to appreciate making local exporters less competitive. 2) Large inflows: Large injections of investments in a small economy can cause distortions and even havoc if pulled out suddenly 3) “Hot money”: If the investments are pulled out suddenly, the economy can crash 4) Asset bubbles: Large investments in one sector can cause unsustainable growth on sector assets (example real estate) 5) Household credit: With inflows, households tend to borrow more leading to high household debt than they can possibly service In 2005 and 2006, Thailand saw unprecedented increase in capital inflows. This is illustrated below in table 1. However, as the FDI component (long term investments) was not in line with all the investments, it was clear that most investments are short-term in nature. Also, according to the Bank of Thailand, a large part of this money was going into currency (Thai Baht - THB) speculation which is illustrated by the continuous appreciation of THB against the US Dollar (USD) as shown in Figure 1. Table 1 Annual Flow of Foreign Investment in Thailand 2003 2004 2005 2006 Current Account 4784 2767 -7852 3240 FDI 4608 4952 7297 9563 Debt securities -827 17 487 -267 Equity securities 583 180 2158 4744 Others (Corporate & government loans + trade credit) -9293 -7232 3042 3758 Total -145 684 5132 21039 Source: FPRI Both 2005 and 2006 saw a huge increase in investments in equity securities, which is typically a short-term investment. While the FDI did register and increase, it was relatively only a small proportion of the total flow of capital. Figure 1 Exchange rate of THB against USD from mid 2005 to December 2006 As seen in figure 1, on the left, the THB was continuously appreciating against the USD from around 42 THB/USD to below 36 THB/USD. This appreciation of the THB meant that the local companies were losing competitiveness. The BOT tried several policies to prevent appreciation of THB, was unable to stem it. The key measures tried were (BOT 19-20) “Permitting a larger amount of residents’ investments abroad, as well as discouraging short-term capital inflows through raising the total permissible outstanding balance in the foreign currency deposit (FCD) accounts of corporate residents. On 4 December 2006, the Bank of Thailand implemented measures on short-term capital flows which required non-residents to hold securities for longer than 3 months and allowed domestic financial institutions to borrow baht from non-residents without underlying trades or investments in Thailand only for a maturity of longer than 6 months.” However, none of these measures could effectively slow down short-term capital inflows and were unable to reduce the pressure on the exchange rate. In the end, the BOT decided to introduce the URR. Impact of URR provision on the exchange rate of Thai Baht with other major currencies such as US$ and local currencies The URR did little to reverse the appreciation of THB against the USD as seen in Figure 2 below Figure 2 Exchange rate of THB against USD from Dec 2006 to Mar 2008 The THB went from 41.4 in December 2005 to 35.5 on 11 December 2006. While in December 2007 it was at around the 30.5 mark. The percentage appreciation in the 2005-06 period (16.6%) is the same as in 2006-07 period (16.3%). This shows that the URR was ineffective is stemming the currency appreciation against the USD. Against other local currencies also, the THB continued to appreciate as seen in Figure 3 below Figure 3 THB against other local currencies Dec 20005 to Dec 2007 Source: Bank of Thailand Impact of URR on Thai financial markets i.e. Stock Markets, Bond Markets and Money Markets Stock markets: Immediately after the announcement of the URR measure, the Thai stock market dropped by 14.48% and closed at 622.14 points of December 19. Following this, the BOT made several announcements related to softening of the measure but it wasn’t until June 2007 that the stock market reached the same level as 18th December. Figure 4 Thai Stock market index (SET) from Jan 2006 to November 2007 Source: CEIC Database Bond markets: There was a negative net buy in the bond markets and the yield fell. This is evident from figures 5 and 6 below. Figure 5 Monthly foreign net buy in bond Source: TBDC Figure 6 Yeild gap between Thai and US 2Y bond vs THB/US$ The bond yield was decreasing making the Thai bonds less attractive. Source: Reuters, TBDC Money markets: As seen from the figures 7,8 and 9 below (source: BOT), the repurchase rates, interbank rates, T-bill yield and interbank overnight lending rates registered a continuous decline after the imposition of URR. Figure 7 Repurchase Rates Nov 2006 to June 2007 Figure 8 Bangkok Interbank rates Nov 2006 to June 2007 Figure 9 T-Bills and government bond yields Nov 2006 to June 2007 Figure 10 Interbank overnight lending rates Nov 2006 to June 2007 Looking at the continuously decreasing rates and yield of T-bills, it can be inferred that the market liquidity also had been decreasing continuously. Impact of URR on neighboring financial markets such as Malaysia, Philippine, Singapore and Korea The URR affected other regional stock markets as well: in Indonesia stock markets went down by 2.85%; in Malaysia dropped by 2%; in India 2.5%; and Singapore had a drop of 2.23% (The economist). In the long-term it had little effect on the neighboring financial markets although if these markets had taken similar steps as Thailand, the effect could have been a lot worse. Conclusion Thailand’s economy is mainly export based. Since In 2005, 73.6% of its GDP came from exports (World Bank). Naturally, an ever appreciating THB in 2005 meant that the domestic exporters were getting less competitive. In this backdrop, the BOT introduced the URR to prevent speculative investment against its currency. The URR, however, was not received well by the market immediately after its announcement, as was evident from the sharp decline in the stock market the next day, and the BOT introduced amendments to the policy on the very next day. The URR did not really meet the objective of stopping the appreciation of the THB though. After two years of several amendments to the URR, in March 2008, the BOT finally removed the URR when the THB was valued at close to 31.50 to the USD. References Auster A. Robinson J. Dean K. The fallout from Thailnad’s capital controls. Economics@ANZ. Thailand update – 20 December 2006. Accessed 19 May 2011. http://www.anz.com/documents/economics/FalloutfromThailandscapitalcontrols-20Dec06.pdf BOT. Bank of Thailand. Inflation Report January 2007. P 19-20. http://www.bot.or.th/English/MonetaryPolicy/Inflation/PaperInFrame/068Reserve_Jan2007.pdf BOT historical data of financial markets. Accessed 20 May 2011. http://www.bot.or.th/English/Statistics/Pages/index1.aspx Caruana J. Burton D. Thailand Financial System Stability Assessment. April 29, 2008. International Monetary Fund. Prepared by the Monetary and Capital Markets and Asia and Pacific Departments. Accessed 19 May 2011. Coelho B. Gallagher K. 2010. Capital Controls and 21st Century Financial Crises: Evidence from Colombia and Thailand. University of Massachusetts Amherst. Working paper series Number 213. Accessed 20 May 2011. www.umass.edu/peri/ Department of International Economic Affairs, Thailand. The reserve requirement measure on short-term capital inflows. 22 December 2006. Bank of Thailand. Jittrapanun T. Prasartset S. Hot Money and Capital Controls in Thailand. 2009. TWN Global Economy Series 15. Rochananonda C. Tax Incentives and FDI in Thailand. Fiscal Policy Office, Ministry of Finance, Thailand. February 2006. http://www.econ.hit-u.ac.jp/~ap3/apppfdi6/paper/THAILAND.pdf Saiecheua S. Fongarunrung T. Thailand: Baht strength and implications. 2010. Phatra securities. Thailand economics. 20 May 2011. https://www2.phatradirect.com/phatra/Research/upload/0000106209/0902ECON.pdf Sangsubhan K. March 2008. Managing capital flows: The case of Thailand. ADBI institute discussion paper 95. Thaicharoen Y. Ananchotikul N. Thailand’s experiences with rising capital flows: recent challenges and policy responses. BIS papers NO 44. Bank for International settlements World Bank. World Development Indicators 2009. Yahoo! Finance. Exchange rate of THB and USD – Interactive chart. 20 May 2011. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“International Finance Course project Research Paper”, n.d.)
Retrieved from https://studentshare.org/military/1422808-international-finance-course-project
(International Finance Course Project Research Paper)
https://studentshare.org/military/1422808-international-finance-course-project.
“International Finance Course Project Research Paper”, n.d. https://studentshare.org/military/1422808-international-finance-course-project.
  • Cited: 0 times

CHECK THESE SAMPLES OF International Finance: The Bank of Thailand

Thailand

thailand's economic development has strongly been market-oriented and has an open trade for investment with the rest of the world.... thailand has been having an outstanding performance in the economic development since late 1950s.... Economic development in thailand.... thailand has been having an outstanding performance in the economic development since late 1950s.... Introduction thailand has been among a group of East and Southeast Asia that have formed the center of research because of their outstanding economic performance....
12 Pages (3000 words) Research Paper

Transformations of Thailand

This research paper "Transformations of thailand" shows that the civil society in Thailand has undergone rapid change.... The civil society gas has grown and this has developed a participatory political structure in thailand.... The loosely cohering and fragmented party system in thailand has been restructured.... The village community has become more cohesive and their actions have become more collective in nature (thailand Country Report, p....
12 Pages (3000 words) Research Paper

The ongoing transformation of Thailand The last 100 years

n the years after the Second World War Danny Unger,quoting a World Bank source has this to say about the economic state of thailand.... The Ongoing Transformation of thailand - The Last 100 Years A hundred years ago, Thailand was a struggling third world nation.... In the years after the Second World War Danny Unger (1998), quoting a World Bank source has this to say about the economic state of thailand: ... With regards to the third aspect mentioned by the authors as part of a national overhaul of thailand's government policies, O'Reilly and Habegger (1993) explain the change of perspective concerning Thailand's Buddhist roots: ...
2 Pages (500 words) Essay

Thailand's Crisis: A critical analyis of Thai Economic Security

The paper presents a critical analysis of thailand's economic crisis; the research analysis essentially includes a scrutiny of the pre-crises economic and social policies and factors that facilitated the economic boom, eventually resulting in the economic bust characterized by the financial crisis.... Though the nation has emerged fairly well from the economic crisis through economic reforms and restructuring as well as political intervention, many socio-political and economic issues still remains to be resolved so that the national security of thailand may be guaranteed....
50 Pages (12500 words) Essay

The Exchange Rate Regime of Thailand, purchasing power parity of Thailand

Geographically the area of thailand is 513,115 sq.... Beautiful city of Bangkok is the capital of Population of thailand is relatively homogeneous, which consists of Buddhist 94-95%, Muslim 4-5%, Christians, Hindus and others.... Economic performance of thailand: - The Thai economy is export dependent, with export accounting for 60% of GDP.... Like many other countries of the world, thailand also witnessed many ups and down and was occupied by the Japanese during Second World War....
16 Pages (4000 words) Essay

The International Disputes in Thailand

The paper "The International Disputes in thailand " highlights that in 2004, the United States and thailand established negotiations for a Free Trade Agreement.... Even though there have been talks about continuing the border committee, thailand is in a continued battle with Karen, ethnic rebels, refugees, and illegal immigration.... thailand's economic system is based primarily on exports, which account for greater than two-thirds of the Gross Domestic Product (GDP)....
11 Pages (2750 words) Essay

The Potential for Commodity for the Future of Thailand

The paper 'The Potential for Commodity for the Future of thailand' looks at rice, which is considered as the globally most consumed food grain and it can easily be figured out that pressure of demand on the production of rice would be touching its zenith in years to come.... thailand as the largest exporter of rice has a substantial interest in the rice market and must prepare for the coming year to match the pressure of the growing demands that will be put on the stocks of rice....
40 Pages (10000 words) Research Paper

Transformations of Thailand

The author concludes that thailand attained greater success under democracy.... The hospitality and tourism industry in thailand has flourished immensely under the private sector which has enhanced the country's global presence .... What follows is that thailand has been greatly affected by the social, political and economic unrest.... The rise of the Democratic Party was an important turning point in the history of the nation The loosely cohering and fragmented party system in thailand has been restructured....
13 Pages (3250 words) Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us