Banana Republic, is it a septic isle?


In a telephone interview on CNBC’s The Call, my business partner, Paul Gambles suggested that it would be wrong for the Bank of Thailand (BoT) to cut the benchmark interest rate. This was before the Monetary Policy Committee (MPC) convened on the 29th May. “A weaker Baht does not stimulate exports,” he said. “The Thai Baht is a pro-cyclical currency and tends to strengthen during periods of global growth, which is when the strongest Thai export growth occurs.” As we know, there was a 25 basis drop in the rate which, Paul, believe could be a mistake.

Paul believes that while everyone focuses on US Dollar/Thai Baht cross rate, it is also important to look at the Baht’s rate against the Japanese Yen, as well as the Chinese Renminbi (RMB) – especially as Asia is exporting within itself more and more so as to compensate for the drop in business with the West. “The Yen is being manipulated and the RMB seems undervalued too,” he explained. “One client recently returned from China remarking how cheap Big Macs are.”

This is significant as The Economist’s ‘Big Mac Index’ is an informal way of measuring purchasing power parity between currencies. So either the Chinese don’t like hamburgers or the RMB is cheaper than it should be. Fast food sales figures suggest that the Chinese do indeed like burgers, so the currency must be undervalued.

The Call’s presenter, Bernie Lo, suggested there was a consensus that rates would in fact be cut by 25 basis points, although Thai Finance Minister Kittiratt Na-Ranong has called for either a cut of 50 basis points or capital controls. Bernie asked if such explicit policy intervention by the Finance Minister was the definition of a banana republic.

“The Bank of Thailand isn’t doing the Ministry of Finance’s bidding,” Gambles replied. “It’s acting as a genuine counterbalance.”

Paul explained that the Ministry of Finance is pushing a growth mandate, whereas the BoT is going for sustainability and prudence. “The two are providing checks and balances in Thailand,” he added. “This is unlike the USA or the UK, where central banks are extensions of government policy.”

“I like bananas anyway!” retorted Lo.

Shortly after the show, the Joint Foreign Chambers of Commerce of Thailand scheduled a luncheon talk with Dr. Prasarn Trairatvorakul. However, Deputy Governor Pongpen Ruengvirayudh had to step in at the last minute as Dr. Prasarn was due to speak but he had been detained in a meeting with the Prime Minister and the cabinet. One can only speculate about that conversation!

When asked about Bernie’s banana republic comments, Pongpen suggested that we would have to monitor the MPC’s behaviour and its responses to economic situations and that the Governor was setting “A great example” – “The MPC is trying to be a good central banker in the BoT’s 70th anniversary year, by walking straight and walking tall; without paying attention to media commentary.”

Pongpen said that the high pace of credit growth raised the risk of the economy overheating. She added that the MPC had flagged this several times, was monitoring the situation closely but was also aware that growth was being affected by a compression in global demand.

Nevertheless, the Deputy Governor sees reversion to mean growth as healthy. She suggested that The Monetary Policy Committee must weigh up the objectives and that interest rates were not the only tools: macro-prudential tools were also available.

The BoT sees the Baht’s strength as a sign of better growth, strong external balances and good fundamentals with a catch-up effect. This situation can be compared favourably with the relative weakness around the region; such as the political uncertainty in Malaysia and Indonesia’s capital account deficit.

The Baht has deviated from its equilibrium, the Deputy Governor admitted, but she does not see foreign exchange as the main policy tool or even an intermediate target. She explained that she was more concerned with the impact of foreign exchange volume on SMEs. “The BoT, the Ministry of Finance and the National Economic and Social Development Board recognise that foreign exchange rates should not derail growth,” she said. “Policy measures will be designed to avoid unintended consequences.”

However, the Deputy Governor also commented that any pre-emptive policies should be used even if they cause short term impediments as long as they improve cause long term gain. So maybe Thailand isn’t a banana republic after all… which is more than we can say for USA, UK, et al.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]