Thai Prime Minister Abhisit Vejjajiva on Thursday dismissed calls for market intervention to help stem the bahts appreciation, saying the central bank could face a huge loss as its intervention may not be successful, as seen in many countries’ attempts to stem their own currency surges.
“Some countries spent a large amount of money to intervene in their currency markets but are [still] unable to buck the market trend. In our case, just simply put, the central bank will face a heavy loss and in fact it would not be able to rein in the rising baht,” he said.”To spend a large amount of the country’s reserves for that purpose will not be worthwhile at all,” the prime minister stated.Mr Abhisit expressed confidence that Thailand will not experience a second round such as the 1997 financial crisis or the so-called “Tom Yam Kung” crisis.
The Thai government announced on Tuesday it has imposed a 15 percent withholding tax on interest payments and capital gains for government and state owned company bonds, indicating the government will take decisive steps to slow the inflow of ‘hot money’. Thailand’s decision to introduce a tax on foreign holdings of bonds is the latest in a series of efforts by emerging economies to decrease destabilizing capital inflows as fears of a global currency war increase.
The central bank’s Monetary Policy Committee (MPC) of Thailand has become increasingly concerned about foreign capital inflows as the economy has failed to grasp their benefit. The inflows have lifted the baht by 11% against the dollar so far this year, the largest gain in the region after the Japanese yen.
Analysts expect the interest-rate gap between the US and developing regional economies to widen, with the US Federal Reserve signalling it might renew its plan to inject liquidity into the private sector.
The Fed statement, coupled with the worsening trend of the US economy, has caused the US interest rate to continue to fall, with yields on 10-year treasury bills slipping below 0.5%.
Steady net gains in trade and services in Thailand have also drawn investment on expectation of continued baht strength. The total balance of payments surplus through August was US$18 billion, of which $6.6 billion was from the current account.