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UPDATE 2-Thai c.bank gov carefully weighs more capital controls
November 24, 2010 / 9:16 AM / 7 years ago

UPDATE 2-Thai c.bank gov carefully weighs more capital controls

* Says rates low, but raising them could attract fund inflows

* Says not concerned about price pressures at the moment

* Bubble a risk if rates stay low for too long

* Says baht’s trade-weighted level manageble, exports healthy (Adds comment on regional coordination, 12th paragraph)

By Jason Szep and Orathai Sriring

BANGKOK, Nov 24 (Reuters) - Thailand’s central bank is prepared to use more capital control measures, including a Tobin-style tax on international transactions, but sees no need to impose them now, the central bank chief said on Wednesday.

He said inflation was not a concern at the moment, reinforcing expectations the central bank would keep its trend-setting one-day repurchase rate unchanged at 1.75 percent at next Wednesday’s policy-setting meeting.

In his first interview with foreign news organisations since taking the helm of the central bank on Oct. 1, Prasarn Trairatvorakul said the Thai economy faces “lots of uncertainties” -- from global economic troubles to a national Thai election expected next year.

“The best way for us is to have a variety of policy tools and then be able to use a mixture of them in a good proportion, hopefully at good timing,” said the 58-year-old former president of Thailand’s No. 3 bank, Kasikornbank .

Asked whether the central bank was prepared to impose a one-time inflow tax or a Tobin tax, he said: “In our toolkit, this is one component. To use it or not is another matter.”

Nobel prize-winning U.S. economist James Tobin first proposed a small levy on currency trading in 1972 to penalise short-term speculation after the United States abandoned the gold standard.

The idea is gaining steam in Asia. South Korean Finance Minister Yoon Jeung-hyun said on Oct. 19 his country was also studying a Tobin-style tax as easy-money policies in the developed world swamp emerging-market economies from Thailand to Brazil with capital searching for higher returns.

That’s driving up currencies and complicating economic policy. The Thai baht is up more than 11 percent this year at a 13-year high against the dollar, while Thailand’s stock market has surged more than 40 percent as foreign investors pile into Southeast Asia.

TRIGGER FOR MORE CONTROLS?

Prasarn acknowledged Thailand’s interest rates remained low compared with the country’s Asian neighbours, especially given projections that growth will reach as much as 8 percent this year.

But he said global capital flows presented a “dilemma”. This year alone has seen $30 billion in capital inflows into the country, he said, including $18 billion of portfolio flows. “The more you increase the rate the more you attract this capital flow,” he said. “It is like giving our benefits to these undeserved investors. Why do you want to do that?”

He said the Bank of Thailand is in regular contact with other regional central banks and “there could be cooperation” in monetary policies if conditions called for it. He said imposing a Tobin-style tax would be relatively easy, requiring just an emergency decree by the Ministry of Finance with Cabinet approval, rather than overhauling tax laws.

But Thailand is treading carefully after tough capital controls in late 2006 triggered a record one-day selloff in the stock market. Those have since been lifted.

He described as a “problem” the U.S. Federal Reserve’s decision this month to embark on another round of “quantitative easing”, buying an extra $600 billion of government bonds with freshly printed money. The U.S. measure has deepened fears of heavy capital flows battering emerging Asia.

In October, Thailand imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai debt to try to stem inflows. More recently the central bank imposed a borrowing limit of 90 percent of the purchase price on new condominiums to prevent the market from overheating.

Prasarn said a possible trigger for further controls could be volatility in the baht on trade-weighted terms, but he said its nominal effective exchange rate was “still manageable”.

“That’s probably the working indicator for us,” he said of the nominal effective exchange rate, which measures the baht’s value against a basket of its trading partners’ currencies and, as Prasarn puts it, is better measure than the baht/dollar rate.

Many exporters have expressed concern that the strong baht would hurt revenues. But Prasarn said next year’s projected 11-14 percent export growth was “still healthy.”

He noted 70 percent of Thailand’s exports go to countries outside the United States, Japan and the euro zone that have exchange rates that are also rising against the U.S. dollar.

Asked if inflation was a concern, he said: “not immediately. But down the road some time next year there will be some.”

Even those pressures are unlikely to be strong enough to push core inflation beyond a target range of 0.5-3.0 percent next year, he said, unless the government fails to extend subsidies on public transport and some utilities. That is considered unlikely.

Still, the soft-spoken Prasarn, who has an engineering degree from Chulalongkorn University in Bangkok and a Master of Business Administration as well as a doctorate in business administration from Harvard University, sounded a note of caution.

“When you have low interest rates for a long time and you also have a huge amount of capital available, it can lead to problems of an asset price bubble,” he said. “We have sent that signal. That’s an indication of what we want to tell the public.”

(Editing by Neil Fullick)

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