Thailand floats the baht

Thai monetary authorities have finally decided to float the baht, a measure they had been urged to introduce early this year and again in May amid the new wave of speculative attacks on the currency. Most analysts had warned that the Thai government had only bought itself time after the Bank of Thailand, in cooperation with the central banks of several Asian countries, succeeded in defending the baht in mid May. Market players had expected an outright devaluation or a much greater exchange rate flexibility. They saw the measures taken by the Thai central bank to defend the baht under a tight exchange rate policy as too costly and unsustainable.

As the key economic indicators continued to point toward a sharply declining economic growth rate, market confidence in the fiscal and monetary policies fell. The June 20 replacement of Finance Minister Amnuay Virawan by former banker Thanong Bidaya did not help restore the credibility of the monetary authorities.

The situation worsened after last Friday's suspension of 16 unsound finance companies and the downward revision of economic growth. Prime Minister Chavalit Yongchaiyudh tried to assure the market Sunday, asserting that the baht would not be devalued, but the prevailing economic indicators told of a different outlook.

The market's wild reaction to the Bank of Thailand's decision yesterday to float the baht against market forces, to raise its discount rate -- the rate the central bank charges on its loans to commercial banks -- and to review the two-tier baht market which was introduced last May, was simply understandable. The situation was still in a flux because most speculators and analysts believed the monetary authorities have yet to learn how to manage the floating of a currency which has had a fixed exchange rate since 1984.

The baht experienced a de facto devaluation yesterday when it plunged by 18 percent on international markets. This was expected as in the short term there would be uncertainty and volatility until the monetary authorities decided on the most appropriate exchange rate band for the baht.

But contrary to earlier apprehensions among foreign speculators, the baht's steep fall did not set off strong speculative attacks on the currencies of other Southeast Asian countries even though several central banks did take precautionary measures against possible fallout.

This shows that the dire economic problems which Thailand currently faces are not regional in nature. True, the combined problems of declining export growth, worsening current account deficits and big bad credits in the financial industry do, to a certain extent, affect countries like Indonesia. One of the basic differences, though, is that Thailand's neighbors do not apply what analysts see as a strange policy dose of high bank interest rates and a fixed exchange rate as Thailand did until yesterday. Bank Indonesia, for example, though adopting a relatively tough monetary policy, has since last year applied an 8 percent band to the rupiah exchange rate to discourage currency speculations by transferring most of the risks of speculations to traders.

The de facto devaluation of the baht, as a result of the floating, will hopefully reinvigorate the economy on the back of stronger export competitiveness. Provided the uncertainty and volatility does not continue, the private sector would not be badly hurt by an expected sharp increase in foreign debt service burdens -- the bulk of Thailand's US$90 billin foreign debts is owed by private borrowers -- the market turmoil caused by the baht flotation will end soon. Thailand and its neighbors could then rest assured that international investors would not lose confidence in what has been called the East Asian economic miracle.