Thailand has no plan to adopt currency board

Thailand has no plan to adopt currency board

BANGKOK (Reuters): Thailand has no plan to establish a currency board and it is confident that the market can see the difference between economic problems facing the country and Indonesia, government spokesman Akapol Sorasuchart said yesterday.

Akapol quoted Finance Minister Tarrin Nimmanahaeminda as telling an economic ministers meeting that Thailand was watching Jakarta's decision on whether to peg the rupiah to a hard currency.

The spokesman said: "If problems faced by Indonesia are prolonged, they may affect Thailand to some extent."

Akapol echoed statements made by Thai economic ministers in the past few weeks that Bangkok is confident that the market could separate Thai economic problems from those faced by Indonesia.

"Thailand has no need to use the currency board system. We have reached the point of the IMF completing its review of the Thai economy, for its third disbursement of funds under the bailout package. We believe the market could differentiate between Thailand and Indonesia," he said.

The IMF is expected to approve next month a third US$1.8 billion tranche of loans under a $17.2 billion international bail-out package for Thailand.

Not panacea

In Tokyo, Mary Davis, a currency strategist at Credit Suisse First Boston (CSFB) told a seminar yesterday that CBS was not a panacea for Asia's currency markets.

"Currency boards have been proposed as a possible solution, particularly in Indonesia. But in my view, currency boards are not a panacea," said Davis, who is director of CSFB's Emerging Markets Group in Singapore.

Countries must have a sufficient levels of reserves to honor the conversion commitment, Davis said.

"They need to have enough reserves to be able to cope with a capital outflow from the system. For example, debt servicing and any other capital outflows that may result," Davis said.

"So it is rather difficult for a country with a substantial current account deficit to maintain a currency board because of the ongoing drain of reserves from the system," she said.

In addition to a sufficient level of foreign reserves, a sound banking system and a sound fiscal policy are also conditions for maintaining a currency board, Davis said.

"You also need a pretty sound fiscal policy. If government debt is rising very rapidly and debt-servicing costs rising with it, then the whole credibility of the currency board may be called into question.

"It (currency board) is a pretty rigid system...You need to be able to commit to a high level of discipline in your monetary system to be able to sustain it," Davis said.

She said the Indonesian rupiah faced risks due to political uncertainties in the country and the ongoing dispute over the currency board plan.

"If Indonesia were to stick with orthodox policies and do the right things, then clearly the rupiah could appreciate substantially from 10,000 (to the dollar)," she said.

"But unfortunately, there is some risk that IMF support may be withdrawn. In those circumstances, it's very difficult to say how far (the rupiah) could go."