Thailand Floats Baht, Raises Interest Rates

Thailand sent shock waves through Asian currency markets on Wednesday by floating the

battered baht, a move which analysts said was a de facto devaluation.

In a bid to keep the currency from spinning into a freefall the Bank of Thailand also raised its key commercial bank lending rate by two percentage points to 12.5 percent.

In order to end uncertainty over Thailands exchange rate policy, Thailands exchange rate system will from 2 July 1997 be a managed float, finance minister Thanong Bidaya said. The value of the baht will be determined by market forces to reflect fundamental economic forces. The Ministry of Finance and the Bank of Thailand believe the managed float system will benefit Thailands overall economic development, he said in a statement.

 

In offshore markets, the baht sank to 27.00/28.00 to the dollar from 24.25 on news of the float, which analysts said would allow the central bank to avoid intervening to support the ailing currency. It means they can stand away from intervention if they want to, said Chiang Yao Chye, economist at CIBC Wood Gundy in Singapore.

Bankers estimate that the Bank of Thailand used up to five billion dollars of its foreign reserves in May to defend the baht after it came under heavy speculative attack.

This cut the countrys foreign reserves to a two-year low of $33.3 billion at the end of May from around $37.3 billion a month earlier

Pressure was expected to mount again soon amid sustained bearish sentiment over the countrys economy and moves to rescue its beleagured financial institutions.

Under the new system movements in the exchange rate are expected to be quite large at the initial stage. However, relative stability should be attained after a brief adjustment period, Bidaya said.

The Bank of Thailand will intervene in the foreign exchange market from time to time to achieve policy objectives and guard against excessive baht fluctuations.

The statement gave no details on the exact way in which the managed float would work, but the central bank said later a baht-dollar reference would be set daily, based on the bahts trading average the day before.

The Bank of Thailand said it had an appropriate rate in mind in which it expected the baht to move, but gave no details.

However, if the baht goes beyond the approriate rate the central bank will intervene in the market, central bank governor Chaiyawat Wibulsawasdi told a news conference. Dealers said they would not be surprised if the baht tested 30.00 to the dollar. Thai overnight interbank rates were unqoted on Wednesday because banks were unwilling to lend until the market settled down. In the Philippines, the peso was hit by ripples from the Thai announcement, and the Philippines central bank raised interest rates to counter speculative attacks.

The Indonesian rupiah and Malaysian ringitt were also jolted by the news. Bidaya said domestic confidence in Thailands foreign exchange rate system had remained shaky despite the fact that the central bank had successfully defended the baht in May.

This is a de facto devaluation, but we need to know about the onshore/offshore trading system before we know if the speculators have won, a European currency trader based in Singapore said.

Thailand has a two-tier exchange rate system which limits offshore trading of the baht.

Before the float, it was fixed on a daily basis against a basket of currencies dominated by the U.S. dollar.

Analysts said higher lending rates would not help Thailands economy, which is burdened with a swollen current account deficit and financial market woes.

The economys already slowing down, interest rates should be coming down not going up, a senior foreign exchange trader at a European bank in Singapore said.