Capital inflows worry Prasarn

• Newspaper section: News

Global foreign exchange cooperation is essential to tackle the problem of excessive foreign capital inflows into regional economies, says Prasarn Trairatvorakul, the governor of the Bank of Thailand.

Bank of Thailand governor Prasarn Trairatvorakul gives his address at the Bank of Thailand International Symposium2010onthe challenges facing central banks in the era of ‘‘new globalisation’’, held at the Mandarin Oriental Hotel yesterday. WISIT THAMNGERN

Failure of negotiations to smooth currency markets might lead to a stagnant global economy, he said yesterday.

"I am concerned," said Mr Prasarn, who took office on Oct 1. "Thailand is not a large economy, but we are very open [to the international market]. The saying goes that when elephants fight, the grass is trampled."
He said central banks in the region were discussing with each other possible measures to curb rapid currency appreciation. Their top concerns are that the US Federal Reserve is likely to extend its near-zero interest rate policy for a longer period, and that it would also buy huge amounts of government and private-sector bonds to shore up the weak US economic recovery.
Huge flows of foreign capital by investors seeking better returns in emerging markets such as Thailand are seen as the main force behind rapid currency appreciation. The baht was trading late yesterday in Bangkok at 29.80/84 to the US dollar, unchanged from Thursday.
The expectation of prolonged low interest rates in advanced economies, coupled with China's refusal to allow the yuan to appreciate, has put Asian economies under pressure from excessive fund inflows.
Mr Prasarn was circumspect about whether the BoT planned to introduce any new measures to curb the baht's surge. But he was adamant that it would not operate with a specific baht target.
"We would rather not impose extreme measures [as they may affect the overall economy]," he said.
"The lesson from 1997 was that we cannot have all three objectives - price stability, an open capital account and a fixed exchange-rate regime - simultaneously. We have chosen the first two."
The Finance Ministry last week introduced a 15% withholding tax on capital gains from foreign bond holdings, a measure the market considered a form of capital control. But the baht has continued to strengthen since then.
Economists expect the G20 forum in Seoul in November to discuss the foreign capital influx into emerging markets.
Developing and developed economies that are members of the G20 were likely to discuss the effects of big injections of liquidity by the US, Europe and Japan on developing economies, said Hyun Song Shin, the Hughes-Rogers professor of economics at Princeton University, who spoke at the BoT forum yesterday.
Barry Eichengreen, professor of economics at University of California, Berkeley, said the euro and yuan may become more important international reserve currencies sooner than expected.