Exchange Rate Policy

1

• Just after WW2: high inflation, shortages of goods and foreign exchange

• Began to use the multiple exchange rate system in 1947• Official rates and market rate

2

• Began to use the multiple exchange rate system in 1947• Required exporters of rice, tin,

and teak to sell foreign exchange at an official rate (12.50 baht/$ which was lower than the market rate)

3

• Began to use the multiple exchange rate system in 1947• Sold $ at an official rate for

essential imports• Less inflation, and more $

available + government revenue from export taxes

4

• Thailand became a member of IMF in 1949• But no par value of the baht• The world adopted the Bretton

Woods system of $ and gold + adjustable peg ER system

5

• Thailand started liberalization of trade in 1955• Abandoned the multiple ER

system• Established the Exchange

Equalization Fund (EEF) to

maintain the baht value at 20 ฿/$

6

6 periods of ER system in Thailand:•Period 1 (1955-1963)• no par value of the baht • Bank of Thailand (BOT)

intervened (through EEF) to maintain the baht value

• Small changes in ER, lowest at

21 ฿/$7

• Period 2 (1963-1978)• set par value of the baht at 20.88

฿/$ + 1%• Rather stable, pegged with $• Devalued with $ in 1972-73

• Adjusted parity to 20฿/$ in 1973 with a wider band + 2.25%

8

• Period 3 (1978-1981): daily fixing• The global floating ER system• Thailand abandoned parity, and

pegged the baht with a basket of currencies

9

• Period 3 (1978-1981): daily fixing• BOT and banks jointly fixed

exchange rates every morning by creating demand-supply balance

• More fluctuation in the baht

value (weakest at 21 ฿/$)

10

• Period 4 (1981-1984): fixing by BOT• The baht began to depreciate

against $ with BOP deficits (second oil crisis)

• Speculation against the baht, with BOT defending and losing much of the reserves through the daily fixing

11

• Period 4 (1981-1984): fixing by BOT• BOT stopped the daily fixing• BOT devalued the baht in 1981

from 21 to 23 ฿/$

12

• Period 5 (1984-1997): basket peg• BOT pegged the baht with a

basket of currencies (7 including $ with the biggest weight), aiming at more flexibility and independence from $

13

• Period 5 (1984-1997): basket peg• BOT devalued the baht in 1984

to 27 ฿/$• Exports and the economy

recovered• In practice, the baht was more

flexible, but still very much fixed with $

14

• Period 5 (1984-1997): basket peg• Financial liberalization: no

interest rate ceiling, free capital movement, BIBF

• High economic growth, influx of capital inflows (high returns with no ER risk), real estate and stock speculative boom

15

• Period 5 (1984-1997): basket peg• Export stagnation in 1996

triggered speculation against the baht, bursting the bubble

• BOT lost most reserves in defending the baht

16

• Period 6 (1997-present): managed float• BOT floated the baht on 2 July

1997• The baht depreciated very

quickly, weakest at 56 ฿/$ in early 1998

17

• Period 6 (1997-present): managed float• Managed float: no target of ER to

defend, but intervene only to reduce short-term fluctuations

• During 1999-2000 the baht

stabilized at 36-39 ฿/$

18

• Period 6 (1997-present): managed float• During 2001-2002 the baht

depreciated to 43 - 44 ฿/$

• Later stabilized at 40 - 41 ฿/$ during 2003-2005

19

• Period 6 (1997-present): managed float• During 2006-2007 the baht

appreciated to 33 - 38 ฿/$, while $ weakened worldwide

• BOT introduced at end of 2006 a capital control measure (unremunerated required reserve for S-T capital inflow or URR) to slow down baht appreciation 20

• Period 6 (1997-present): managed float• BOT abolished the Exchange

Equalization Fund (EFF) in 2007• BOT just ended the capital

control measure (URR) in March 2008

• The baht has appreciated against the US dollar in recent years, due to the weak dollar worldwide

21

• Period 6 (1997-present): managed float• The baht can be compared

against a number of currencies

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