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Prasarn Says Capital Flows Remain Key Risk for Thailand Economy

Bank of Thailand Governor Prasarn Trairatvorakul said volatile capital flows are the main threat to economic growth this year, after overseas purchases of stocks and bonds pushed the baht to a 17-month high yesterday.

“We have to take care of capital flows, which will be more volatile, and assess the baht’s impact on the real economy,” Prasarn said today in an annual policy address in Bangkok. “We have prepared tools and will use them if needed,” he added, without saying what measures the central bank may employ.

Finance Minister Kittiratt Na-Ranong said last week that Thailand’s exchange rate is “not at a good level” and that exporters will face difficulties should the baht strengthen further. Policy makers in the Philippines and South Korea have taken measures to contain their currencies as monetary stimulus in the world’s biggest developed economies spurs capital flows to the region. The baht is the gainer in Asia this year.

“If there is unusual movement, we are ready to take action,” Prasarn said today. “This is our normal practice. Moving against the market will create risk on cost, but that doesn’t mean we accept that the market mechanism is perfect.”

The baht traded at 29.73 per dollar at 12:38 p.m. in Bangkok after touching 29.66 yesterday, the strongest level since August 2011, according to data compiled by Bloomberg. Overseas investors bought $3.1 billion more of sovereign debt than they sold this month and purchased a net $382 million of equities, according to data from the Thai Bond Market Association and stock exchange.

Imbalances, Bubbles

The Bank of Thailand on Jan. 9 kept its policy interest rate unchanged for a second straight meeting after cutting it twice last year as the economy recovered from the floods in 2011. The monetary authority last week raised its growth forecast for this year, citing strong local demand and improving exports.

“The challenge this year is to balance between economic expansion and financial stability,” Prasarn said. “If we keep the key interest rate, which is the cost of borrowing, low for a long time, it will encourage more debt or more investments in risky assets and lead to financial imbalances and bubbles.”

Foreign direct investment totaled $8 billion last year and Thai investments overseas were $11 billion, Prasarn said. Overseas purchases of Thai stocks and bonds added up to $12 billion in 2012, while Thai investments in foreign securities were $8 billion, he said.

While the baht’s appreciation has accelerated in recent weeks, its gains over the past year are in line with other Asian currencies, Prasarn said. The central bank has the resources to help smooth volatility in the baht even after the monetary authority recorded 323 billion baht ($11 billion) of negative equity and 130.4 billion baht in net losses as of end-2011.

““We are monitoring the situation to see how business operators cope,” Prasarn said of the baht’s appreciation. “‘We have to look at the long term.”

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