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Foreign Exchange Intervention and Its Implications for the Central Bank's Balance Sheet: Experience of Thailand

Jittima Tongurai*

JSPS Postdoctoral Research Fellow, Faculty of Economics, Oita University, Oita Japan.

Periodicity:December - February'2009
DOI : https://doi.org/10.26634/jmgt.3.3.239

Abstract

This empirical study examines the experience of a central bank of a developing country, Bank of Thailand, in operating foreign exchange intervention during the period of persistent appreciation of its currency in 2001-2007. Bank of Thailand has resorted to various tools, specifically foreign exchange intervention of outright spot transactions (buying US dollar/selling Thai baht) and sell/buy swaps (selling US dollar/buying baht spot and buying US dollar/selling baht forward), capital flow management, and sterilization operation to dampen rapid baht appreciation and stabilize its domestic economy. Prolonged foreign exchange intervention results in rapid increases in foreign exchange reserves and forward obligations of US dollar buying, especially during 2006-2007 when the size of intervention is unprecedented. This massive accumulation of foreign exchange reserves and net forward position could jeopardize the Bank of Thailand’s balance sheet as taking long position in depreciation-prone currency, the US dollar, may incur foreign exchange loss when baht appreciates substantially. In the world of increasing financial integration, mitigating exchange rate volatility at the same time of stabilizing domestic economy has become a great challenge to the monetary authorities of developing countries. The experience of Thailand provides a case study of how a small and open economy manages its exchange rates to contain the risks that come with global capital flows while maintaining internal stability.

Keywords

Foreign Exchange Intervention, Foreign Exchange Reserves, Forward Obligations, Thailand.

How to Cite this Article?

Jittima Tongurai (2009). Foreign Exchange Intervention and Its Implications for the Central Bank's Balance Sheet: Experience of Thailand. i-manager’s Journal on Management, 3(3), 25-34. https://doi.org/10.26634/jmgt.3.3.239

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