Improving Financial Resilience of the Thai Economy Against Exchange Rate Risk

Yunyong Thaicharoen, Punpilas Ruangwisut and Jirapol Mahuttikarn
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Yunyong Thaicharoen: Bank of Thailand
Punpilas Ruangwisut: Bank of Thailand
Jirapol Mahuttikarn: Bank of Thailand

No 2005-02, Working Papers from Monetary Policy Group, Bank of Thailand

Abstract: Excessive currency mismatch and structural fragility against FX risk not only was among the major contributing factors to the 1997 crisis, but also made the crisis very costly to resolve. Since then, the Thai economy has reduced vulnerabilities at the macro level to potential FX changes by strengthening its external positions as well as adopting a more flexible exchange rate regime. However, this is not a cause for complacency. With prospects of volatile exchange rate movement associated with existing global imbalances as well as increased importance of trade to the Thai economy, Thai firms are exposed to FX risk which could substantially impact both their income and balance sheets. This paper will first assess Thailand’s external vulnerabilities at the macro level by examining developments of various key indicators under the context of existing managed float regime. The paper will then explore current FX risk management practice at the corporate level. This part of the analysis will incorporate information from a corporate survey which was conducted to learn more on the impacts of FX risk, the methods and instruments they employ to manage the risks as well as the impediments that may prevent them from more effective hedging practices. The implications from above analysis then will be used to draw policy recommendations in order to improve country’s resilience against FX risk.

Pages: 87 pages
Date: 2005-08
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