Since the end of the Second World War, Thailand employed the regime of fixed exchange rate one way or another. At the beginning our currency was fixed to the British Pound, and later to the US Dollar - first directly, then later via a basket with a very heavy US Dollar content. The regime had served us very well. It provided certainty for international trade, and it helped to attract foreign investment. We were able to maintain the parity with the US Dollar for more than 18 years until 1981 when we had our first devaluation. The pressure on our parity in the early days was slight. Thailand’s exports at that time were rice, rubber, tin and teak. Our production costs for those items were among the lowest in the world. However, beginning from the 1980’s, we began to industrialize. Our industrial exports which was only 33 % of the total exports at the end of the 1970’s quickly rose to 76 % in 1990 and even further to 86% today. With industrialization, we began to find that our productivity did not keep up with our major trading partners, particularly the US, and pressure on the parity began to build up. Our domestic costs of production have never been flexible downward. To ask for a wage and salary reduction was unthinkable then - as it is today. Our only choice was to devalue. The devaluations that occurred were not always smooth.
It allows the intermediation process to proceed uninterrupted when the banks are temporarily in difficulty. But more importantly, it helps with liquidity management. In the case of Thailand, the government throughout the 1980’s had been very disciplined in their fiscal policy. They maintained balanced budgets in most years. As a result, no new government bond was issued, as old ones were being retired. Without a deep and liquid government bond market, growth of corporate bond was also slow. When the crisis erupted, financial institutions that could not seek liquidity from the inter bank market were stuck without liquid instruments in hand. Some of them might have survived had the bond market been more active. After the crisis, the government had to issue massive amount of bonds to cover losses in the financial system. Today, the Thai bond market is therefore much larger, at 38 % of the GDP. We have a much more active market. What does an active bond market mean to monetary policy? I will highlight three points. First is the implication on transmission mechanism. When the central bank wants to change stance in monetary policy, it changes interest rate up or down. But it does not directly change the interest rates along the whole spectrum of the yield curve. It only affects the key policy rate, which in the case of Thailand is the very short-term 14 day rate in the repurchase market.