Once upon a time, according to the Bible, a man named Noah constructed an ark at God’s command to save his family and the world’s animals from a great flood. Subsequently, Noah’s ark allowed the continuation of humanity and the animal kingdom up until the present day. To compare Thailand to the Noah’s story, the country has been hit by several severe floods this year, be it water or capital floods. As time and tide wait for no man, rescuing our country and eliminating, or at least alleviating, flooding problems, will require the putting together a good risk management structure; our “Noah’s Ark” of 2010.
In order to establish a good risk management structure, a cleverly designed irrigation system has to be constructed. How can this be done? First of all, high-quality information and close surveillance are required to create an effective warning system so that people can take precautions before the flood arrives. With reliable information and closely-monitored water situation, when the siren sounds people can prepare to evacuate to safe locations, resulting in less damage to lives and properties. Correspondingly, trustworthy information systems and surveillance on capital inflows would allow the responsible authorities to accurately assess the ongoing situation, and take proper action in time when inflows reach the warning level.
Secondly, well-designed dams need to be created. Dams can help manage water flow, and along with retaining water, they will effectively reduce the probability of flooding. In the same way, well-planned capital account policies and appropriate measures could facilitate capital flow management by acting as valves in encouraging the balance of flows and preventing excess flows. Hence, excessive baht volatility could be limited.
Other than close surveillance and building dams, canal dredging and deepening, as well as canal digging, are necessary as this would allow the stream of water to evenly distribute to different locations and increase the soil fertility. Akin to canal dredging and deepening, enhancing the financial market depth by adding new products and players could help manage massive capital inflows, and eventually reduce the vulnerabilities of the market. In addition, canal digging resembles building new pathways for capital flows. The recent relaxation of outflow regulation regarding investment of Thai companies overseas could serve as an example, as it would result in balancing capital movements, alleviating the over-heated local markets, and hence more stability in our baht currency. In other words, with well-planned management, capital inflows would allow Thai companies to have access to cheaper capital, and thus create more opportunities to expand their businesses and investment.
Besides, prevention is better than cure. If the risk of deluge is foreseeable, sandbags should be prepared and stacked in advance to prevent or lessen possible damage. Likewise, if the risk of massive capital flow is expected, Thai companies ought to perform hedging to avoid potential pressure from exchange rate fluctuations. That is to say, awareness about the importance of hedging needs to be raised, while risk management education is advocated.
Last but not least, it is necessary for one and all to adapt and adjust themselves to be capable of coping with any forthcoming situations. If each individual could take care of his/her own flooding risks, the global impact would become less severe.
As the proverb says, “procrastination is the thief of time” and a good risk management structure is needed now to serve not only as our “Noah’s ark”, but also as our “prince charming”, so that we may all live happily ever after.
The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.