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2 Thailand triggers another Asian
contagion By David Fullbrook
BANGKOK - After months of playing down a
fast-appreciating baht, Thailand's central bank
lashed out against speculators on Monday by
introducing capital controls. These caused the
currency to dip slightly, but had the apparently
unintended consequence of sending stocks crashing
in the biggest single-day drop in the Thai
bourse's 31-year history.
Later on Tuesday night,
the Thai government said it would lift
the new controls on foreign investment in
stocks.
Reminiscent
of the "Asian contagion" triggered by Thailand
in 1997, which became a full-blown Asian financial
crisis, other
Asian stock indices reacted
to the Thai news with sharp falls on Tuesday. The
Bombay Stock Exchange's Sensitive Index dropped
2.5% and Indonesia's Jakarta Composite Index lost
2.9%. Malaysia's Kuala Lumpur Composite Index fell
2% and the Karachi Stock Exchange 100 Index was
off 2.8%. Singapore was also down, by about 1%.
"There is a general question about who
might be next in following Thailand's move and so
people are focusing on, could it be the
Philippines, Malaysia, perhaps Korea?" Adrian
Mowat, JPMorgan Chase & Co's regional equities
strategist in Hong Kong, was quoted by Bloomberg
as saying.
Thailand's central bank
governor Tarisa Watanagase announced on Monday
that foreign investors would have to lock up 30%
of foreign-exchange deposits for a one-year
period. The new rules affect all sums over
US$20,000 that are not linked to trade or foreign
direct investment, and investors who wish to
repatriate their money within a year will face a
stiff financial penalty.
Thailand's
dramatic move raises hard questions about the new
military-appointed government's economic
stewardship. It has given rise to speculation that
the controls may have been imposed preemptively to
temper the impact of bad economic news ahead. Some
analysts are concerned that recently ousted prime
minister Thaksin Shinawatra may have hidden old
financial problems or accumulated new ones off
balance sheet, which the new government will need
to deal with publicly.
It is probable,
though, that the government has reacted to growing
political pressure from exporters and the farming
sector in particular to stem the rise of the baht,
lending credence to the theory in some quarters
that the Bank of Thailand's move was not
independent of government pressure.
The
baht slipped back on Tuesday from a nine-year high
of 35.12 against the US dollar, while stocks fell
more than 11.76%, or 85.89 points, prompting
stock-exchange officials to ask the central bank
to reconsider the move. Stock-market analysts
consider a single-day fall of 10% a full-blown
crash. Whatever the motivation and whoever was
behind the central bank's action, it appears to be
an overreaction to the appreciation of the baht,
which had gained more than 19% against the
greenback since January, making it one of Asia's
best-performing currencies this year.
On
many technical measures, Bangkok-based market
analysts say, the baht remains undervalued. Credit
Suisse, an investment bank, reckons the baht's
fair value against the dollar is 25.5, using its
equilibrium exchange-rate model. Cem Karacadag, a
director at Credit Suisse, is sticking by a
forecast of 34 baht to the dollar by December 2007
- even with the new restrictive capital controls
in place.
During the past few months, the
Bank of Thailand (BoT) has twice introduced mild
measures to moderate the baht's advance - to no
avail. Capital has been pouring out of the United
States, where fears of recession had been riding
high, into so-called emerging markets such as
Thailand, where economic prospects seem brighter.
But the inrush of foreign capital caused
the authorities to worry that speculators' hot
money would drive the baht up too high and too
fast, undermining the competitiveness of exports,
which contribute more than 65% to gross domestic
product.
The central bank has long used a
mild form of capital controls to control
volatility in the exchange rate and has
historically intervened in foreign-exchange
markets, even though the baht has officially been
a free-floating currency since the 1997-98 Asian
financial crisis.
However, as Tuesday's
stock-market crash demonstrated, the central bank
appears to have overstepped its mark. "I think
what they did yesterday [Monday] was arguably a
disproportionate response, it was beyond market's
expectations in terms of scale and scope. It's
hard to be encouraged by the stock market's fall
and the baht's strengthening" off overnight lows,
said Karacadag.
Tarisa's choice of
instruments to prick the speculation bubble caught
most financial analysts off guard. They note that
similar measures imposed in developing economies
elsewhere have not
