Page 2 of 2 Thailand triggers another Asian
contagion By David Fullbrook
fared too well, including in Chile in 1991
and Argentina in 2005. In both cases, investors
and speculators found ways around the controls and
the real exchange rate continued to be determined
largely by market forces.
At the same
time, governments have usually moved to stave off
depreciatory, not appreciatory, speculation
against their currencies. What may well be
worrying the BoT is not so much
the
baht's strength, but the country's vulnerability
to external shocks if speculators suddenly find
cause to bail out of their baht holdings, either
in currency or stock assets.
On the
surface, there seems little reason for such
concern, with widespread perceptions that the
September 19 coup ended a prolonged period of
political turmoil and with exports growing at a
healthy double-digit pace. Still, private
investment has fallen since June 2005, rising less
than a miserable 2% year on year in October.
Exports are expected to slow next year, given that
the US economy is losing speed and housing is in
recession.
Thai exporters, whose
competitiveness has been undermined by the
appreciating baht, reacted favorably to the
central bank's intervention. "Customers are citing
currency as a key obstacle to proceeding with
orders," said Paul Spencer, business development
manager of Panda Thai Industries, a leading
furniture exporter. "What concerns us the most is
our industry is sliding into greater
non-competitiveness as compared to other Asian
producers, which have seen half the currency
appreciation as compared to the baht."
Investors were already nervous about
Thailand's policy regime toward foreign investors
in light of a review of the Foreign Business Act,
which includes caps on foreign ownership in
various industries that many foreign investors
have circumvented through the use of local
proxies.
It is, of course, too early to
judge just how effective the capital-control
measures will be - but it's clear they could have
other unintended consequences, both for Thailand
and the region.
"It's one that raises
policy risks in other areas. It raises more
questions in foreigners' minds, including foreign
direct investors, just when Thailand is trying to
rebuild investor confidence," said Karacadag.
"This action certainly does not increase
confidence about what comes next."
What
could come next is that other export-dependent
regional countries facing an appreciating currency
may follow Thailand's lead if the measures prove
effective.
Malaysia imposed capital
controls in the wake of the 1997-98 financial
crisis, and some economic analysts say the
measure, decried by foreign investors, helped
Malaysia ride out the crisis better than places
like Thailand and Indonesia, which adopted the
International Monetary Fund's neo-liberal
prescriptions to set their economies straight.
Malaysia, Singapore and the Philippines
have all seen their currencies appreciate against
the greenback this year, putting their export
industries at a greater disadvantage in relation
to Chinese competitors, which have enjoyed record
sales due to the yuan being pegged, not floating,
against the dollar.
But unlike the run-up
to the 1997 crisis, nearly 10 years later, the
region's policymakers are significantly operating
from a position of currency strength rather than
weakness.
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