AWSJ : Lessons Learned in Thai Policy Flip-Flop
Uncle Yap
December 21, 2006
Lessons Learned in Thai Policy Flip-Flop
Market Rebounds, But Bangkok May Lose
Credibility Among International Investors
By JAMES HOOKWAY
BANGKOK, Thailand -- On Monday afternoon, Thailand's finance minister
teased a group of local reporters about the steps the country's
central bank was about to announce to halt the rapid appreciation of
Thailand's currency and make the economy more competitive.
"You guys won't be able to guess" what the central bank is going to
do, Pridiyathorn Devakula said.
Twenty-four hours later, Mr. Pridiyathorn was no longer joking. A
seasoned central banker, he was on national television saying the
central bank would reverse its new capital-control policy after just
one day, amid intense pressure from Thai stock brokers and bankers.
The policy had spooked foreign investors, triggering a 15% dive in the
Thai stock market that wiped out $22 billion in market capitalization
Tuesday and shook stock markets as far apart as Malaysia, Hungary and
Brazil.
The Thai market partially recovered yesterday after Tuesday's U-turn,
with the benchmark Stock Exchange of Thailand index closing up 11%.
But many analysts say the policy flip-flop has already cost Thailand
much of its credibility among international investors.
How Thailand's policy makers botched their attempt to stop global
funds from wreaking havoc with the currency is a cautionary tale for
developing countries struggling to cope with the ocean of money
sloshing around the world's financial markets looking for the best
returns. But it also shows how, in this case at least, market
participants acted decisively, derailing the ill-conceived policy
before it caused more damage.
[Thai markets]
STR/AFP/Getty Images
An investor examined prices in Bangkok, Thailand, Wednesday.
It all started with good intentions two weeks ago, when the Bank of
Thailand, the country's central bank, began searching for a way to
stop the rapid strengthening of the baht, which has risen by as much
as 17% against the dollar this year.
Officials felt the situation was becoming dire. Foreign money was
flowing into Thailand, lured by its relatively high interest rates and
the prospect of further appreciation of the baht. Officials worried
that if the trend continued, Thai exporters would soon be priced out
the market, undercut by China, which doesn't let its currency move as
freely as the baht.
The speed of the inflows prevented Thai policy makers from lowering
interest rates, which they want to do partly to boost the economy. But
-- in a policy conundrum -- if rates were lowered, then bond and stock
prices would become more attractive, and there could be more upward
pressure on the baht.
Officials also felt hindered by China's reluctance to let its currency
appreciate -- which, in turn, makes Thailand's exports comparatively
more expensive. Investor interest in the country had been accelerating
after the military ousted the divisive former Prime Minister Thaksin
Shinawatra in a coup in September. Taken together, officials say they
had to come up with a way to limit the flow of money.
At a meeting last week, policy makers decided to impose a version of
the so-called Tobin tax introduced in Chile in 1991. Named after Nobel
prize-winning economist James Tobin, the policy was designed to tax
the flow of short-term foreign funds in and out of countries to limit
the impact of speculative money.
[Bulleted List]
In an interview, Mr. Pridiyathorn, who was appointed finance minister
by Thailand's army chief after the September coup, said "the central
bank looked closely at the measure for two weeks before announcing
it."
Unlike Chile, however, Thailand included foreign investments in the
stock market in its new capital controls, requiring foreign investors
to deposit 30% of the money they bring into the country in noninterest
bearing accounts at the central bank for at least a year. In effect,
it was a steep tax on foreign equity investments.
The central bank worried that funds ostensibly destined for the stock
market might instead be used to buy Thai bonds and commercial paper,
Mr. Pridiyathorn said. Speculative money has been building up in bonds
and commercial debt for weeks in anticipation of a stronger Thai
currency and declining interest rates. "It's very difficult to
separate" the two markets, so the bank opted to apply capital controls
across the board, he said.
Central bankers didn't consult outsiders on the policy move in order
to prevent news of it from leaking; they picked Monday as the day to
announce it, after the stock market closed.
But the officials didn't expect what happened next. Brokers and local
and foreign investors were stunned by the announcement and tried to
warn the Bank of Thailand about what would happen in the stock market
on Tuesday.
Korn Chatikavanij, a leading member of the Democrat Party and the
former head of J.P. Morgan Chase's brokerage operations in Thailand,
tried to telephone senior central bankers to persuade them to reverse
the new policy. Mr. Korn says he wasn't able to reach them.
Some stock brokers, worried that the new measures would cause
foreigners to flee the market, warned their clients a heavy sell-off
was looming.
On Tuesday, the opening of trading at Bangkok's sleek new
stock-exchange headquarters confirmed the brokers' worst fears. Many
blue-chip stocks lost 10% of their value almost immediately, and the
rout continued through the morning session.
[Rapid Reactions]
Stung by the extent of the losses, Thailand's senior stock brokers
united in an unusual display of activism. At midday, with the
benchmark index down 12%, the president of the Stock Exchange of
Thailand, Patareeya Benjapolchai, sent a letter to the governor of the
central bank, urging the bank to modify its new policies. She also
took her appeal public: At a lunch-time news conference, she declared:
"The Bank of Thailand should reconsider its measures."
When it became clear that a market implosion was likely, Thai brokers
and bankers huddled to discuss ways to persuade the central bank to
roll back its policy, especially the measure requiring investors to
deposit 30% of all new funds in a non-interest-bearing account.
Their main goal, Ms. Patareeya says, was to present an alternative way
to stop money earmarked for equity investments from flowing into the
bond market, as Mr. Pridiyathorn and the central bank feared it would.
They suggested the Bank of Thailand introduce a new kind of bank
account, which could be used only to transfer foreign funds to the
stock market.
Unmoved, the central bank spurned the brokers' suggestion.
Indeed, with the baht trading 1.6% lower against the U.S. dollar by
midday, Mr. Pridiyathorn said the new capital controls were a success.
"The measure has proven to be effective as the baht has stopped
appreciating and is starting to ease," he told reporters. "The foreign
inflows have been too large, causing excessive baht strength and
hurting exporters. At this point, we need to take care of the economy
first, and investors later."
But Thai stocks soon resumed their plunge, with the main index sliding
almost 20% at one point after a temporary suspension of trading.
Meanwhile, more than 100 brokers and bankers increased their pressure
on Thailand's financial regulators at a meeting at the central bank's
headquarters on the banks of Bangkok's Chao Phraya River. At the
meeting, Bank of Thailand Deputy Governor Atchana Waiquamdee argued
that the market was overreacting to the new capital curbs. But for the
next 90 minutes the brokers barraged Ms. Atchana with complaints that
the measures were causing severe damage to Thailand's stock market,
according to a person at the meeting.
At 4.30 p.m. the market closed down almost 15%, prompting warnings
that Thailand had effectively removed itself from international
investors' radar screens.
The negative onslaught was beginning to worry officials. Bank of
Thailand Assistant Governor Nitaya Pibulratanagit acknowledged to
reporters that, after listening to the brokers, the central bank had
concluded that "we must introduce measures to soften the rules
quickly."
In the early evening, Ms. Patareeya, the stock exchange's president,
and other leading brokers and bankers went to the Finance Ministry to
talk to Mr. Pridiyathorn and central bankers, who continued to argue
their case for the capital-control policy. The officials said they
wanted to cut interest rates to weaken the baht, but were unable to do
so without making Thailand's bonds even more attractive, says Keith
Neruda, head of research in Thailand for UBS AG, who attended the
meeting.
In response, the brokers pointed to the market sell-off.
"We...explained how we could work together to modify the new rules" to
prevent stock-market money flowing into the bond market, Ms. Patareeya
says. Ultimately, she says, "the government was receptive to the
change."
At 8 p.m., Mr. Pridiyathorn went on television to say capital controls
would no longer be applied to money destined for the stock market. "A
lesson has been learned, but no one needs to be responsible for this,"
he said.
That evening, international fund managers breathed easier. Mark
Mobius, who oversees emerging-market portfolios at U.S. money manager
Templeton Management, heard about the rollback during Templeton's
Christmas party in Singapore, when a trader called him on his mobile
phone.
Mr. Mobius says the policy miscue was scarier than the September
military coup, or any other kind of upheaval he has faced in years of
trading in emerging markets. "Political turmoil doesn't bother us, but
foreign-exchange controls focus our attention," he says. "You don't
want to be in a position where you can't get money out if there's
massive selling."
--Kate Linebaugh and Laura Santini in Hong Kong contributed to this
article.
Write to James Hookway at james....@awsj.com
+++ From The Nation, Thailand +++++++++
Credibility damaged by fast U-turn
After a day of policy flip-flop, the stock market yesterday re-
covered 11 per cent while the baht rose to a more comfortable zone of
Bt35.60-Bt35.70 to the US dollar. But credibility has been damaged by
the ill-thought-out capital controls and some people have started to
question whether anybody should be held accountable.
"I am not sure whether the Bank of Thailand and the Finance Ministry
had consulted each other before introducing the capital control
measure]. If the discussion did not take place, then the central bank
was having too much independence," said Chaturon Chaiseang, the leader
of the Thai Rak Thai Party.
"I guess the finance minister must have known about the measures
beforehand. So the question is why did they not think the whole thing
through carefully. This is the damage from a government that does not
come through democratic means."
MR Pridiyathorn Devakula, the deputy prime minister and finance
minister, yesterday sought to play down the damage created by the
indiscriminate capital control measure - principally designed to curb
baht speculation - that also had a severe side-effect of damaging the
equity market badly. He indicated that nobody should assume
responsibility as the mistake has been corrected.
Case closed.
But Abhisit Vejjajiva, leader of the Democrat Party, said it was not
that easy to call the case closed as the finance minister's remarks
had hurt foreign investors confidence.
"Most people have found it difficult to accept this because a damage
of several hundred billion baht has occurred. If correcting the
mistake means assuming responsibility, then I would not agree. But I
don't want this matter to be politicised. We should let good
governance play the role here," he said.
"Since we have made a mistake, we have to admit it. And to restore
investor confidence we have made it clear as to who announced the
capital controls measure and who revoked the measure, which is quite
confusing."
Seamico Securities also questioned if there was political inference.
If the Bank of Thailand was solely responsible for the measure, then
on Tuesday evening why did no top officials at the central bank appear
side by side with Pridiyathorn during his televised interviews?
Some Bt820 billion in market capitalisation was wiped out from the
stock market on Black Tuesday following the central bank's draconian
rules on capital controls, which scared off foreign investors.
The central bank intended to curb the sharp baht rise, which
threatened to damage Thai exports and wreak havoc on the Thai economy.
But the indiscriminate capital control measure badly hurt the stock
market because no foreign funds would invest in a market which
requires them to surrender 30 per cent of their money to another
entity, which is the central bank in this particular case.
Later in the evening, after the severe punishment of the Thai stock
market, Pridiyathorn was forced to back-track a half-step by
announcing the capital control rules would not apply to the stock
market but would apply to the money market only.
Thailand has immediately become a subject of condemnation and
suspicion for its policy flip-flop. Market capitalisation was
recovered by more than Bt500 billion, but questions remain thick in
the air as to what kind of macroeconomic policy Thailand would be
pursuing going onward.
Dr Supavud Saicheua of Phatra Securities said it would be tough for
Thailand to reclaim its credibility. "We have to be careful not to
create an impression that we are going to pursue an isolationist
policy. Both Fitch and Moody's, the credit agencies, have started to
get a bit suspicious. So we have to avoid this trend."
Frederic Neumann of HSBC Markets (Asia) said the erratic policy course
of Thailand implemented over the past few days has raised questions
over the credibility of the current administration and its
macroeconomic management.
"While some measures aimed against further baht appreciation were
expected, actual policy announcements have far exceeded these
expectations, causing confusion in capital markets. Moreover, the
authorities provided little guidance as to the actual implementation
of their proposed rules, leaving market participants short of
information," he said.
"Crucially, however, the administration appears to have misgauged the
impact of the new exchange controls, giving the impression that the
measures had not been well thought out. These concerns add to the
impression that the government might steer away from Thailand's
long-held tenet of relatively free financial markets."
++++++++++++++++++
'Black Tuesday' also meant opportunities
About Bt820 billion in paper wealth disappeared on Black Tuesday and
it is not surprising it was sarcastically portrayed as "Thailand's
grand winter sale".
However, Black Tuesday created losers, winners and lost opportunities.
Chanjira Pinthongkum, a retail investor, said she snapped up shares
when the SET index on Tuesday plummeted by 60-odd points.
"I anticipated share prices would be low when I bought them, but when
the SET index sank even further I was shocked. I have never seen a
fall like this in my life," she said.
The SET index on Tuesday tumbled almost 20 per cent at one point
before recovering to close the day with a 14.84 per cent loss - the
biggest single-day fall in the Thai stock market's history, prompted
by the BOT's 30-per cent reserve withholding requirement.
The government later announced it would exclude investment in the
stock market from the measure.
Chanjira said she was tempted to scoop up stocks because the
fundamentals of listed companies remained unchanged, while the steep
fall was ascribed to the central bank's measure.
"I think it was an opportunity to make a lucrative profit as share
prices fell significantly. Today, I have been proved right. All the
shares I bought yesterday rose significantly and I have already taken
the profit because I think the risk still remains in the stock market.
I don't know what will happen next," she said.
An unnamed retail investor said he bought shares in Kasikornbank,
Erawan Group, and Home Product Centre.
"I bought shares even though I didn't know whether the authorities
would exclude the stock market from the central bank's tough measure,
but I snapped them up them because I thought the prices were very
cheap. I will cut my losses if the share prices fall by 20 per cent,"
he said.
He pointed out that he was a long-term investor who always holds
shares not less than two to three months, but he is likely to look for
profit-taking by selling shares bought on Black Tuesday soon.
"I'm not sure if the stock market will fall sharply again," he
commented.
Black Tuesday was not only an unhappy day for direct stock investors
but also for those who invest indirectly through Retirement Mutual
Funds (RMF) and Long-term Equity Funds (LTF).
Take Ayudhya Fund Management as an example. There were around Bt100
million and Bt40 million worth of orders to buy LTFs and RMFs,
respectively, yesterday, compared with around Bt30 million-Bt50
million per day for LTFs and Bt10 million-Bt20 million per day for
RMFs ahead of Black Tuesday.
"Selling was not an option yesterday," said a retail investor who
chose to remain anonymous. "I didn't think about how deep the index
was going to dive. I thought early in the morning about buying some
stocks but I had only a very small amount of money, so I couldn't buy
much. I believe in the potential growth of the stocks I bought. So,
in the short term the price may fluctuate. In the long term, I believe
the prices I bought today are low enough to generate some profit."
Another retail investor said she regretted not buying any shares on
Tuesday. "Since I have been investing in the stock market for 10
years, I had not seen a sharp fall like this before. I believe the
stock market always rebounds after a steep decline," she said.
She did not buy shares on Tuesday as she wanted to assess the
situation for a while.
"If the central bank does not revise the measure, the stock market
will nosedive further. However, after I listened to Finance Minister
MR Pridiyathorn Devakula's announcement, I knew at that moment that
the stock market would certainly jump," she said.
http://www.nationmultimedia.com
*************From Uncle Yap**************
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