Thailand discovers fury of investors scorned
cnnw
December 21 2006
IN A SPAN of 24 hours, the Bank of Thailand first outraged investors by slapping
a Chilean-type tax on capital inflows and then tried to placate them by taking
equity investments outside the purview of the levy.
The capital lock-up rules revived memories of what Malaysia had done in 1998
when it imposed capital control measures to insulate its economy from
speculators, which included pegging the ringgit at 3.80 to the US dollar.
Nevertheless, the Bank of Thailand's actions have raised the spectre of more
widespread use of monetary shock therapy in Asia.
The Thai authorities' flip-flop shows the level of desperation with a world
awash with money.
Policymakers in emerging markets can see the risks to the stability of their
financial systems from a surfeit of liquidity, but they can't do a thing to
regulate money supply at its source.
If these countries give the slightest indication that their appetite for global
funds is limited, and so only more long-term money is preferred, they are told
they can't pick and choose.
It is either all or nothing.
That is the message that Tuesday's 15 per cent decline in stocks gave to the
Thai authorities, who then had to back down.
Clearly, the Bank of Thailand hadn't anticipated the ferocity of the stock
market reaction to its new rules.
According to the original plan, foreign investors sending US$100 (US$1 = RM3.56)
into Thailand to purchase stocks, bonds or property were to be allowed to buy
income-generating, freely convertible assets worth only US$70. The remaining
US$30, to be set aside in a reserve account similar to the Latin American
"encaje", would be refunded after a year. Investors who wanted the money earlier
would get back only US$20.
With ebbing private investments and lacklustre consumer spending, Thailand is
basically an underperforming Asian market supported by foreigners. It is cheap
because it has reason to be.
International investors have purchased about US$6 billion of Thai stocks since
the beginning of 2005, more than 10 per cent of which they have lapped up since
the military coup of September 19.
Before yesterday's fall, the SET Index had gained about 20 per cent in US dollar
terms over two years, among the world's 10 worst-performing benchmarks.
The Thai economy is neither so small (or closed) that speculators won't care to
put it in play, nor so large (and strong) that they won't dare touch it.
Consider the overwhelming challenge for Bank of Thailand in controlling the
growth of domestic money supply in the face of ever-increasing sums of incoming
capital.
From May to October this year, the expansion in the monetary base - currency in
circulation and bank reserves - remained restricted at about half a per cent
even as net foreign assets in the banking system grew 6.5 per cent.
Central bank Governor Tarisa Watanagase couldn't possibly have kept her foot on
the money brakes forever.
One option was to let the currency keep rising.
That would have eventually shut down exports, the only economic engine that is
still firing.
Or, the authorities could let the monetary base expand to a point where they
lost control over inflation.
The Bank of Thailand is probably itching to revive investments by cutting
interest rates, though it can't do so before taming the gains in consumer prices
more convincingly.
The inflation rate accelerated to 3.5 per cent in November from 2.8 per cent in
October.
The Bank of Thailand's move, thus, is a desperate attempt to prevent its
monetary policy from being compromised by capital inflows that had, until last
week, caused an intolerable 16 per cent surge in the baht, making it this year's
best-performing Asian currency.
The motivation was the same in Chile.
The Chilean tax perhaps did play a role in stabilising the economy: Annual
economic growth in that country averaged 8 per cent when the levy was in force
from 1991 to 1998. And that was the quickest pace in Latin America.
But it wasn't a free lunch.
Sebastian Edwards, who was the World Bank's chief economist for Latin America
from 1993 to 1996 and is now a professor at the University of California, Los
Angeles, has shown that the Chilean controls pushed up the cost of capital for
small domestic firms in 1996 to as high as 21 per cent in US dollar terms.
According to research by Kristin Forbes, an economist at the Massachusetts
Institute of Technology and a former member of the White House Council of
Economic Advisers, the Chilean tax hindered development of the local stock
market as it created a perverse incentive for companies to raise capital through
American depositary receipts, bypassing the levy.
If Thailand had persisted with capital controls on equity investments, its
economy may also have lost the benefits of cheaper capital and deeper markets
that come with financial globalisation.
Before any of that could happen, the authorities blinked.
The carnage on the stock market must have convinced them that in the process of
stemming inflows, Thailand could end up encouraging capital flight.
Thailand's immediate requirement is stability. The country is in a flux: It
doesn't even have a permanent constitution at the moment. The last thing it
needs is financial turmoil.
But since global investors have no aversion to risk right now, they won't allow
Thailand to have any, either. - Bloomberg
Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his
own.
http://www.btimes.com.my/Current_News/BT/Monday/Column/BT600857.txt/Article/