Monday, December 18, 2006

Updated: Capital Controls

It's indeed ironic that Thailand today introduced curbs to stop currency speculators and prevent the baht from appreciating too much -- some 9 years after it tried in vain to prop up the Thai currency against currency traders and hedge fund players like George Soros (Right in the pix. Pix Source: Screenshots).

Dec. 18 (Bloomberg) -- Thailand's regulators required banks to lock up 30 percent of new foreign exchange deposits for a year to curb currency speculation, causing the baht to slump by the most in almost three months.

Overseas investors buying baht starting tomorrow will only be able to invest 70 percent of what they transfer, and only recoup all of their funds if they keep the money in Thailand for more than a year, central bank Governor Tarisa Watanagase told a briefing in Bangkok today. Those who withdraw the reserved amount in less than a year will be penalized 33 percent of that 30 percent portion, she said.

The baht had risen about 16 percent this year to a nine-year high as the economy accelerated and a Sept. 19 coup broke a political stalemate. Exporters including Thai Union Frozen Products Pcl, the world's second-biggest tuna canner, on Nov. 16 asked the central bank to stem baht gains that are undermining their competitiveness.

The Thai move may remind some of what former Malaysian premier Dr Mahathir Mohamad (left in the pix) did to insulate the economy with capital controls in the wake of the Thai baht crisis in 1997 but the schemes are completely different.

While Thailand seeks to prevent too much inflow of money today, Dr Mahathir had erected controls to bar local and foreign capital from fleeing the country in 1998 following the collapse of the Malaysian currency. Almost all the controls, including the freeze on foreign capital from fleeing the country for one year, have since been lifted except for the continued ban on the offshore trading of ringgit.

The controls are longer a hindrance to Malaysia, which has undergone substantial structural changes in the economy since 1998.

Even Dr Mahathir and his former foe -- hedge fund king George Soros -- have patched up, as shown in the pix of the newsworthy meeting last week.

It's well known that Dr Mahathir had called Soros a 'moron' at the height of the regional financial and currency crisis in 1998. In return, Soros had called Dr Mahathir, who looked fine in the pix after his recent heart attack, a 'menace to his country'.

PS: Read Marina Mahathir for her interesting account of the meeting between her dad and Soros.

PS2: Thailand did an about turn on its capital controls hours after they were rolled out. It's highly embarrassing. The damage done will be etched in the minds of investors for a long time, perhaps longer than Dr Mahathir's arguably more well-crafted system of capital controls for Malaysia in 1998.

ST, 20 Dec 2006:
On Monday afternoon, the Bank of Thailand (BOT) - the central bank - announced a 30 per cent reserve requirement on short-term inflows as part of measures to put a lid on the speculative buying of the baht.

This meant a foreign investor planning to invest $100 in Thai assets would have had to bring in $130 - $30 of which had to be deposited with the central bank for zero returns for one year. Selling the $100 investment within a year would have incurred a $10 penalty.

Yesterday, economists, brokers and investors watched in horror as the Thai stock market plummeted as much as 20 per cent in response to the measures. It is estimated that foreign investors sold a whopping US$700 million (S$1.1 billion) worth of Thai shares, Reuters reported.

Then, in an equally stunning reversal, the Thai government abandoned the controls late last night, but only for stock investments.

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