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Thailand finance: Capital-controls reversal - UPDATE
(EIU Viewswire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
In an abrupt and embarrassing about-face, Thailand's government has partially reversed the capital controls introduced only a day earlier by the Bank of Thailand (BOT, the central bank). The original measures had been intended to stem the rapid appreciation of the baht, but they caused chaos in the equity market as Bangkok's SET index plunged almost 15% on December 19th. The revised measures now exempt investments in stocks, but the fiasco has damaged the credibility of the military-backed government. The episode will add to concerns about the predictability of Thailand's investment environment given the political and policy uncertainty that has emerged as a result of the September 19th coup.
The BOT first announced new anti-speculation measures on December 18th, the same day the baht temporarily reached a nine-year high of Bt35.12:US$1. The Thai currency has appreciated by over 16% against the US dollar since the start of 2006, raising concerns about the ability of the country's export sector to remain competitive, particularly when the currencies of key rival exporting countries in the region (most notably China) have not appreciated by nearly as much.
The original version of the measures required financial institutions to deposit 30% of foreign-currency inflows into Thailand in interest-free accounts with the BOT. Although the government's U-turn now means that the restrictions no longer apply to investments in the stockmarket, investments in bonds will still be affected. Investors bringing foreign currency into the country to buy debt instruments will have to leave 30% of that money with the central bank for one year, or face an early-withdrawal penalty that will mean getting back only two-thirds of the amount withheld. As before, financial inflows related to trade and services are exempt, as are inflows of money by Thai residents repatriating overseas investments.
As was also the case before the Thai authorities' change of heart, FDI inflows are in principle exempt from the reserve requirements. The 30% deposits can be refunded to investors once the inflows are proven to be genuine FDI (rather than, presumably, short-term speculative capital inflows, which the new measures aim to deter).
Even before the market chaos on December 19th, the BOT's new measures would have done little to reassure foreign investors about the wisdom of putting their money in Thailand, particularly given other current issues of concern. This is still the case now. Bond-market investors, in essence, are being asked to trust that the investment climate will remain stable for the entire year in which they are obliged to keep their money in the country--all this at a time when Thailand faces intense political uncertainty as a result of the coup. Although the military has promised to return power to an elected government by late 2007, there is no guarantee that this will happen. Any sign of slippage on the deadline for the restoration of democracy could unnerve foreign investors and prompt capital outflows--with resultant losses for investors who repatriate funds earlier than stipulated in the BOT's measures.
Nor are other signs wholly encouraging. The military-appointed prime minister, Surayud Chulanont, a retired general, has stated that his administration will focus on a "sufficiency" philosophy in managing the economy. This is an effort to distance the new government from what were widely perceived to be the excesses of the gung-ho, pro-growth approach of the ousted previous premier, Thaksin Shinawatra. But the term "sufficiency" will be disconcerting to some just for its echoes of crackpot isolationism--even though economic policy, in truth, looks set to remain fairly sensible under the new regime. Certainly, the interim administration in recent weeks has sought to reassure investors that its "sufficiency" concept does not preclude the upholding of market principles in managing the economy, but instead focuses on good governance as a means of regulating the market economy.
Concerns will nevertheless remain. In particular, foreign companies anxious to protect their investments in Thailand will be keeping a close eye on upcoming changes to the Foreign Business Act. Public outcry over the sale by Thaksin's family of Shin Corp, a telecoms conglomerate, to Singapore's Temasek provided the catalyst for the military coup, and in the aftermath of that the issue of foreign ownership has received great scrutiny. If changes to the act alter the definition of foreign ownership or substantially change foreign shareholding limits, it could spell trouble for the thousands of foreign companies that have invested in Thai firms through nominee Thai shareholders. Overall, in the wake of the Shin Corp episode (and the anti-Thaksin protests it sparked), attitudes to foreign firms have become less welcoming. Foreign retailers in Thailand have also faced a backlash.
Therefore, although the authorities are worrying right now about the amount of foreign money coming into the country, if further policy misjudgements occur they could well have an exodus to contend with.
SOURCE: ViewsWire
Copyright 2006 Economist Intelligence Unit
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