[THAILAND] Government's Controls on Foreign Investments
- Thailand triggers an alarm
By Tom Petruno, Times Staff Writer
Thailand's surprise decision to slap controls on foreign investment
fueled a 15% plunge in its stock market Tuesday and rattled other
emerging markets, which have been favorites of U.S. investors in
By early today the storm appeared to have blown over: Many Asian
markets were rebounding after falling 1% to 3% after Thailand's move.
Still, the affair served as a reminder of how volatile smaller
foreign markets can be. And the risk of short-term losses may be
rising after the hefty gains in many emerging markets since 2002,
some investment pros say.
"I think people aren't paying attention to the risk side of the
equation," said Mark Headley, president of San Francisco-based
Mathews International Capital Management, a big investor in Asian
The decision by Thailand's military government revived some painful
memories for veteran investors: It was that country's move in 1997 to
allow its currency, the baht, to plummet in value that set off a
chain of market meltdowns across Asia.
This time, however, Thailand was trying to address the opposite
problem: The government believes its currency has been too strong, in
part because of heavy inflows of capital from foreign speculators. In
turn, a rising baht has made Thai exports more expensive abroad.
To slow those capital inflows, Thai officials declared that
foreigners effectively would be able to invest only 70% of money they
transferred into the country, with the rest to be held in reserve by
financial institutions. If the investors tried to pull the money out
within a year, they would lose 10% of the total.
The government's decision had the desired effect on the baht, pushing
it from a nine-year high of 35.2 per U.S. dollar to nearly 36 per
dollar, a 2.2% drop.
But the decline occurred as some investors fled Thai markets rather
than risk having their money locked up. The Stock Exchange of
Thailand's main index plummeted 108.41 points, or 14.8%, to 622.14, a
Early today, the government backtracked a bit. Finance Minister
Pridiyathorn Devakula said the reserve requirement wouldn't apply to
stock investors, but would still cover other investments such as
The Thai stock market shot up 9.5% in early trading today.
Some U.S.-based investors in Asian stocks said the Thai government,
which was installed by a military coup in September following the
overthrow of Prime Minister Thaksin Shinawatra, showed extraordinary
"We suddenly have a junta running the country that is not investor
savvy, to put it mildly," said Anthony Cragg, manager of the Wells
Fargo Advantage Asia Pacific stock mutual fund.
Still, the move addressed an issue that is vexing other Asian nations
as well, including South Korea and Singapore: Their currencies have
been rising against the dollar, which threatens their export-
The problem with using capital controls on foreign money is that such
restrictions often trigger market convulsions. Because money now
moves so freely around the globe, investors aren't willing to put up
with government-imposed limitations; they'll simply flee.
"This will warn other emerging markets to think carefully before
putting on such draconian measures," Headley said.
As Asian markets opened today, there seemed to be little fear that
Thailand's move might be duplicated elsewhere in the region. The
Singapore stock market, which slid 2.2% on Tuesday, rose 1.3% in
early trading today. Malaysia's main market index gained 1% today
after falling 2% on Tuesday. The South Korean market was up 1.2%
after losing 0.4% the previous day.
"I don't think there's any contagion from this," Cragg said.
Thailand, however, may continue to pay a penalty, he said. Investors
may decide the country is "too troublesome to bother with," he said.
Some global investors may have been hoping for a broader and deeper
sell-off in emerging-market stocks, to give them a chance to buy in
at lower prices.
Investors got such an opportunity in spring, when markets worldwide
dived on worries about the effects of rising U.S. interest rates.
Some highflying emerging markets lost 15% to 30% of their value
between mid-May and mid-June.
But their recovery from that plunge also was rapid which has
reinforced the appeal of staying invested in the stocks, said Cameron
Brandt, research chief at Emerging Portfolio Fund Research, a
Cambridge, Mass.-based firm that tracks capital inflows into foreign
South Korea's benchmark index, for example, tumbled 18% from mid-May
to mid-June but has since rebounded 20% as money has poured back in.
Many emerging markets are up more than 30% year to date, far better
than the 14% gain of the average U.S. blue-chip stock.
Analysts say the demand for emerging-market stocks in part reflects
institutional investors' search for better returns on their money
than is available in bonds and short-term bank accounts, given that
interest rates worldwide remain relatively low compared with what
investors were used to in the 1980s and 1990s.
"As long as there's this much money sloshing around, people are going
to be reluctant to abandon their positions" in emerging-market
stocks, Brandt said.
Many portfolio managers, however, are advising caution. Although the
long-term growth outlook for many foreign economies, particularly in
Asia, remains exciting, four straight years of spectacular stock
gains have raised the level of risk in emerging markets, Headley said.
"It's a little frothy," he said.
The Thai government's decision to slap capital controls on foreign
investors sent many emerging-market stocks lower worldwide. Pctg.
Country/index Tues. YTD
Thailand/SET -14.8 -12.8
composite -2.9 +49.4
Poland/WIG -2.8 +42.6
India/Sensex -2.5 +42.4
composite -2.0 +17.9
Turkey/ISE-100 -1.9 -1.8
Russia/RTS -1.3 +63.3
Mexico/IPC -0.9 +43.9
composite -0.4 +3.5
Changes measured in local currencies.
Source: Bloomberg News