Loading ...
Sorry, an error occurred while loading the content.

[THAILAND] Government's Controls on Foreign Investments

Expand Messages
  • madchinaman
    Thailand triggers an alarm By Tom Petruno, Times Staff Writer http://www.latimes.com/business/la-fi- thailand20dec20,1,1020024,full.story Thailand s surprise
    Message 1 of 1 , Dec 20, 2006
      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
      recent years.

      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
      two-year low.

      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-
      dependent economies.

      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.


      Sudden impact

      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
      South Korea/
      composite -0.4 +3.5
      Changes measured in local currencies.

      Source: Bloomberg News
    Your message has been successfully submitted and would be delivered to recipients shortly.