Tuesday, December 19, 2006

Thai stock market to snap back?

Currency controls on foreign investment led to a rout in Thailand's stock market Tuesday. Now that impositions on foreign stock investors have quickly been withdrawn, the market is expected to go higher. Bloomberg reports:

Thailand scrapped currency controls on international stock investors one day after their imposition by the central bank prompted the biggest stock market plunge in 16 years.

The government lifted a requirement that banks lock up 30 percent of new foreign-currency deposits for a year for funds earmarked for stocks, Finance Minister Pridiyathorn Devakula said in Bangkok. The rule, intended to slow a 16 percent gain in the Thai currency this year that threatened exports and economic growth, sparked investor selling that wiped out $23 billion of market value in Thai stocks.

``The surprising speed and responsiveness of this policy reversal should help forestall a deep and lasting impairment of Bank of Thailand credibility,'' Michael Kurtz, a strategist at Bear Stearns Asia Ltd. in Hong Kong, wrote in a note to clients. ``We expect Thai equities on Wednesday to undo a large portion of Tuesday's decline.''

Thailand's government exempted stocks from the central bank rule that international investors must pay a 10 percent penalty unless they keep funds in the country for a year. The policy reversal illustrates Thailand's dependence on foreign investment and the degree to which investors resent restrictions on their investment decisions.

More on the market drop and how the measures would affect foreign investors:

The rules would have limited international investors to using 70 percent of their funds to buy Thai stocks. The requirements stay in effect on other investments, including bonds and property, Pridiyathorn said.

The currency controls triggered declines in other emerging stock markets by highlighting the risks of investing in developing economies.

Thailand in 1997 untied the baht from a U.S. dollar peg, triggering currency collapses in South Korea and Indonesia and leaving much of Asia in a financial crisis that required an international bailout.

Thailand's SET Index tumbled 15 percent to its lowest since Oct. 29, 2004. The index sank 108.41 to 622.14. Morgan Stanley Capital International's Emerging Markets Index fell 1.6 percent to 881.01 as of 4:07 p.m. in London.

The Financial Times added an element of colorful narrative with their report, focusing in on the reaction of shaken government officials and the laments of their opponents.

Thailand was forced on Tuesday to reverse plans to impose a 10 per cent withholding tax on short-term foreign equity investment, after the imposition of draconian capital controls sent the stock market plunging 15 per cent, and wiped around Bt773bn ($22bn) from the market’s capitalisation.

The dramatic about-face came at about 8pm local time, after Pridiyathorn Devakula, the finance minister, held crisis talks with central bank and stock market officials on the massive, and apparently unanticipated, equity sell-off, the largest one-day fall in the market since the Asian financial crisis of 1997.

On television, an obviously rattled Mr Pridiyathorn – who had expressed strong support for the central bank’s restrictions throughout the day – declared that the withholding tax would not be applied to money brought into Thailand for equity investment.

However, he said the central bank withholding tax will remain on capital inflows used for the short-term purchase of debt, which the central bank believes is the primary asset held by the currency speculators blamed for the rapid appreciation of the Thai baht.

And further down the page...

Korn Chatikavanij, deputy leader of the Democrat party and a former investment banker, said central bank officials – pre-occupied with trying to battle the currency speculators they blame for the baht’s rapid rise – had apparently failed to recognise the impact of measures that he described as “gross overkill”.

“They just didn’t understand the markets,” he said. “This exposes a weakness in the technocrat dominated government. They were more dependent on theory, and less sensitive to how the real world, and real markets, operate.”

Thailand’s move had initially raised fears that other Asian central banks might try similar tactics to slow the strengthening of their own currencies against the dollar, but analysts said the subsequent Thai market havoc would likely deter any imitators.

Now let's see what happens.