ASIA HAND Mixed reviews for
Thai cap controls By Shawn W
Crispin
BANGKOK - Thailand, like many
export-oriented Asian countries, is grappling with
how best to deal with the precipitous drop of the
US dollar and concomitant rise of its own local
currency. The Bank of Thailand's (BoT) decision
this week to reverse the capital controls it had
introduced to stem the baht's rise indicates that
administrative fiat is probably not the best tack
to take.
When Thailand's
military-appointed civilian government abruptly
imposed capital controls on equity, bond and
currency transactions on December 19, 2006, the
Thai stock market plummeted by over 12% - the
largest single-day loss in the history of the
local stock exchange. The BoT immediately reversed
the restrictions on equity investments, but kept
the 30% un-remunerative reserve requirement (URR)
in place for currency
and bond
transactions.
The surprise move sparked
investor fears that the military government - soon
after espousing its commitment to King Bhumibol
Adulyadej's inward-looking "self-sufficiency"
concept and off-the-cuff remarks that it intended
to maximize "gross national happiness" rather than
gross domestic product (GDP) - was adopting
anti-growth policies and potentially reversing
Thailand's long-time commitment to laissez faire
economics.
A soberer assessment was that
the BoT - clumsily and with much hubris - moved to
stem speculation on the baht through the local
bond market, where foreign investors were pouring
in funds to take advantage of interest-rate
differentials with the US. Throughout 2006, that
speculation had put strong upward pressure on the
baht and gave rise to sharp complaints from
politically influential Thai exporters that an
appreciating currency was undermining their global
competitiveness.
Now, with a new
government in place, the US seemingly poised to
tip towards recession and growing concerns that
Europe could eventually follow, Thai policymakers
seem willing to sacrifice exports for more
domestic demand-led economic growth as they ramp
up fiscal spending on big-ticket infrastructure
projects.
Because many of those large
projects are import-intensive, a baht free of
capital controls will likely appreciate and help
to offset the import bill. Thai imports already
surged 40.1% year-on-year in January, to US$13.7
billion, while the baht appreciated 2.1% against
the US dollar.
Also in that direction, the
new government is bidding to lure, rather than
repel, more foreign investments. Fredric Neumann,
a regional economist at HSBC, wrote in a recent
note to clients that apart from rolling back
capital controls, the BoT has recently raised the
cap on non-resident bank borrowing from 50 million
to 300 million baht.
He believes the moves
will likely "lift investor sentiment" and conforms
with the new government's "stated aim of boosting
economic growth and offering a more business
friendly environment" than their military
predecessors, who had "advocated a whole series of
restrictions on foreign investments".
Counting the real
costs Although Thailand's brief
capital controls experiment was wildly unpopular
with foreign equity and other short-term
investors, their overall cost to the economy was
minimal and in the main achieved the BoT's policy
objective to stem the baht's rise.
One
Bangkok-based foreign analyst with a large
European investment bank argues that the measures
created "more confusion than actual damage" to the
economy. That included the inconsequential
emergence of a two-tier baht market, where in
recent months the currency sold at a 10% premium
to the US dollar in offshore markets where
investors were unaffected by the 30% URR.
The same analyst noted that the Thai stock
market "barely budged" on Friday with the
announcement of the capital controls rollback,
which was already widely anticipated by the market
and already priced into most shares. Underlining
his argument that the measures were more damaging
to investor perception than to the actual economy,
he notes that the BoT still maintains a raft of
other more distortionary capital controls,
including restrictions on local investors from
buying US dollars, which investors often overlook.
Nor did the capital controls appear to
dampen long-term foreign investor sentiment. The
Board of Investment (BOI) approved 745 billion
baht worth of new projects last year, nearly twice
the amount approved in 2006. Although commitments
do not always lead to actual investments,
Bangkok-based analysts estimate that, barring any
major political flare-ups, most of the
BOI-approved projects will be implemented over the
next three years.
To be sure, the Thai
economy underperformed many of its regional
neighbors last year, including the Philippines,
Indonesia and Vietnam - though it expanded a
faster-than-expected 5.7% in the fourth quarter
due mainly to buoyant exports, which with a
capital control-depressed baht were up an
impressive 18% year-on-year.
Thailand is
currently one of Asia's most export-dependent
economies, with nearly 65% of GDP derived from
export revenues. Those dollar-denominated revenues
and a steady decade of trade surpluses have
restored the national coffers, which were
completely depleted in the wake of the 1997-98
Asian financial crisis.
According to
Phatra Securities, a Bangkok-based investment
bank, Thailand as of late February had accumulated
over $95 billion in foreign reserves and an
additional $24 billion in forward positions. This
year alone, with the capital controls still in
place, the country had added an additional $13
billion to that pile, according to the same
research.
Still, Thailand now finds itself
in a tight technocratic space, as it bids to both
pump-prime the local economy and keep a lid on
galloping inflation, where high global oil prices
are just now beginning to pass through to Thai
consumers. Headline inflation as measured by the
consumer price index was up over 5.4% year-on-year
in February, due mainly to fast rising food
prices; the producer price index was up even
higher over the same period at 11.4%, similarly
due to surging fuel and agricultural prices.
The last time Thailand ramped up fiscal
spending to stoke economic growth, during the
first term of former prime minister Thaksin
Shinawatra in 2002 and 2003, those expansionary
policies were buoyed by a favorable external
economic environment and relative macroeconomic
stability at home. Some Bangkok-based economists
continue to argue that Thailand's fast economic
growth during Thaksin's tenure was in line with
global trends and only marginally driven by his
highly publicized, but in the main
inconsequential, fiscal policies.
That
once favorable global environment has since gone
sour, and even as the new government removes the
past military administration's unpopular capital
controls, there is preliminary talk of returning
the baht to a fixed exchange rate regime to stem
the currency's appreciation. Prime Minister Samak
Sundaravej recently told reporters that
policymakers should "study" China's fixed exchange
rate mechanism, which is pegged within a narrow
band to the US dollar.
If implemented, the
move would commit Thailand to strictly follow US
monetary policy and would likely go down poorly
with foreign investors, who as a rule prefer
market-determined over government-pegged exchange
rates due to the pricing distortions - as in
Thailand 1997 - they often tend to build into
financial markets.
Adopting a fixed rate
would also restrict the BoT from using interest
rate policy to stimulate the economy should the
new government's pump-priming fail to have the
desired pro-growth effect - and, in effect, would
merely replace one set of controls with
potentially more damaging new ones.
Shawn W Crispin
is Asia Times Online's Southeast Asia Editor. He
may be reached at swcrispin@atimes.com.
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