Thai authorities performed a swift U-turn on policy Tuesday, easing some of the capital controls they put in place a day earlier after the new rules sparked a rout in the local stock market.
| 19 December 2006 | |
| NEW YORK (Dow Jones) -- Thai authorities performed a swift U-turn on policy Tuesday, easing some of the capital controls they put in place a day earlier after the new rules sparked a rout in the local stock market. While the sudden policy reversal will likely take the pressure off local assets, investors said the back-and-forth hardly builds confidence in a country which saw a military coup in September and whose economy may be facing tougher times ahead. After repeated warnings about excessive strength in its currency, the baht, the Bank of Thailand announced Monday that all banks would have to lock up for one year 30% of capital inflows that aren't linked to trade, services or the repatriation of residents' offshore investments. Any early withdrawal of the funds will result in a 10% tax payment on the face value of the investment. The new measure was to come into place Tuesday. Thai policymakers said they were seeking to stem speculative inflows, especially in local debt instruments, which have lifted the baht to a nine-year high against the dollar. In a region where most currencies are kept weaker to benefit export-led economies, the appreciating baht threatened to become a real problem. The reaction to the new controls was swift. Overnight, the Thai stock exchange tumbled 14.8% from the previous day at 622.14 points, sinking to its lowest levels since Oct. 2004. It was the single biggest day of selling since the Asian currency crisis of 1998. The sharp drop in the Thai stock market sparked a selloff in other regional markets. The Thai baht dropped roughly 1% following the announcement of the controls while Thai credit default swaps - insurance-like contracts that offer investors protection against default - widened by around 10 basis points to around 30-35 basis points. "In highly integrated global financial markets, you can't get away with unilateral action," of this type, said Hari Hariharan, chairman and chief executive officer at hedge fund NWI Management LP, that invests mainly in emerging markets. Policymakers didn't prove tone-deaf to the market reaction. During the overnight session, Assistant Central Bank Governor Nitaya Pibulratanagit said that "after listening to (brokers), we must introduce measures to soften the rules quickly." In something of an understatement, she admitted that the bank's "communication wasn't clear enough." The U-turn came a little later, with Finance Minister Pridiyathorn Devakula announcing that stocks and foreign direct investment, but not debt instruments, will be exempted from the 30% withholding requirement. While there is general relief about the policy reversal, the instability has caught the attention of international investors, said Scott MacDonald, co-head of research at Aladdin Capital in Stamford, Conn., which has $16 billion in assets under management. "Something like this functions as a pin-prick of investors' confidence," he said. "I think the bottom line is that it was a misstep," MacDonald said, adding that the government's attempt to play to a domestic audience on the currency issue had left them with "a policy black-eye." Still, a New York-based trader of Asian American depositary receipts said the policy reversal should help the stock market rebound as much as 10% in the next few sessions. "What it will probably do is ease some of the selling pressure on (the local Thai market), but it may not necessarily bring a lot of new buyers back in." Some investors will likely stay away until there's more stability, he predicted. "I think I'm going to hang on for a while because valuations are really cheap, but eventually I'm interested to sell,"said Federick Jiang, who manages $380 million in Asian equities at Waddell & Reed Investment Management in Kansas City. He pegged Indonesia, China, Taiwan and Korea as markets with good opportunities that are less risky than Thailand. | |
Sourced http://www.fundsupermart.com/main/research/viewSector.tpl?lang=en&articleNo=5609
No comments:
Post a Comment