Thailand Actions Unlikely to Spur Global Shake-Up Shares Fall on Memories of Crises, But Economic Changes May Limit Effect on Other Emerging Markets
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By JAMES HOOKWAY
December 20, 2006
BANGKOK, Thailand -- The record decline in Thailand's stock market on Tuesday makes it the latest casualty of global investors' aggressive pursuit of returns world-wide.
However, few people expect the trouble to spread, highlighting fundamental changes in Asian economies since the financial crisis that swept the region a decade ago.
WALL STREET JOURNAL VIDEO
1
WSJ Deputy Managing Editor John Bussey discusses2 the Thai central bank's decision to remove currency controls.
• MarketBeat: Lessons from Thailand's Meltdown3
• Manila Mulls Currency Rules4
The Thai market's 15% one-day drop on Tuesday, its worst showing ever, was prompted by a drastic government move to clamp down on booming foreign investment. Before the drop, Thai stocks had been up 2% for the year.
The scale of the plunge sent a shudder through other emerging markets, with prices falling 2% to 3% in India, Indonesia, Hungary and elsewhere.
The cross-border nervousness was triggered partly by memories of the Asian financial crisis a decade ago, which was sparked by trouble in Thailand. Back then, the circumstances were markedly different: Asian nations faced weakening currencies, not strengthening ones, and were burdened by mountains of debt.
Today, in most cases, that debt has either been paid down or converted to longer maturities, and thus isn't a threat. What's more, Asian economies are now robust, fueled by years of expansion and strong global consumption of commodities and manufactured goods, particularly by ever-larger China, one of Asia's biggest customers.
Emerging-market stocks have been some of the best-performing in the world this year. "Everyone was complacent about global markets, but Thailand has made people take cognizance of global risks," said Ajit Surana, managing director at Mumbai-based brokerage Dimensional Securities.
In Thailand this year, increased foreign demand for local stocks and bonds has lifted its currency, the Thai baht, higher against the dollar. The Thai central bank feared the ever-stronger baht would hurt exports and chose a dramatic response: restrictions on foreign investment, including stocks.
By Tuesday afternoon, however, the markets had given their brutal verdict on the move. The government then quickly reversed the restrictions on stocks.
David Hale, chief economist at Hale Advisors LLC, a Chicago economic consulting firm, said Thailand's action vividly demonstrates that "it is a challenge for a small country to cope with volatility in global capital flows."
The recent influx of money into Thai bonds illustrates the games that international investors play as they seek out money-making opportunities around the world. Many investors buying Thai bonds were betting the government was about to lower interest rates. Since bond prices move in the opposite direction of rates, falling rates would send bond prices higher -- enabling investors to cash out with a quick profit.
Stock-market investors, meanwhile, were betting the country would demonstrate strong economic growth going forward and that the government, which took power after a military coup in September, would provide stability. The coup ended a months-long political impasse, and since then many local and foreign investors had returned to the stock market in the hope that Thailand's political system would stabilize and its economy would ignite.
ASIAN CONTAGION
See a timeline5 of how the Thai baht rattled world markets in 1997.Thailand's ill-starred regulatory effort on Tuesday may be a sign of growing stresses in a global economy marked by large imbalances. The U.S. runs large trade deficits with the rest of the world, in particular Asia. At the same time, low interest rates world-wide have prompted investors -- in particular fast-moving hedge funds -- to seek out incrementally higher returns in risky markets, such as Thai stocks.
Thailand sought to contain some of the pressures on its economy by letting its currency strengthen. But a rising currency can hurt exports, and Thailand found itself losing ground competitively to China, where the currency is much less flexible.
The baht did weaken slightly after the moves. The currency was trading at 35.92 baht to the dollar at the close of Asian trading, down 1.6% from its level before the measures were announced.
Jonathan Anderson, chief economist for Asia at UBS, noted that Thailand's interest rates are comparatively higher than its neighbors, adding to the appeal of the baht and the difficulty the Thai authorities face in slowing its ascent.
One result of the Thai government's regulatory maneuver could be "a massive loss of credibility" for the government, says Allan Conway, head of global emerging-market equities at Schroders Investment Management in London. Mr. Conway manages several emerging-markets funds at Schroders with roughly $3 billion in assets; those funds had about 3.5% of their holdings in Thai stocks. The MSCI Emerging Markets Index, by contrast, has 1.6%.
Asia-based economists say they don't expect severe or extended fallout in other markets because of the unique circumstances affecting Thailand. The Thai currency has appreciated faster than other Asian currencies partly because its stock market is undervalued compared with some of its neighbors. Yesterday, central banks in Malaysia, Indonesia and the Philippines quickly said they would continue to let markets determine the value of their currencies and wouldn't emulate Thailand's policies.
Thailand's policy reversal is an embarrassing miscue for the new military-installed government, which could shake confidence in its management of the economy. The zig-zag and subsequent sell-off wiped more than $20 billion of value from the Thai stock market.
Investors were reacting mainly to a new rule that required foreign investors to deposit 30% of the funds they bring into Thailand to buy shares or bonds in a non-interest-bearing account with the central bank for at least a year. Foreign investors who wanted to leave Thailand before a year was up would get back only two-thirds of the money deposited at the Bank of Thailand.
Investors viewed it effectively as a stiff tax on foreign investors seeking to buy Thai stocks. Some market analysts warned that Thailand risked removing itself from the international investment map if it didn't modify the policy.
Stunned by the market reaction, Thai Finance Minister Pridiyathorn Devakula scaled back the scope of the capital controls Tuesday night, a day after they were announced. Mr. Pridiyathorn, who was central bank governor until being appointed to head the finance ministry in September, said the rule requiring foreign investors to deposit 30% of their funds with the central bank would no longer apply to stock-market investments. It would remain in place for investments in bonds and other debt instruments, he said.
Thailand's attempt to halt the baht's rise marked the first time a major economy in Southeast Asia has used capital controls since Malaysia introduced its own strict curbs in the late 1990s. That move was designed to prevent a sudden outflow of foreign money from further hurting its economy amid the Asian financial crisis.
Foreigners had invested 114 billion baht ($3.2 billion) in Thai stocks since the beginning of the year by the time the Bank of Thailand announced the capital controls Monday. On Tuesday, some of the country's biggest blue-chip stocks took the largest hits. Bangkok Bank PCL fell 20 baht, or 16%, to close at 103 baht, with foreign shares of Siam Cement PCL falling 34 baht, or 13%, to 230 baht.
As well as causing short-term chaos, the Bank of Thailand's measures may also have damaged the longer-term prospects of Thailand's stock markets. Several analysts noted that it took several years for Malaysia to regain the confidence of foreign investors after it introduced capital controls in 1998. |
