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The Baht and the Thai government take a “beating”

Updated On: Dec 22, 2006

However the Thai government apologises, the damage has been done.

Not only were financial losses severe but the credibility of the military regime and interim government has taken a nosedive as well. With the lack of progress in tackling corruption (one of the key reasons for the coup), continued violence in the South and the latest policy flip flop people are wondering if the authorities know how to govern.

According to the Straits Times, when the Thai government announced onerous penalties for foreign investments withdrawn within a year and stipulated that “investors would also have to lodge 30per cent of the amount as a bond with the central bank, where it would sit, earning no interest”, tremendous sell-offs ensued.

This resulted in the Thai stock market plunging “15% on Tuesday, its biggest belting in 16 years, while regional markets, including Singapore, took a sizeable hit”. The damage was so bad that Thai Finance Minister Pridiyathorn Devakula came out to reverse the policy, saying that “the penalties would not apply to equities and foreign direct investment”. Unsurprisingly, Tarisa Watanagase (the head of the Thai central bank, Bank of Thailand or BoT) has been condemned for “introducing currency controls without consulting the stock market regulator or stock exchange”.

Bratin Sanyal, ING's head of Asian equity investments, told the CNN, “The one thing worse than an incompetent central bank is an incompetent central bank that flip-flops.” Marc Chandler, global head of foreign exchange strategy at Brown Brothers Harriman in New York, was reported by Bloomberg as saying, “This underpins some people's conclusion that the Thai military government and central bank are out of touch with the markets.”

However, BoT chief Tarisa remained adamant about the Bank’s policy, saying, “We had expected long-term investors to stay, but they sold to avoid further risk. We didn't think this would occur, but have to accept the way it was… There was panic selling, and the market overreacted. The measure was well thought out based on available information, but it is difficult to control herd psychology.” She added that “foreign investors, not Thais, were the main losers” and that Thais would not have lost money if they did not follow the panic-selling.

PM Surayud Chulanont also defended the BoT’s “strong measures against baht speculation”. He insisted, “The policy isn't flip-flopping. There has been no change in policy. The policy is clear that we don't want to see the baht rise too much, as it would affect the overall economy.” Finance Minister MR Pridiyathorn Devakula also deflected the issue of responsibility for the mess as long as the situation was rectified.

With governmental reactions like these, it is understandable that public anger has not been assuaged despite a promising rebound in the stock market. After losing 15% in value, the “Stock Exchange of Thailand (SET), which lost over 800 billion baht (US$23 billion) on Tuesday, regained 550 billion in value on Wednesday” as the SET index rose 11.16%, the Bangkok Post reported.

Standard & Poor's Ratings Services has issued a report –Capital Controls Come at a Cost to Thailand –from its Singapore office denoting that “while controls on short-term capital inflows in the Kingdom of Thailand…have succeeded in stemming further speculative inflows, they could also trigger a pullout of foreign funds already invested in the Kingdom” The Nation also reported Standard & Poor's credit analyst Kim Eng Tan as saying, “Foreign investors will now be far more wary of investing in Thai financial markets… This will lead to higher funding costs in the Kingdom… [and] could adversely affect domestic investment if planned government capital spending leads to the reappearance of current account deficits… because such deficits would increase Thailand's reliance on foreign financing.” Moreover, the Thai Baht remains open to speculation, despite the BoT’s measures, as it is popular “among speculators who are eager to make profits from short-term portfolio investment along with currency gains from the widespread speculation on the appreciation of Asian currencies”.

Over in the South, the Thai cabinet has “agreed to provide tax breaks in the four southernmost provinces and in four districts of Songkhla to try to reverse stagnating investment in the troubled region”. These measures will take effect from New Year's Day. The Bangkok Post also noted that Deputy PM M.R. Pridiyathorn Devakula “said corporate income tax in the strife-torn region will be cut sharply from 30% to 3%, while business revenues of individuals will be exempt from tax. The tax on real estate transactions will also be reduced from 3% to 0.1%, while the fees on land transfers and mortgages will be reduced to 0.01%. The tax breaks will remain in effect for three years until December 2009”.  Whether such tax breaks will bring in the investments to violence-striken region remain to be seen.

Sources:

Bangkok's credibility at stake after stock market debacle (Straits Times, 21 December 2006)

Central bank governor under attack (Straits Times, 21 December 2006)

About-turn gives stocks major boost (Bangkok Post, 21 December 2006)

Baht further depreciates to 36.37 in morning trade (Nation, 21 December 2006)

Surayud supports BOT's measures against baht speculation (Nation, 21 December 2006)

S&P says Thai capital controls come with costs (Nation, 21 December 2006)

Credibility damaged by fast U-turn (Nation, 21 December 2006)

Market recovers, govt reels (Nation, 21 December 2006)

'Black Tuesday' also meant opportunities (Nation, 21 December 2006)

Baht could still surge (Nation, 21 December 2006)

Political shadow over economy (Nation, 21 December 2006)

Foundation begins to build Pattani mosque (Bangkok Post, 21 December 2006)