Draconian controls imposed to help baht By Amy Kazmin in Bangkok
Published: December 18 2006 19:25 | Last updated: December 18 2006 19:25
Thailand central bank imposed draconian capital controls to try to stem rapid appreciation of the baht yesterday, forcing offshore investors to keep their money in the country for at least a year or face stiff penalties for early withdrawal.
As from Tuesday, 30 per cent of all foreign currency inflows of more than $20,000 will be held on deposit – interest free by the central bank, unless it relates to a trade in goods or services.
Tarisa Watanagase, who was appointed Bank of Thailand governor after the September 19 coup, said investors could receive their money back after a year. But should they wish to repatriate money overseas sooner, they would be refunded only two-thirds of that amount, she said.
The currency weakened sharply at the announcement to Baht35.82 to the dollar; down from the nine-year high point of Baht35.06 earlier in the day but closed at Baht35.23.
Pridiyathorn Devakula, finance minister, called the decision an historic effort to counter speculation. The baht appreciated nearly 17 per cent against the dollar this year more than any other Asian currency. Thai exporters have been agitated about the baht strength.
Analysts were shocked and dismayed by capital controls, which, they said, would deter foreign capital inflows into Thai assets, including the stock market.
Sriyan Pietersz, head of research at JP Morgan, said: like hitting an ant with a sledgehammer. It will probably be helpful in achieving their goal, like getting pressure off of the baht, but it's a very broad instrument because you are pounding equity investors as well.
The announcement came after the stock market closed but analysts warned of an equity sell-off if investors decided there would be little further upside to Thai stocks, given the probable lack of future foreign buyers. Some overseas funds also bar investment in countries with capital controls.
Given the coup, and uncertainty about whether the administration will be able to restore democracy within a year, analysts also said few foreign investors would accept being effectively forced into a year-long bet.
This is a country that just had a coup, and you are not entirely sure that everything is going to pan out like it is supposed to said Mr Pietersz. Are you going to risk your money for a year?
Shahab Jalinoos, an ABN Amro strategist, warned in a client note of longer-term net negative consequences for Thailand via damaged sentiment and capital markets, rather than a positive impact on Thai exporters
Speculators appear to be the target of the controls.
Ian Gisbourne, head of research at Phatra Securities, said the administrative measures would also mean headaches for foreign direct investors, already jittery about Bangkok plans to revise the ambiguous foreign investment laws, which may force them to sell down their Thai holdings.
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