Thaim Bomb
Wednesday Dec 20, 2006
In a move that sent fears of another Asian financial crisis rattling throughout most Asian indices, Thailand’s central bank governor, Tarisa Watangese, imposed currency controls on international investors. In fact, according to the International Herald Tribune, “Under the new rule, banks must hold 30 percent of the funds in reserve for one year, paying no interest, and any withdrawals made within a year are subject to a 10 percent tax.” Traders took it as a signal that the six-month rally in emerging markets was coming to an end.
That was announced Monday. By Tuesday, after the Thailand SET lost 13%, or $20 billion in value, Thailand’s central bank backtracked and announced it would lift those contols. However, the new rule will remain in place on foreign investments on bonds and commercial paper “as part of the central bank’s measures weaken the Thai baht, which hit a nine-year high versus the dollar Monday,” according to BusinessWeek.com.
With the baht plunge, investors couldn’t help but remember the Asian financial crisis of 1997, which quickly reverberated to other currencies and other indices, and sent the region into a deep recession. But there’s no real chance of another financial crisis today, considering the regional economies are much stronger than they were in 1997. Plus, this time, the baht was too strong. Thailand may have felt obligated to weaken its currency appreciation versus the dollar.
While we’d suggest using Thailand’s market weakness as a buying opportunity, tread lightly. As said earlier, the new rule will remain in place on foreign investments on bonds. But that may not be a good thing. The bond market has been significantly responsible for attracting much of the influx of dollars ($1 billion this month alone, according to BusinessWeek.com). The move may help cut pressure on the baht, but it will also cut back on capital inflows. Keep an eye on Thailand.
Ian L. Cooper
Editor, Early Alert Trader
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