Thailand to Scrap Capital Controls

Dow Jones
SmartMoney.com

February 28, 2007 2:15 PM

By Polya Lesova

NEW
YORK (Dow Jones) – The Thai central bank will scrap remaining capital
controls for foreign investors as of Thursday following the resignation
of the finance minister under whose tenure they were imposed.

Controls on foreign investments in bonds, mutual funds and property
funds will be removed on Thursday, Central Bank Governor Tarisa
Watanagase said Wednesday, according to news reports.

Tarisa said that the capital controls had
succeeded in stopping the appreciation of the Thai currency, the baht,
but others disagree.

“It is not clear that the capital controls succeeded,” said Marc
Chandler, a currency analyst at Brown Brothers Harriman. “The baht is
stronger against the dollar than it was when the capital controls were
first announced.”

“The abolishment of the capital controls seems largely a facing saving gesture,” Chandler said.

Thailand’s benchmark SET Index ended Wednesday’s session 1% lower at 677.13.

In late December, Thailand’s central bank introduced restrictions on
foreign investments in an attempt to curb speculative inflows that had
lifted the baht, by about 17% against the U.S. dollar in 2006. The
measures included locking up 30% of new foreign currency deposits for a
year and penalizing investors trying to repatriate funds quickly.

The new rules, however, triggered a hemorrhage in Thailand’s equity
markets, with Bangkok’s benchmark SET index tumbling 15% in one
session. In an embarrassing about face the following day, the
government removed controls on equity investors, but kept controls on
foreign investment in bonds and commercial paper.

“In the context of the political turmoil going on in Thailand, it’s a
small drop in the bucket,” said Roberto Herrera-Lim, an analyst at the
Eurasia Group, about Wednesday’s announcement.

“There are bigger structural issues in Thailand politically,” Herrera-Lim said.

Finance minister resigns, increasing political uncertainty

One such issue now is who will succeed Finance Minister Pridiyathorn
Devakula, who resigned on Wednesday, citing disagreements within the
government over the appointment of an economic adviser. Pridiyathorn
had been tapped to oversee the finance ministry after the Sept. 19
military coup. He also held the position of deputy Prime Minster
overseeing economic policy.

“The resignation was a surprise,” Herrera-Lim said. “Pridiyathorn was
one of those running for the prime ministership. He was brought in very
early into the cabinet and was trumpeted by the government in order to
build confidence.”

Pridiyathorn’s resignation is “a huge blow” for the Thai government,
which has now lost any credibility they may have had in the eyes of
investors, said Glenn Levine, an economist at Moody’s Economy.com’s
office in Sydney.

“Pridiyathorn built up a reputation as a shrewd economic observer
during his time as head of the Bank of Thailand and gave the government
some much needed economic clout,” Levine said. “With him now gone there
is no telling what crazy ideas the interim government will come up
with. This is all bad news for the Thai economy.”

The government hasn’t announced a replacement for Pridiyathorn,
although there is speculation that Virabongsa Ramangkura will be the
likely successor. Ramangkura resigned his post as chairman of the
Export-Import Bank of Thailand on Wednesday.

“The generals are not capable of making these [economic] decisions,”
Herrera-Lim said. “You need a competent bureaucrat to act as the public
face of economic policy-making.”

The government needs to quickly appoint a replacement for Pridiyathorn,
whose policies proved less investor-friendly than expected in his short
tenure, said Kitti Nathisuwan, an analyst at Macquarie Research
Equities, in a research note.

“The more crucial political milestones – the general election – are on track for fourth quarter of 2007,” Nathisuwan said.

In a coup last September, the military seized power and ousted then
Prime Minister Thaksin Shinawatra. The coup leaders introduced a
temporary constitution that empowers them to appoint and fire the
government and the acting parliament. It’s generally expected that
Thailand will have a draft constitution by the end of the first half of
the year, followed by a referendum to approve it in the third quarter
of the year, and elections by the fourth quarter.

“There’s still a lot of uncertainty as to what Thai politics and
governance will look like even within the next year,” Herrera-Lim said.
“There’s a lot of uncertainty about the transition. Will the generals
leave on time? Will Thaksin come back? Who will run the country after
the generals are gone?”

In a separate development, Thailand’s central bank cut its benchmark
lending rate by 25 basis points to 4.5% Wednesday. A spokesman for the
central bank’s rate-setting policy committee said the move was in line
with economic conditions and declining inflationary pressures.

Despite today’s rate cut, the growth outlook will remain unexciting
until the underlying problem of political uncertainty and its
consequent impact on business confidence are addressed, said Chetan
Ahya, an analyst at Morgan Stanley, in a research note.

“Political uncertainty is affecting the flow of new investment [into
Thailand],” Herrera-Lim said. “The longer this drags out, the more
difficult it becomes to manage the effect on the economy.”

(END) Dow Jones Newswires

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