Wednesday, December 20, 2006

Mai Pen Rai

Bloomberg: The Finance Ministry late yesterday in Bangkok reversed the Bank of Thailand's move requiring banks to lock up 30 percent of new foreign-currency deposits for a year on funds earmarked for stocks. The restrictions sent Thailand's SET Index tumbling 15 percent, wiping away US$23 billion in market value and prompting declines in emerging markets globally. PTT Pcl, Thailand's biggest energy company, plummeted 17 percent yesterday, while Bangkok Bank Pcl, the largest lender, sank 16 percent. Shares of companies in the 458-member SET Index now trade at 9.91 times forecast earnings, the cheapest of any country in the MSCI emerging markets index. The benchmark slid to a more than two-year low of 622.14 after overseas investors dumped a net 25.1 billion baht (US$699 million) worth of shares, the largest such sell-off since at least Jan. 4, 1999, according to data compiled by Bloomberg. The drop erased all of the SET's gains this year. The index is now 13 percent lower than at the start of 2006. ``The stock market has fallen too much today,'' Finance Minister Pridiyathorn Devakula said yesterday. ``This is the side effect of the central bank's measure, but we have fixed it already.'' The requirements stay in effect on other investments, including bonds and property, he said. Asian stocks have advanced this year as growth in the region's emerging markets drew funds from overseas investors. Funds investing in shares of developing countries had a net inflow of US$1.65 billion in the week ended Dec. 13, figures from Emerging Portfolio Fund Research showed. The net fund inflow was the biggest since the weekly period ended May 10, when they drew US$2.86 billion.

Central banks in Malaysia, the Philippines and Indonesia said that they wouldn't implement capital restrictions to control their currencies. The Thai rule came after the baht appreciated 16 percent in 2006 to a nine-year high against the dollar, threatening exports and economic growth. The baht had its biggest two-day decline in Asian trading since April 2005, following yesterday's measures. The currency climbed 0.22 percent against the dollar to 35.90 as of 1:09 p.m. in New York on Dec. 19. Emerging-market stocks plunged 25 percent in 26 days between May and June on speculation higher interest rates would damp economic growth and reduce the appeal of riskier assets.

After slumping to its low for the year on June 13, the MSCI emerging markets index has recouped all its losses, climbing to an all-time high on Dec. 18. For the year, the measure has gained 25 percent, compared with a 14 percent rise in Standard & Poor's 500 Index. In the past five years, the MSCI emerging markets index has advanced an average of 26 percent each year, more than quadruple the 6.2 percent average gain the S&P 500.

My Lima Sen - The U-Turn was basically a Britney Spears' admission - "Ooops, I did it again!". But investors need to remember that it is still in force for property and bonds. Especially property, so this is not that bad a thing. The Dow continued on its merry ways, and investors would be silly to think that this morning you can plough all your savings into the markets. Regional markets will spike up especially Thailand but I think the Thai market WILL weaken FURTHER after the first hour or so because the act of clamping down on inflows and outflows of currency IS possibly the most distressing thing you can inflict on foreign investors (second to doing something ala to the CLOB by Malaysian authorities). Hence even if you reverse the decision, damage has been done already. I tell you, Malaysia till today IS STILL PAYING FOR THE CURRENCY CAPITAL CONTROLS thing even though we have lifted it. You cannot slap people in the face and ask them to continue to give you money, then say "no hard feelings", then slap them again.

In a way the controls implemented by Thai central bank did its thing even though part of it was reversed. It already scare the shit out of all speculators. So, u-turn or no u-turn, after the slight recovery today, many will continue to exit the Thai market, and the regional bourses would be affected slightly. So don't get overly confident.

Central bankers have to learn that managing the currency and funds flow is a very tedious thing. Speculation has to be managed way before it gets too hot, and there are a hundred and one ways to massage the thing before it reaches breaking point. Don't just suddenly whack the kid with an acid dipped cane when all you have been doing all along is some verbal rebuke.

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