Wednesday, December 20, 2006

The Thai debacle

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For once, I read and talk about something about Thailand other than tasty Thai food (I love it!) . Thailand is desperately considering ways to prevent foreign fund flows into their bond market, as such funds could push the Thai baht higher against the US dollar and undermine Thai exporters. Here' what happened in short,

Monday: Finance Minister Pridiyathorn Devakula and central bank announced that foreign investors would be required to deposit 30% of the money they bring in to Thailand to buy stocks and bonds in a non-interest bearing account in the central bank.
==> bhat dropped 1.6% lower against the dollar, but this also led to a disaster in the Stock Exchange of Thailand where the index dived 15% in its biggest ever daily decline

Tuesday: Late night on Tuesday, after foreign investors fled the stock market due to what effectively amounted to tax on foreign equity investment, Mr. Devakula announced that investments destined for stock market would no longer be subject to this reserve requirement

Wednesday: Mr. Devakula tells central bank has to find a new way to stop speculative flows of money into the country's bond market after coming into the country through the stock market.

I'm just talking about this here to point out how difficult it is to control a country's fiscal and monetary policy. Well-thought on decisions may have to be reverted in just a single day, as in the case of Thailand. Thailand is still in a tough situation, still. This 30% exemption to stock market is going to create further loopholes and headaches, unless they fix things fast. Over time, foreign invesetors will start disguising debt and property-related investments as equity and FDI.



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