Thailand Encourages Forex Outflows
By ROBERT FLINT
Thailand has come full circle in its efforts to constrain the baht's appreciation, now encouraging currency outflows after placing short-lived controls on capital inflows a few years ago.
The change in rules had been announced last week, with details revealed Monday in Bangkok. The main points include easing limits on investment and lending abroad as well as looser regulation of corporate management of foreign-exchange risk.
It's another chapter in the struggle by regional Asian currencies to maintain an independent course in the shadow of the Chinese yuan. As long as China keeps the yuan stable against the dollar, its smaller neighbors can't let their currencies appreciate too much so as not to diminish the competitiveness of their exports.
Moreover, regional currencies often serve as a proxy for the yuan, since China's exchange system doesn't allow investors to take positions--and thereby make direct bets--on the yuan.
Thailand has been resisting pressure on the baht from one direction or the other for more than a decade. In the opening round of the Asian financial crisis in the late 1990s, speculation against the baht forced the Thai government to abandon a fixed-rate regime and float its currency. The dollar peaked around THB56 in January 1998, from precrisis levels roughly seven years earlier at THB25.
As the Thai economy recovered, the baht regained a lot of ground on the greenback. Hot money began flowing into the country to take advantage of a booming local stock market, which in turn fed further appreciation of the local currency.
By December 2006, the dollar had reached a nine-year low versus the baht and threatened to dip below THB35 if left unchecked. In response, the military-appointed government of the time imposed capital controls to hinder the inflow of short-term speculative funds.
The announcement of controls had a disastrous effect on the Thai stock market, with equity prices plunging close to 15% in their largest-ever one-day loss. The government immediately scaled back on the controls to cease penalizing foreign investors in Thai equities. All controls were gradually relaxed and finally abolished by a newly elected civilian government in March 2008.
The controls on inflows had only a limited effect on the baht. By the time they ended, the dollar was around THB32. Since then, it has fluctuated between THB32 and THB35 and most recently traded just above THB33.
But with the baht once again threatening to push higher, the Thai government chose to encourage outflows rather than restrict inflows. The big question is whether the latest revision to the rules will be more successful than previous attempts that have included repeated intervention in the dollar's favor by the Bank of Thailand.
"Other countries in the region, like China and South Korea, have also tried encouraging investment outflows to remove some of the upward pressure on the currency," Marc Chandler, global head of foreign exchange at Brown Brothers Harriman, said in a note.
"It is not clear that the measures in those countries have had much impact on outflows or the respective currencies," Mr. Chandler said.
There wasn't much immediate effect on the baht Monday, with the greenback down slightly to THB33.160 from THB33.179 late Friday, in line with declines against other currencies.
Some analysts doubt that Thai companies have enough money to invest abroad on a scale that would have an impact on the baht's exchange rate. In fact, there may be nothing the Thai government can do to guide its currency in the direction it deems best. The baht may remain a prisoner of movements in the yuan and dollar, whatever strategy Thai authorities choose.
Write to Robert Flint at robert.flint@dowjones.com
http://online.wsj.com/article/SB10001424052748704022804575041090733252952.html?mod=WSJ_Markets_section_Currencies
