Currency Controls

The Thai stock market plunged 17%+ today, the worst loss in 30 years, I heard, with the imposition of currency controls. The monetary authorities in Bangkok are putting a tight grip on the inflow and outflow of investment funds into the country. The Thai Central Bank implemented these draconian measures to rein in an appreciating baht and to ward off speculative attacks. To recall, speculation against the currency ushered in the Asian financial crisis way back in 1997 which reverberated across the region, resulting in bankruptcies and consequently, job losses.

This time, however, the scenario is a bit different. No massive devaluation took place (not yet anyway, it moved by only about 2%) which means interest rates remain stable. Only the equities market got burned. In addition, unlike in 1997, no domino effect on other South East Asian markets took place.

But in the medium to long-term, as investment funds from outside slow down (both direct and portfolio-based), there will be pressure for the baht to depreciate (defeating the purpose of stabilizing the currency), which will also be weighed down by rising interest rates, as listed companies will now increasingly turn to borrowings and rely less on equities to finance their working capital requirements and expansion plans.

With the Thai market becoming too unattractive to portfolio fund managers and investors, other stable markets in the region might benefit over the short-term.

The Philippine stock exchange recently averaged PhP2-3 billion in daily volumes, a good sign that foreign investors are upbeat about the general business conditions. The local bourse might benefit from funds exiting Bangkok and investors who got burned might want to recover some of the losses by dipping into the markets of KL, Jakarta, Singapore and Manila.

Expect market activity to perk up after the holidays.