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Monday, December 18, 2006

Capital Flows In Thailand

This news is pretty incredible really.:

Thailand's regulators required banks to lock up 30 percent of new foreign currency deposits for a year to stop investors speculating on gains in the baht.

Overseas investors buying baht from tomorrow will only be able to recoup all of their funds if they keep the money in Thailand for more than a year, central bank Governor Tarisa Watanagase told a briefing in Bangkok today. Those who withdraw the reserved amount in less than a year will be penalized 33 percent of that portion, she said.

``They're getting pretty aggressive, as when a central bank starts withholding money it's pretty serious,'' said Steve Rowles, a Hong Kong-based analyst at CFC Seymour Ltd. ``This is really going to put the breaks on the baht.''

So now we have capital controls, not to stem an outflow of foreign exchange, but to stop an outflow of domestic currency. Oh how the world has changed.

Of course, it should escape no-ones notice that with fertility now well below replacement (somewhere in the 1.6 tfr range) Thailand is now right in the middle of that Demographic Dividend/Demographic Transition process I keep talking about.

Now for some more from Bloomberg:

The baht has risen about 16 percent this year to a nine- year high as the economy accelerated and a Sept. 19 coup broke a political stalemate. Exporters including Thai Union Frozen Products Pcl, the world's second-biggest tuna canner, on Nov. 16 asked the central bank to stem baht gains that are undermining their competitiveness.

The baht slipped almost 0.8 percent to 35.53 against the dollar as of 5:24 p.m. in Bangkok, the most in almost three months. It earlier climbed as much as 0.5 percent to 35.08, the highest since Oct. 7, 1997, according to data compiled by Bloomberg.

A devaluation of the Thai baht from about 25 to the dollar was the trigger for a plunge in currencies and a collapse in banks around the region in 1997 and 1998. The Thai government has since sought to restrict inflows of foreign currency.

The baht, the third-best performer among the world's 71 most-active currencies, started slumping after Finance Minister Pridiyathorn Devakula said this afternoon the central bank would make a ``historic'' announcement. The rule applies to transactions worth more than $20,000.

A rising baht hurts exporters by cutting the value of their local currency-denominated profits and making their products more expensive compared with those of Asian rivals. China's yuan has added 3.1 percent against the dollar this year, Malaysia's ringgit has gained 6.3 percent and Singapore's dollar has climbed 7.9 percent.

The baht has appreciated even though the central bank earlier this month introduced measures to limit its gains. The monetary authority on December 4 asked companies and commercial lenders not to sell baht short-term debt securities to overseas investors.

Thailand's economy may expand 5 percent this year, exceeding an earlier estimate of as much as 4.7 percent and last year's pace of 4.5 percent, the government said on Dec. 4.

A military coup on Sept. 19 ousted prime Minister Thaksin Shinawatra and ended seven months of political turmoil. Prime Minister Surayud Chulanont, installed by the military junta after the coup, is planning record spending on roads, subways and other infrastructure projects.

Speculative cash has poured into Thailand this month. Foreign short-term inflows surged to $950 million a week in December, from an average of about $300 million a week in November, Tarisa said today.

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