Thai government in U-turn as baht move hits markets

Fears of a repeat of the devastating Asian financial crash a decade ago yesterday prompted the Thai government to perform an abrupt U-turn on its unexpected imposition of capital controls.

The Bangkok stock market slumped as much as 20 per cent after the government imposed penalties on foreign investors who did not keep their money in the country for a year.

The move was aimed at clamping down on speculative inflows that have lifted the Thai currency, the baht, to a nine-year high, and hurt the country's exporters.

But the move triggered the biggest single-day drop on the stock market since Saddam Hussein invaded Kuwait in August 1990 as foreigners sold $700m (£360m) of Thai shares.

It sent ripples across the region. Indonesian shares were down 3 per cent while the markets in India, Singapore, Malaysia and Vietnam all fell by at least 2 per cent.

The sell-off evoked memories of Asia's 1997/98 financial crisis, which was prompted by a devaluation of the baht that triggered an economic downturn and social unrest.

Initially the authorities yesterday rebuffed calls for it to abandon the policy, but, after a matter of hours the finance minister, Pridiyathorn Devakula, announced equity investments would be excluded from the restrictions starting today. The restrictions still apply to overseas investments in bonds.

"Everyone agreed that this will ease foreign investor concerns and the money should come back into the market as market fundamentals remain good," the minister in the military-appointed government said.

"I insist there has been no damage and market value will increase later. It's not against our policy, as the central bank's policy is to prevent the baht's strength. But when there were side-effects, we had to fix them."

The volte-face was treated with derision in Bangkok. "It's a joke, isn't it? A total farce," a foreign banker in the Thai capital said. "This will leave a bad taste in people's mouths for a long, long time."

"How can they change their minds? Why didn't they tell us sooner? And why now? The damage has been done," the head of research at a Thai brokerage told Reuters.

Analysts said the impact would probably be confined to Thailand, whose economy was already under pressure following September's military coup.

"The draconian intervention by the Thai government is a timely reminder of emerging- market regulatory risk," said Katrina Preston, an analyst at Bridgewell stockbrokers.

"That said, we believe any contagion will be restricted to sentiment, given that Thailand's actions were merely intended to influence exchange rates."

Mike Hanbury-Williams, head of Pacific equities at F&C Asset Management in London, said the decision to withdraw the restrictions had provided some comfort for international equity investors.

"However, it is unsettling to see policy introduced and amended within such a timeframe," he said. "We remain concerned that yesterday's move heralded a more protectionist policy stance by the new government."

Mike Kerley, who manages Henderson's Far East Income fund, said the government's attempt to rein in the baht has made him nervous about the political situation.

"Our view has changed. We have been fairly positive on growth in 2007 because it just looks cheap. But on the back of what's happened, we've become more negative," he said.

"There's a huge credibility issue. It's an unelected government with no constitution. When we start to see policies like this, it makes us nervous. It has certainly put a spanner in the works."

Meanwhile overseas retailers such as Tesco will face new laws designed to protect small local shops, Mr Pridiyathorn said. "The rapid expansion of chain stores that combine supermarket and department-store merchandise has "damaged some cultural values" in Thailand, Mr Pridiyathorn said on Monday. "Expansion of large retailers such as Tesco Lotus and Makro hurt a number of mom and pop shops."

Tesco launched its Asian business through the acquisition of the Lotus chain in Thailand in 1998. It has 219 stores and plans to roll out another 207.