Thai Central Bank Deliberately Created Forex Uncertainty

When Thailand's central bank imposed tight controls on short-term investments to stabilize its currency and protect the Thai export, the major result was a sharp pullback in Thai stocks and other investment markets. Now it turns out the uncertainty created by Bank of Thailand Governor Tarisa Watanagase around Thai currency was "deliberate." According to Tarisa, "It was important and necessary for us to put a brake on the sentiment, to create some uncertainty." Though a ruling that the new capital controls don't apply to equities has helped that market to recover some of its December losses, the new rules have stifled investments in bonds, real-estate mutual funds and foreign-currency borrowings by demanding investors have 30% of their funds locked up, interest-free, for a year. The policy's detractors have complained it amounts to a heavy tax on investing. In the meantime, credit-default swaps based on $10 million of Thai bonds have risen to $37,500 up from $24,000 on Dec. 15, before the new measures were imposed. Managers of global bond funds have begun boycotting Thai debt as a result. Many members of the Thai middle class, originally supportive of the September coup, have changed their minds as they have seen the ways it has been detrimental to the Thai economy.

• Sources: Bloomberg, Wall Street Journal, International Herald Tribune/Bloomberg
• Related commentary: Thai Fiasco: The Downside of Emerging Markets, We're Buyers of Emerging Markets Stocks on Thai Related Weakness
• Potentially impacted stocks and ETFs: iShares MSCI Emerging Markets Indx (EEM), Thai Capital Fund (TF), Thai Fund Inc. (TTF), Vanguard Emerging Markets ETF (VWO)

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