Thai Trading Curbs Backfire, Set Stage for Baht Gains (Update1)

By Kevin Lim and Shanthy Nambiar

April 2 (Bloomberg) -- Thailand's baht, the second-best performer among Asian currencies this year, may keep gaining because investment restrictions aimed at protecting exporters have backfired.

Limits on bringing money into the country imposed Dec. 18 have eroded consumer confidence in Southeast Asia's second- largest economy, reducing demand for imports. The currency controls also spawned an offshore exchange rate that has risen five times faster that the official price of the baht.

The policies have created a ``vicious cycle of an inexorably strengthening baht,'' said John Stuermer, managing director of Bear Stearns Cos. in Singapore. ``The capital controls are supposed to curb the baht's rise but every time they do something stupid it decreases consumption and imports.''

The military junta that seized power in a bloodless coup imposed the rules to curb last year's 16 percent gain in the currency and protect exporters. Instead, they have caused rifts within the government, prompted businesses to delay spending and slowed growth in the $195 billion economy.

The onshore baht rate has risen 2.1 percent to 34.99 per dollar this year, second only to the Malaysian ringgit, as reduced imports led to a current account surplus of more than $1 billion per month. Stuermer said the currency may rise as much as 11 percent by year-end.

The Bank of Thailand has fended off criticism of the controls, which included requirements that investors put 30 percent of their funds in bank accounts subject to penalties if they withdraw cash within a year.

`One-Way Momentum'

The rules succeeded in ``breaking the one-way momentum'' of the baht, said Pongpen Ruengvirayudh, the central bank's senior director for financial markets in Bangkok. She agreed that the pressure is now for appreciation.

``The market has a tendency to believe that the baht will appreciate further'' because of the current account surplus, Pongpen said in an interview. The central bank last week told lenders to report currency positions daily to evaluate whether they are speculating.

Thailand started backtracking on the capital controls within 24 hours of imposing them. Equity investors were exempted on Dec. 19, after the benchmark stock index slumped 15 percent. Investors in bonds and property won a waiver on March 1. They now need to prove they have completely hedged to avoid profiting from baht gains.

Offshore Exchange

Transactions such as paying for exports and sending funds to subsidiaries are a ``hassle'' inside Thailand, said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore. ``You have to put the money in some sort of onshore account and then prove that it's not for speculation,'' he said.

Companies seeking to avoid delays are buying the baht outside the nation. Limited supply has driven the so-called offshore exchange rate higher. The baht trades at 32.31 to the dollar offshore, an 11 percent increase this year. It's 8 percent higher than the onshore rate.

``The offshore market, although thin, influences the onshore rate by providing investors' perception of the baht's value,'' said Thio Chin Loo, senior currency strategist at BNP Paribas in Singapore.

Trading offshore has slumped by about 75 percent to $50 million a day, BNP Paribas estimates. In the domestic market, trade has also shrunk to between $100 million and $500 million, Pongpen estimates. Total trading in the baht previously averaged $1.3 billion a day, according to the latest Bank for International Settlements data.

Thailand isn't the only country with two exchange rates. Venezuela has a parallel market because of restrictions imposed in 2003. The currency, fixed by the government at 2,150 per dollar, has plunged 15 percent this year on the black market.

Finance Ministers

``Historically speaking, capital controls are put in to avoid outflows,'' said Corrinne Ho, senior economist at the Bank for International Settlements' Asia-Pacific representative office in Hong Kong. ``The Thai case is exactly the opposite.''

As the government argued over the policies, Finance Minister Pridiyathorn Devakula quit in February after less than five months in office. Consumer confidence slid to the lowest in six months in February. Business confidence dropped to 42.9 in February, the weakest since 2001, from 43.9 in January, the central bank said on March 30.

Imports dropped for three consecutive months because businesses ``are hesitant to invest,'' Commerce Minister Krirk- krai Jirapaet said on March 21. A central bank report on March 30 showed the current account surplus rose to $1.54 billion in January, the highest since 2000, from $1.22 billion in December. Currency reserves reached $69.6 billion, the report showed.

Trade Surplus

Morgan Stanley last week cut its forecast for economic growth in 2007 to 4 percent from 4.3 percent as domestic demand and export growth slows.

``Recent policies have created lots of uncertainties and have not been effective,'' said Mark Mobius, who oversees $30 billion in emerging market stocks at Templeton Asset Management Ltd. in Singapore. ``With trade and current accounts in surplus and foreign exchange reserves increasing, the baht could continue to appreciate.''

Richard Han, chief executive of Hana Microelectronics Pcl, a Bangkok-based assembler of memory chips exported to the U.S. and across Asia, says the trade surplus will keep pressure on the baht to strengthen.

``The baht is generally strong because we've seen quite a big drop in imports,'' said Alistair Thompson, who helps manage $18 billion of Asia-Pacific stocks and global emerging markets at First State Investments in Singapore. ``No one is taking strong, big decisions.''

To contact the reporters for this story: Kevin Lim in Singapore at Klim27@bloomberg.net ; Shanthy Nambiar in Bangkok at snambiar1@bloomberg.net .

Last Updated: April 1, 2007 22:42 EDT

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