Thailand Re-thinking Economic Nationalism?

[Evel_Penivel]

It's too early to know exactly what was behind the coup's ill-conceived capital control experiment. It obviously failed in its stated goal, as the baht is now stronger (although not by much) than it was in December when controls were imposed. The best that can be said is that the baht might have strengthened even further if the controls hadn't been in place. The full extent of the damage to Thailand's economy from the unintended side-effects is also hard to judge at this point.

 

What's most interesting is that the controls were so badly thought out and had to modified almost immediately because they gutted the Thai stock market. Certainly there was enough expertise in the Ministry of Finance and BOT to anticipate that is what would happen. A more reasonable approach would have been to lower interest rates, particularly with the Thai economy showing signs of flagging.

 

A few ideas are being thrown around by financial analysts as to why. Most popular is that "orders came from on high," probably from the big kahuna's closest financial advisers. These advisers may have been driven by ideology more than a sound understanding of how markets function, forex markets in particular. They don't appear to realize there's a huge difference between a speculative run that causes a currency to depreciate as in 1997-98 and speculation while a currency is appreciating.

 

The coup leader and those he trusts the most may have been influenced by former Malaysian PM Mahathir in seeking to blame Thailand's woes on a small group of foreign speculators. Basck in 1998, Mahathir publicly stated the Jews were behind the attack on the ringgit. It's doubtful the current Thai leadership is as explicitly anti-Semetic as Mahathir, but they may see markets in some sort of conspiratorial light.

 

On the other hand, the big kahuna may just be taking care of his own at the expense of political opponents. That was a big factor in Mahathir's tactics as well.

 

"Firing the Deputy Prime Minister and imposing capital controls in September 1998 primarily benefited firms with strong ties to Prime Minister Mahathir. Of the estimated $5 billion gain in market value for Mahathir-connected firms during September 1998, approximately 32% was due to the increase in the value of their connections. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported."

 

Johnson, Simon H. and Mitton, Todd, "Cronyism and Capital Controls: Evidence From Malaysia" (August 20, 2001). AFA 2002 Atlanta Meetings.

 

Evel

[Old Hippie]

OK, so if/when the BoT removes these controls, will the Bhat fall or rise? I assume other factors would be involved as well.

[Gadfly]

the value of their connections. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported."

 

Johnson, Simon H. and Mitton, Todd, "Cronyism and Capital Controls: Evidence From Malaysia" (August 20, 2001). AFA 2002 Atlanta Meetings.

 

Thanks. I am going to take a closer look at this. Here and, more importantly, elsewhere, I am hearing now how the capital controls in Malaysia were an unambiguous success, something that sounds like absolute nonsense (but never underestimate short memoraires.)

 

One of the big problems here is the senior members of the BoT civil service. They are living in the past - a past of 20 to 30 years ago where state controlled economies enjoyed more legitimacy. There is also an element of feudalism in their policies. They are extremely parternalistic and suspicous of markets.

 

And they don't seem to have learned much from the 1997 financial crisis - we'll they did learn that it easier to blame outsiders like Soros than make the hard choices that need to be made here.

[SingaporeSteve]

In purely simple terms, I would suspect that the word is reaching the elite that however its spun, no foreigners believe it, which is a point well made by Gladfly. Simply put when I had dinner a couple of weeks ago with a Thai Chula Professor, she expressed surprise at my concern as to what is happening in Thailand. Basically I advised her that I and everyone I know who is here are cutting back on any capital expenditure (i have cancelled opening a business and creating 8 jobs) purely because of this situation. She felt it was just a blip, and that the new government will be a lot better. To which I added, well we will wait and see what happens, however I am not investing another cent in this country and if anything am actually looking at liquidating assets if the opportunity arises. Having known this lady for 8 years, she knows me and what I do for a business pretty well and she seemed genuinely concerned at how foreigners are perceiving this. I added that in a simple straw poll of my residents, none of them are anticipating any further capital investments in big scale projects - even the BOI approved companies (and 3 of their senior guys live at my estate). She is a well read person of course, but as I say seemed genuinely surprised when we were talking about real companies, employing real Thai people and paying real taxes - cast aside the issue about 'financial experts', banks etc however she better understood the position when I spoke of the 8 jobs that are not going to be created. Lets face it, 8 jobs is nothing, but it brought home to her, well if this little guy is doing this what other things are happening in other 'real' companies. Its wierd and I dont make any claims to understand the economic situation like Gladfly and others - but relating this to her, she was almost scornfull of the 'markets' but totally focused on the 8 jobs that have been lost. Seems like you need to 'humanise it' for people to understand the damage being caused. Maybe there is a lesson for the marketing guys somewhere in this. Forget the talk of $500m dollar of investment and focus on what the Thai's understand - Jobs and monthly salary cheques seems to be the way to go. Everyone of us assumes the jobs will come with such big investment, but she seemed to skirt over it and not even relate jobs to investment $$$'s.

 

Another educated Thai I was chatting with, told me she is now only shopping at Big C instead of Tesco Lotus as its a Thai company. When I told her that Tesco Lotus buy up a huge quantity of chicken which are then airflown to the UK to be sold - she was totally surprised - I then said and they probably use the profits coming from Tesco Lotus and actually use that money to pay the guy who grows the chicken - OK its a very simple scenario of an accounting excercise in moving money I accept, but I doubt its that far from the truth. No surprises there - but just another example of how insular Thai's are on these matters. Of course the funniest part of this is that all her clothes come from places like Mango, Zara, Bebe, Nine West etc - all of which are imported.

 

Strange times for sure and will be interesting to see what shakes down.

 

Cheers

SS

[HeartThais]

The globalization of financial markets fascinates me. But there is no consensus among the top economists on whether completely opening up the financial markets in developing country is a smart or risky thing. Most seem to agree that some set of capital controls are necessary for developing countries. Even IMF and World Bank have reversed their stance that capital controls are unconditionally bad.

 

The problem with developing countries like Thailand is that their economy is small relative to the capital flows. There is a ton of money out there looking for better returns and with leverage, speculative attacks are not unrealistic. A handful of people could break the Bank of Thailand if they went completely free market.

 

If they really want to dampen f/x volatility, the government shouldn't have repealed the capital controls for the equity markets. That market correction was necessary. Supposedly thai stocks were averaging 20% returns but 15% of that was baht appreciation. If you are investing under those conditions, you aren't really investing in thai productivity, you are investing in the baht. By lifting the controls on the stock market the next day, they were essentially inviting people to come back and speculate on the baht which I believe is causing the slower but still upward climb.

 

In any case, I think Pridiyathorn got scapegoated. Sure, he could probably have done things more gracefully. But he did slow the baht appreciation and sent a message that they weren't going to encourage investors expecting double digit baht appreciation.

 

"And they don't seem to have learned much from the 1997 financial crisis - we'll they did learn that it easier to blame outsiders like Soros than make the hard choices that need to be made here.

"

I think they did learn much from the 1997 crisis. They learned that the BOT does not have enough foreign reserves to combat a speculative attack or mass capital flight so they had better keep things under control before it gets too hot. It is much easier to control capital inflows than trying to curb capital outflows during a panic.

 

I think they did an honest assessment of themselves and realized that the economy is growing much faster than it was supposed to. When there's that much capital, the quality of the investments goes down. Lots of companies were probably built on risky foreign loans that look like a great deal today but in case of sudden baht depreciation will fold faster than Superman on laundry day.

 

We in the US or Europe take currency stability for granted so it's easy for us to advocate opening up the financial markets.

[HeartThais]

"Certainly there was enough expertise in the Ministry of Finance and BOT to anticipate that is what would happen. A more reasonable approach would have been to lower interest rates, particularly with the Thai economy showing signs of flagging."

 

You can't float an exchange rate and then have both a monetary policy and manage the exchange rate through monetary mechanisms like interest rate. You can do one or the other. This is an economic principle called the unholy trinity. If you use money supply (the mechanism used to manipulate interest rates) to manage the exchange rate, you have to suffer from the economic effects of such tampering. In the case of lowering interest rates without an increase in production, you get inflation. Most developing countries and actually most countries in general have chosen deliberately NOT to subordinate monetary policy to exchange rate policy. I think that makes sense because the overall economic health of your citizens is more important than the exchange rate. Capital controls are the only way to manage an exchange rate while keeping an independent monetary policy.

 

"They don't appear to realize there's a huge difference between a speculative run that causes a currency to depreciate as in 1997-98 and speculation while a currency is appreciating."

 

One is a function of the other. What goes up must come down and it is much harder to keep people from fleeing especially with the financial derivatives of today. Much easier to keep people from speculating upward in the first place. If the government only controls a downward run, it gives speculators even more incentive to speculate upward on the baht. Afterall, they can make a killing if they can set off a bubble and they know the government will step in to protect them somewhat if the baht starts to fall fast. To prevent this bad behavior, they need a balanced policy in both directions.

 

"Back in 1998, Mahathir publicly stated the Jews were behind the attack on the ringgit."

 

It is probably true that Jews were behind the attack. But that was just coincidence because Jews manage a huge percentage of capital. It's not because Jews are evil or anything. Bankers are just really smart.

 

Speculative attacks are real and they are deliberate although it doesn't require a conspiracy. Think of the thai currency like a very small company. One strategy if you are a very large hedge fund is to keep buying up the shares of the company. And then when you think you have enough, you dump all at once while at the same time going short on futures contracts. What you hope for is that your sudden selling triggers a widespread panic and the other shareholders sell like crazy too. You make a nice profit on the short contracts and can then rebuy the shares cheaply because only you know why the shares plummeted all of a sudden. Soros is publicly against opening up developing countries completely to financial markets because he is actually a nice guy and he knows all too well the havoc that investors can create. It's how he made his fortune by taking massive positions against central banks, including the Bank of England when he sold short $11 billion pounds... and won. He is one smart speculator and jewish to boot. There may be a correlation there.

 

A smart hedge fund trader with enough clout will engineer a speculative attack whenever he thinks that they can get other traders to panic and that the central bank of the target company doesn't have enough foreign reserves to defend itself. They also prey on countries whose financial ministers are not experienced enough to defend themselves effectively using other means. In the case of Asia, they got doubly screwed because the IMF and others were pressuring them to give up capital controls for the promise of ongoing foreign investment. Well, they got raped.

 

I think the current government is pretty crafty. They got their capital controls in place to stabilize exchange rate. And then they blamed the financial minister for the stock crash and switched to a new guy to reassure the rich Thais that lost money. Plus they were able to show they are willing to take drastic measures to stop speculation which should slow foreign speculation. This is the kind of strategizing you would expect from a good military leader.

[HeartThais]

 

"Basically I advised her that I and everyone I know who is here are cutting back on any capital expenditure (i have cancelled opening a business and creating 8 jobs) purely because of this situation."

 

Please don't take offense as I don't mean it at all. But to me it seems more like you are showing your disgust of a policy rather than making a rational business decision. Kind of like protesting with your dollars or pounds. Afterall, if you really think there is an opportunity, you could go ahead and do the business because you probably wouldn't be pulling out before a year anyway. Plus you could make a direct investment and meet the hedge requirement to have 100% access to funds and then you could pull up at any time.

 

But if you are worried that the Thai economy is going to collapse without ongoing transfusions of foreign capital, that's rational. But you are more or less confirming what the first prime minister was implying... that the thai economy is being artificially bolstered by foreign capital.

 

"Everyone of us assumes the jobs will come with such big investment, but she seemed to skirt over it and not even relate jobs to investment $$$'s."

 

I don't think it's because Thais are stupid or naive. They just have a very different market experience than we have. Currency speculation is a very big part of their financial experience and a very small part of ours. When we hear about hedge fund traders arbitraging treasury notes, we don't really care because it doesn't affect us and most of us don't understand it anyway. But when it happens to Thais, it very much affects them and they don't understand it either. I think the overall effect is a desensitization to capital flow in general. In the US, citizens often express that sentiment too as in "it's all just paper anyway." The difference is that we can ignore it.

 

From my time in Thailand, I feel like it has a productivity problem that is only going to get exacerbated by free-flowing capital. Switzerland's ratio of % of global output to % of population is somewhere above 6 to 1. Thailand is under .25 to 1. I think they need to take things slow until they fix whatever it is that keeps them from being like South Korea.

[ThaiHome]

I think that with just 14 posts, you probably have by far the highest ratio of meaningful post of anyone I have ever seen here. :thumbup:

TH

[shygye]

This is the 1st time I have seen a currency that is worth more outside the country than inside the country. I would have thought all this FUD would cause the currency to sink.

[ThaiHome]

From what I have read and understand, spreads in onshore and offshore rates are a common result of capital controls.

TH