Thai U-turn on foreign controls as shares plunge

Thailand was forced yesterday into an astonishing retreat from its controversial move to impose controls on equity investment by foreign investors after Bangkok shares suffered their steepest one-day plunge since 1990.

Just a day after introducing the controls, a rattled Thai government announced it would exempt equities from the measures, although it would still maintain curbs for bonds and other debt instruments.

The sudden reverse followed crisis talks between the central bank, government and stock market officials after Thai shares tumbled by as much as 19 per cent at one point as shocked investors rushed to dump stocks.

The sell-off forced the Bangkok Stock Exchange to impose its first suspension of trading before shares eventually closed down 15 per cent.

Other equity markets in the region fell in sympathy, providing investors with a catalyst to take profits after recent sharp gains. Mumbai fell by 2.5 per cent, Jakarta by 2.8 per cent and Singapore by 2.2 per cent.

However, foreign investors played down the prospect of contagion to other countries, saying the sell-off was driven by dismay over a move that was unlikely to be repeated elsewhere.

"The Thai authorities seem intent on committing financial hara-kiri," said Christopher Wood, chief strategist at CLSA.

Mark Williams, manager of the F&C Pacific Growth Fund, said yesterday's share price falls were overdone and that he expected a strong bounce today.

But he said Thailand's "macro mismanagement" would leave lasting damage on the country's credibility with international investors.

"It would be naive not to think that this will be anything but a lasting negative in that it provides a clear reason for equity risk premium on the country to rise," he said.

Foreign investors, who own an estimated $50 billion (€38 billion) worth of Thai stocks, or about 30 per cent of the market, sold baht 25 billion (€455 million) worth of shares yesterday.

The benchmark 10-year Thai government bond rose 33 basis points to 5.190 per cent, the highest level in the past two months. But there was little broader impact on emerging market bonds, which were trading at near record low spreads over US Treasuries.

The Thai baht rallied after news of the U-turn, trading about 0.3 per cent higher on the day at Bt35.87.

Pridiyathorn Devakula, finance minister, had earlier called the decision on capital controls a "historic" effort to counter speculative pressure on the baht, which had appreciated nearly 17 per cent so far this year.

The baht's sharp rise - more than any other Asian currency this year - has caused Thai exporters to suffer in overseas markets. The controls on debt instruments force foreign portfolio investors to keep their money in Thailand for at least a year or face stiff penalties for early withdrawal.

From yesterday, the central bank was to begin withholding 30 per cent of all foreign capital inflows into debt instruments and hold the money, interest free, for a year, after which investors could reclaim it.

If investors sought to repatriate the money from Thailand in less than 12 months, they would only receive two-thirds of the amount held, resulting in a 10 per cent withholding tax on the initial investment.

Korn Chatikavanij, deputy leader of the Democrat party and a former investment banker, said the central bank's officials "just didn't understand the markets".

"They were more dependent on theory, and less sensitive to how the real world, and real markets, operate," he said.