Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The curse aka politics! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 20, 2006

    The curse aka politics!

    As a way to 'quickly restore confidence' and pare the 'damage' done by its central bank, the military-backed Thai government has scrapped currency controls on international investors just a day after the country's central bank had imposed them thus leading to a sharp plunge (biggest in 16 years) in the Thai stock market. Readers should note that following the announcement from the central bank, which read that international investors must pay a 10% penalty unless they keep funds in the country for a year, Thai stocks witnessed an erosion of almost US$ 23 bn in market capitalization in a single trading session. What's more, these currency controls triggered declines in other emerging stock markets as well (see adjacent graph), thus highlighting the risks inherent in emerging market equities.

    As the Thai central bankers must have watched in awe, the country's government announced the removal of the requirement that banks lock up 30% of new foreign-currency deposits for a year, citing that 'the stock market has fallen too much today!' In a truly political tone, the finance minister clarified that the stock market fall was a side effect of the central bank's measure, and that "he has fixed it already." As reported, the rule would have limited international investors to using 70% of their funds to buy Thai stocks, as also bonds and property. While removing the control on equity investments, the Thai government has indicated that controls shall stay in effect on other investments like bonds and property.

    As a matter of fact, the Bank of Thailand (Central bank of Thailand, or BoT) had imposed currency controls after the Baht appreciated to the strongest in nine years, even though the central bank had recently introduced steps to limit the currency's gains. Readers would do well to note that an export-dependent economy like Thailand (exports were 81% of total GDP in 2005) would feel a greater pinch from currency appreciation than an economy that is internally driven (like India, that exports less than 14% of GDP). This is because currency appreciation makes exports uncompetitive and has a great impact on growth of such economies. The Thai Commerce ministry already expects the country's export growth to slow to near 10%-12% in 2007, from the 16% growth that is expected for this year. Following the Thai central bank's announcement of restrictions on short-term foreign capital inflows, the Baht had the biggest two-day decline since April 2005.

    Thailand's economy is much like India's, or vice versa. Both the economies have the largest chunk of population dependent on agriculture yet the biggest contribution to GDP coming from the services sector (52% for Thailand and 60% for India). Both the countries are almost at similar stage of development and are a 'hungry' lot as far as capital requirements are concerned. This hunger for growth capital has led to the countries attracting a lot of foreign funds, although more in terms of portfolio and less in terms of direct investments.

    As a result of flow of cheap global money in the past 2-3 years, the stock markets of both the countries have 'benefited' tremendously. In the past 2 years, the Indian BSE-Sensex has gained 109% point to point. However, this influx of funds from global investors (which includes more of short-term than long-term funds) has had its consequence in strengthening the Baht, which has significantly hurt Thai exports. The BoT's announcements of controls on short-term foreign money were, thus, directed towards curbing the 'menace'. However, the speed at which the policy has been reversed might go a long way in impairing the BoT's credibility.

    Lessons for India
    As has been indicated above, as also in an earlier article, the country has attracted a lot of foreign capital (more of the portfolio type) in the past 2-3 years. "But everyone in this country seems scared to distinguish long-term capital from short-term capital. Any Foreign Institutional Investors (FIIs) buying is seen as a vindication of economic success when, in all likelihood, much of this inflow is the effect of cheap global money. The cost of speculation is close to zero for most global hedge funds." The Indian central bank, the Reserve Bank of India (RBI), has sounded alarm bells in the past with respect to curbing the flow of 'non-serious; short-term money through strict controls, but in the process, has received flak from the Finance Ministry.

    If only India was as brave to take steps against speculative foreign capital flows and other forms of short-term capital. But no one wants to be blamed for 'killing' the stock market. Are we ready to pay the price? Will we be at least forthcoming to 'regulate' rather than 'license'? If Ms. Watanagase can do that, so can Mr. Reddy!



    Equitymaster requests your view! Post a comment on "The curse aka politics!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)