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Published on August 14, 2007

The capital controls imposed last December by the Bank of Thailand (BOT) were the proper medicine at the time, but its poor communication efforts wreaked havoc in the markets.

Sarakorn "Bobby" Gerjarusak, who has been based in Hong Kong for more than a decade, said the BOT's poor communication resulted in wild speculation about its overall intentions.

"Accompanied by knowledge of the recent coup, rumours were flying all over the place," said Bobby.

He said everyone at the time knew something peculiar was causing the baht to appreciate more than its neighbours' currencies against the US dollar.

However, when the BOT slapped the 30-per-cent reserve requirement on incoming funds, it did not fully explain specific details to the markets.

"People were confused, because the BOT basically faxed instructions to the commercial banks, and it took them several days to analyse the content."

In the meantime, because of the uncertain political environment, these exchange controls "spooked" the markets, and the Stock Exchange of Thailand (SET) crashed immediately.

"The next day, the then-finance minister came out and said the equity markets were exempt from the controls."

With rumours rampant, many pundits began saying the BOT's controls were only the beginning of massive new measures that would eventually restrict foreign investors from withdrawing their funds from Thailand.

"This happened because the BOT did not communicate why they were implementing the controls. They just implemented the rules."

He said that in hindsight, the BOT should have explained the controls were merely measures that would allow the central bank to keep the baht within certain limits against the dollar.

"They were not the beginning of an overall plan eventually to stop foreign investors from withdrawing their funds from Thailand," he said.

Second, the BOT could have explained the real overall effect of the 30-per-cent foreign-capital-reserve requirement.

"They could have portrayed it as a type of indirect tax that would reduce a foreign investor's overall yield from Thai investments."

The reserve requirement forced foreign investors to use more funds when investing in Thailand.

Bobby said the BOT should have clearly articulated that the 30-per-cent reserve requirement was merely to reduce yields on foreign investments in Thailand as a way of deterring some foreign investors.

"Many investors would not have been spooked had they known the BOT was merely trying to reduce their overall yields and not implementing the beginning of a long-term strategy to stop foreign investors from withdrawing their funds from Thailand."

Bobby said the BOT's poor communication efforts might have long-term ramifications. "Speculators look for weaknesses, and they speculate on currencies if they sense the government or central bank is weak."

In the past several weeks, foreign speculators have kept the baht at 29 to the dollar abroad, while locally it was trading at 33 to the dollar.

"Now, many foreign speculators are betting the capital controls will be lifted."

Nevertheless, Bobby still believes the BOT should use whatever resources and tools (including capital controls) it has available to keep the baht stable.

When investors understand that the BOT's controls are designed to control currency fluctuations, they will accept them more readily. "Investors only want to know that if they put their money into Thailand, they can take it out relatively freely."

In general, exchange controls are not necessarily a bad thing. Everyone is still investing in China even though they know they can't really take their money out.

"They don't really care, because they still believe in the country's growth."

The first article in this series was published yesterday.