Bangkok: Thailand’s tough capital controls have failed to keep the baht from rising to nine-year highs against the dollar as investors are betting the government will soon rescind rules, analysts say.
The Bank of Thailand imposed the currency rules three months ago in a bid to rein in the baht, which jumped by more than 10% over the past year.
But the Thai unit has risen again over the past month, breaking the 35 level barrier in March and hitting new nine-year highs on speculation that the central bank will soon let go draconian rules.
“Investors are betting on the fact that officials will have to remove currency controls soon,” said Philip Wee, a currency strategist at DBS Bank in Singapore.
The currency rules required 30% of all incoming investment to be held by financial institutions for upto one year.
Foreign investors, who comprise 40% of Thai’s market, saw rules as a steep tax on equity investments and quickly dumped shares, triggering the bourse’s biggest-ever one-day drop in December with market losses worth $23 bn (Rs1,03,500 crore)
While the stock debacle later forced the army-backed government to reverse some of the currency rules in an embarrassing U-turn, the baht weakened to the 36 level to the dollar from the level of 35.12 seen in late December.
As the baht began rising again this month, central bank governor Tarisa Watanagase and Finance Minister Chalongphob Sussangkarn repeatedly insisted the government would keep the capital controls though market players believed just the opposite.
The baht is now firming in line with gains in regional currencies against the dollar amid concern over a slump in the US economy, and foreign demand for Thai equities.
“Investors are trying to get into the Thai market because it is relatively cheap compared with other regional stock markets in Singapore, Hong Kong and Malaysia,” Wee from DBS said.
The US investment bank even called Thailand’s U-turn on the capital controls “positive” so that “central banks in the region will be very cautious when using non-conventional means to control currency strength.”
Among 19 emerging markets including Brazil, India and the Philippines, JP Morgan put Thailand the cheapest, while warning that the kingdom’s military-installed government was “still struggling to gain investors confidence.”
Six months after a military coup in September, the Thai stock market has still not recovered to the pre-putsch level of 700 points, hovering around the 670 level.
But exports, a key driver of Thai’s economy, have so far been resilient to post-coup political uncertainty and a strong baht,making Thai exports less competitive abroad.
“If the baht keeps rising, it will hurt exports in the second quarter and exports may tank due to a slowdown in the US economy,” Thailand’s biggest exporter, Pichai said.