Thailand Joins the Club, Encouraging Capital Outflows

Apparently learning for the fiasco in 2006, when it imposed controls to limit the Thai baht appreciation, by limiting inflows, Thailand announced today measures to liberalize outflows. The goal appears largely the same. Reduce the upside pressure on the currency. 

The steps announced today include abolishing the cap on overseas investments by Thai companies and easing the ability of businesses to manage their FX risks.

Thailand is abolishing the $200 mln a year cap on investment on lending to overseas affiliates and companies no longer will need approval to hedging fx transactions in excess of $20,000. Rules on the establishment of overseas corporate treasury centers and intra-company loans have also been relaxed.

The key question for our purposes is the currency impact of the new initiatives. Other countries in the region, like China and South Korea, have also tried encouraging investment outflows to remove some of the upward pressure on the currency. It is not clear that the measures in those countries have had much impact on outflows or the respective currencies. 

The baht initially weakened on the news but recovered to finish the local session little changed. Around the middle of January the US dollar had fallen to its lowest level against the THB since Aug 08. The dollar appeared to bottom against the baht a bit after many other currencies in the region, including the Korean won, the Indonesian rupiah, the Taiwanese dollar and Philippine peso.

Ironically, foreign demand for Thai shares has been particularly weak this year. While most of the equity markets saw large increases in foreign purchases, Thailand is one of the few markets that reported substantial selling by international investors. Data from the local stock exchange suggest foreign investors were net sellers of a $227 mln of Thai share sin January. The 5% decline in the Thai Stock Exchange makes it among the region's better performers thus far this year.

In the absence of strong demand from foreign investors, the liberalization of capital outflows may appear to have an exaggerated impact in weakening the currency. In truth, the baht and many other regional currencies and the major currencies appear to be wilting in the face of the broad US dollar recovery.