The Thai government performed an abrupt U-turn last night after the stock market suffered its worst fall in 16 years as foreign investors pulled the plug in response to drastic measures to rein in the baht.
Finance Minister Pridiyathorn Devakula said that from today, foreign investment via the Stock Exchange of Thailand (SET) would be exempt from draconian measures introduced yesterday to halt the soaring baht.
"After consulting with brokers, investors and all parties concerned, the Bank of Thailand [BoT] and Finance Ministry will waive that 30 percent lock-out required for the foreign investment which invests in the Stock Exchange of Thailand," Pridiyathorn said.
"The Bank of Thailand will focus its management of the baht in the debt instrument market. I hope the new measure will restore foreign investor confidence in the Thai stock market and return the stock market to the normal level," he said in a televised statement.
"Starting 8:30am tomorrow, the money that comes into the stock exchange will not be subject to 30 percent reserve," he said.
His announcement came just hours after the central bank had rebuffed a plea from a stunned stock market chief to withdraw the restrictions.
Investors who had just watched the Bangkok market plummet 14.8 percent -- its biggest single-day drop since former Iraqi president Saddam Hussein invaded Kuwait in August 1990 as foreigners sold US$700 million of Thai shares -- were stunned and disgusted.
"It's a joke, isn't it? A total farce," a foreign banker in Bangkok said. "Things will obviously go up tomorrow, but not to where they were because the risks have clearly changed. This will leave a bad taste in people's mouths for a long, long time."
Domestic dealers were equally furious.
"Are they playing games? This looks really bad. How can they change their minds? Why didn't they tell us sooner? And why now? The damage has been done," said the head of research at a Thai brokerage, who did not want to be named.
The Franklin Templeton Thai Fund, an exchange-traded fund tracking Thai stocks which fell 9 percent after the central bank imposed the new restrictions, rose 3.4 percent to US$11.15 rose after Pridiyathorn's climbdown.
The sell-off evoked memories of Asia's 1997-1998 financial crisis prompted by a baht devaluation and triggered stock drops of 2 percent to 3 percent in Kuala Lumpur, Singapore and Jakarta.
The Thai bourse was forced to halt trading for the first time in the market's 31-year history as the main index dropped 10 percent -- and kept on going as foreign investors made for the exit as it resumed.
At one point, the index was down 19 percent, cementing Thailand's position as the worst performer in Asia this year.
Under the original version of the rules, investors had to keep all sums over US$20,000 not linked to trade or foreign direct investment in Thailand for at least a year or risk stiff financial penalties.
The baht, the strongest Asian currency against the dollar this year, dropped as much as 2.5 percent from Monday's nine-and-a-half-year high in response to a BoT move analysts described as draconian.
Reaction in the bond markets -- still subject to the new rule despite the reversal on stocks -- was swift as the headlong departure of international investors pushed yields up 20 to 30 basis points for all maturities.
"Please call an ambulance, there is a bloodbath," a dealer at a domestic brokerage said.
"I think it's only the first round. There is a lot of money already in the Thai markets. If they're pulling out, we're dead," he said.
Bourse president Patareeya Benjapolchai begged BoT Governor Tarisa Watanagase -- its first woman governor -- to change her mind. The bank slapped down his plea, saying it stood by the move.
Rubbing salt into the wound, her former boss Pridiyathorn said the military-appointed government would not step in.
Within five hours, he had essayed a stunning volte-face.
"Everyone agreed that this will ease foreign investor concerns and the money should come back into the market as market fundamentals remain good," he said.
The long-term repercussions on foreign investment could be significant. Global index-compilers MSCI Barra and FTSE said they were studying the bank's currency controls to see whether Thailand should be dropped from international equities indices.
Analysts said the bank's action showed the generals might be prepared to tighten the squeeze on outsiders.
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