In mid-October, it did so. The finance minister, Korn Chatikavanij, made it more expensive for foreign investors to buy Thai government bonds in a vain bid to curb the baht’s relentless appreciation. Effective immediately, the withdrawal of a withholding tax exemption for foreign investors added a 15% levy on any bonds issued by the government, the Bank of Thailand and state governments.
Few expected it to achieve much, including, it seemed, both Chatikavanij and Abhisit Vejjajiva, the prime minister, who said at the time of the announcement: “Going on [global] economic trends, the baht is not expected to get any weaker in the near future.” During a trip to
That makes sense. After all, it is not international bond funds that are causing the baht to rise against the dollar. As with most emerging market economies today,
With American interest rates at zero, investors have been forced on a global hunt for yield that has led many of them to
Both of these contributors are here to stay --
Frederic Neumann, HSBC’s co-head of Asian economic research, wrote recently that this flow of money to the region is relentless, though not all bad: “The set-up for
Trying to stem this tide with a 15% withholding tax on bond investors seems futile. Indeed, even if bond investors really were driving the baht higher, the measures are still too weak to have much effect. There are two main reasons for this, according to Rahul Bajoria, an emerging markets strategist at Barclays Capital.
First, the appreciation that the tax is targeting will also make it impotent. “Bond investors will need only about 50bp to 75bp of additional annual baht appreciation in FX to compensate for losses due to withholding tax,” according to Bajoria, who forecasts the baht to rise 2.5% (or 250bp) during the next year. Second, he argued, a big part of the new money flowing into the Thai bond market comes from index-based real money managers. “Given that
But the problem of foreign money flooding the economy is hardly contained to the bond markets. As Bajoria points out,
The withholding tax measure will be ineffective, but that is not to say it will have no effect. And, in combination with other measures, the finance ministry will be hoping that it will at least win some valuable breathing room for Thai exporters.
The other measures include a $1.7 billion plan for state-owned enterprises to buy new machinery, tools and raw materials, which will likely be implemented in the fourth quarter. The central bank had already introduced measures to make it easier for Thai companies to invest and lend more overseas.
Even with all these measures, nobody expects the Thai baht to weaken against the dollar. If the government and the market both agree that the current round of baht appreciation is out of anyone’s control, why bother in the first place?
Politics is probably the best answer, as ever.
The government is under pressure to act, not because it can do anything, but simply to appear to be doing something. It has few other tools at its discretion, as Neumann noted: “The main policy tool, interest rates, seems a little too blunt if growth is to be protected. Moreover, raising interest rates may only serve to attract more of the stuff that no-one really needs.”
Regulatory tightening is the only meaningful alternative, but
Short of closing the doors,
This article was first published in the November 2010 issue of FinanceAsia magazine.