The Stock Exchange of Thailand or SETI closed down over 2% Thursday
after rebounding 11.2% Wednesday. The Bank of Thailand's decision to impose capital controls led to a 14.8% plunge on Tuesday -- its biggest single-day sell-off since Saddam Hussein invaded Kuwait in 1990.
Money was coming into commercial paper and short-term debt instruments, so the Bank of Thailand came up with measures to deter capital inflow, which was "really hurting our economy through the strengthening of the baht currency, to the point that our exports has become (not) competitive against our other friends in Asia," Thailand Finance Minister Pridiyathorn Devakula told CNBC Asia.
But given the effect on the stock market, the government decided to lift controls on equity investment, Devakula said.
Army-appointed Thai Prime Minister Surayud Chulanont stood by his finance minister and central bank chief Thursday despite the disastrous intervention to halt the rise of the baht.
Surayud said the decision to impose restrictions on short-term capital inflows had been necessary to protect exporters struggling because of the currency's 16% rise against the U.S. dollar this year. He also refused to criticize Devakula's abrupt U-turn in lifting the measures for stock market investment.
"It's not a flip-flop policy. We have a solid policy, which we had to adopt because we don't want to see speculation in the baht," Surayud told reporters. "If the baht rose much higher, it would have affected the country's economy."
International investors and analysts have derided Pridiyathorn and BOT governor Tarisa Watanagase, saying the measures were draconian, ill-conceived and poorly executed. Ratings agency Standard & Poor's said the country's fumbled baht controls could trigger a further pull-out of foreign money and hurt domestic investment by driving up financing costs.
"Foreign investors will now be far more wary of investing in Thai financial markets," S&P credit analyst Kim Eng Tan said in a report two days after a bungled intervention to halt the rise of the baht sparked a huge share sell-off. "This will lead to higher funding costs in the Kingdom, with negative implications for the prices of debt and equity assets," Tan said.
S&P said the currency controls appeared to have put a brake on the baht, which fell to a one-month low against the dollar on Thursday as investors continued to dump the currency. But it noted "such success brings long-term costs".
Domestic investment could become costlier if planned government spending led to a return of current account deficits, the report said. "This is because deficits would increase Thailand's reliance on foreign financing," it said.
The interim government appointed after a bloodless Sept. 19 coup ousted Prime Minister Thaksin Shinawatra plans to boost public spending next year to keep the economy humming ahead of promised elections in late 2007.
The surprise baht controls and later policy U-turn also tarnished the central bank's reputation in the eyes of foreign investors, S&P said. "The Bank of Thailand has gained itself a reputation -- however undeserved -- as an interventionist, one that administers abrupt and inconsistent policy actions," the report said.