Thai financial turmoil highlights region's volatility, but another crisis looks unlikely

Thai financial turmoil highlights region's volatility, but another
crisis looks unlikely

The Associated Press
Wednesday, December 20, 2006
BANGKOK, Thailand
Most Asian markets bounced back Wednesday, a day after a plunge in Thai
stocks triggered selloffs across the region and evoked memories of the
1997 Asian financial crisis.

But the turmoil, triggered by Thai controls on foreign investment to
stem its currency's surge, reflects the underlying volatility of the
region's markets and sends a wake-up call about their risks and the
challenges facing policy-makers in an increasingly interconnected
global economy, analysts and fund managers say.

Asian stocks and currencies have surged in recent months as investors
have pumped money into the region, with benchmark stock indexes hitting
records this month in China, India, Australia, Indonesia and Singapore.

"The fact that a lot of portfolio money has come to Asia makes them
that much more vulnerable to any sudden policy changes," said Hak bin
Chua, an economist with Citigroup in Singapore.

That's just what international investors experienced when the Thai
central bank imposed tough measures Tuesday to curb foreign inflows in
an attempt to weaken the baht, which hit a nine-year high versus the
U.S. dollar on Monday.

The measures, which included a 10 percent penalty on foreign funds
invested for less than a year, triggered a 15 percent plunge in Thai
stocks and rattled markets from South Korea to India amid worries that
another financial crisis was brewing.

But most Asian markets rallied Wednesday after Thai authorities did an
abrupt about-face late Tuesday, rescinding the controls on foreign
stock investments but maintaining curbs on bonds.

Thailand's benchmark index rose 11.2 percent, while markets in South
Korea, Malaysia, Indonesia, Singapore and Hong Kong also bounced back
from their drops Tuesday.

While those recoveries have lifted some of the worries of a regional
meltdown, this week's market volatility - coupled with looming issues
like the dollar's persistent weakness, China's huge trade surplus and
an equally yawning deficit in the United States - highlight the
possibility that a financial crisis is never far away.

"It does illustrate the potential disruptive impact of these
imbalances," said David Cohen, chief of Asian economic forecasting at
Action Economics in Singapore.

Emerging markets are known for their volatility. In India, for example,
stocks plunged 43 percent from mid-May to mid-June - before roaring
back to hit new records earlier this month.

And despite the recovery in Asian stocks Wednesday, troubles could
still loom, experts warn.

"I think we're going to get away with it this time around, but it's a
sign of things to come," said Axel Merk, whose Palo Alto,
California-based Merk Investments manages the Hard Currency Fund. "All
the asset classes in the world have been rising, volatility shrinking
to record lows. Now you get this reminder that the world is risky,
things begin to shake a little - and traditionally risky places begin
to show it."

While Chua calls Thailand's "draconian" moves to limit foreign inflows
"a big mistake," he also says it is a wake-up call that Asian central
banks are concerned about the strength of their currencies.

But if this week's policy decisions are the way Thailand's interim
government, installed after a military coup in September, is going to
operate, "it doesn't look very encouraging for investors," he said.

Chua said authorities instead might have considered less dramatic
measures or interest rate cuts as ways to restrain the baht, which
weakened slightly to 35.67 per U.S. dollar Wednesday from a nine-year
high of 35.09 on Monday.

For its part, neighboring Malaysia has no plans to impose currency
controls, said Prime Minister Abdullah Ahmad Badawi.

"The people should not be unduly worried by the Thai government's
measures as our financial position is strong," he said, according to
national news agency Bernama.

Tuesday's plunge inevitably brought back memories of the 1997 crisis,
which was triggered by a sudden plunge in the Thai baht, which kindled
speculative pressures that forced other nations in the region to allow
their currencies to fall as well.

That prompted foreign investors to withdraw their "hot money" from
Asia's emerging markets, leaving Bangkok, the epicenter of the tumult,
with hundreds of half-finished skyscrapers. South Korea, Thailand and
Indonesia came under the sway of the International Monetary Fund,
accepting bailouts totaling billions of dollars.

But today, Asia's economies are stronger and better able to weather
turbulence, analysts say.

And Thailand, the epicenter of the 1997 crisis, is in much better shape
now, they say. Ten years ago, it had a huge current account deficit,
whereas now it has a surplus. It also has nearly US$65 billion in
foreign currency reserves, far more than it did in 1997. And the baht,
which plunged 10 years ago, is now considered too strong.

Also, Thai authorities were much quicker to react this time -
reversing their decision on stock investment controls literally within
24 hours - than they were in 1997, when little was done to address
the crisis.

"It's a mistake to compare it to '97," said Chua.

Still, he's lukewarm about Thailand's prospects, partly due to the
political uncertainty. Elections are scheduled for October 2007. He
predicts Thailand's market and economic growth will underperform
countries like India and Malaysia.

"With the interim government, people are wondering what will happen,"
he said.

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AP Business Writer Kelly Olden in Seoul and Joe Bel Bruno in New York
contributed to this report.

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