Citigroup - Thailand - Out of Proportion

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Thai currency control measures to have limited impact

The market plunged in a broad based decline in Asian markets after Thai central bank's currency controls heightened concern about emerging markets but market men see limited impact of the development for the domestic bourses.

The Thai situation is very localized and all the Asian markets would recover to levels that their fundamentals command individually and this shouldn’t take a long time, said Shaheena Mukadamm, head of research, IDBI Capital Market.

The Thai development came at a time when the market sentiment was cautious after the provisional data showed substantial FII sales of Rs 369 crore on Monday (18 December), the day when Sensex had risen 116 points in volatile trade.

The current fall, in fact, offers a buying opportunity for medium term and long term investors, Mukadamm reckons. Sensex plunged 349 points or 2.5% today to settle at 13,382.01. Thailand’s central bank said international investors will have to pay a 10% penalty on funds withdrawn out of the country within a year.

The near term trigger for domestic bourses is Q3 December 2006 results. Market men expect December 2006 quarter to be another strong quarter in terms of earnings growth. The Q3 results would start trickling in from about 12 January 2007.

But volatility may remain high in the next few days ahead of expiry of December 2006 derivatives contracts next Thursday (28 January). At the beginning of today’s trading session, the market wide open interest in derivatives was about Rs 52500 crore.

FII activity is likely to be muted till the end of this month, as foreign fund managers will be on vacation for Christmas and New Year.

Technical analysts feel that the Nifty has a strong support at 3,700 and Sensex at 12,800-12,900.

Thailand Currency Update

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Thai Stocks, Baht Slide as Investors Withdraw on Currency Curbs

Thai stocks plunged after regulators yesterday told banks to lock up 30 percent of new foreign- currency deposits for a year to curb speculation. The baht dropped the most in three years.

The benchmark Stock Exchange of Thailand index slid as much as 8.9 percent, the heaviest in more than three years, and the baht almost doubled yesterday's 0.8 percent drop after central bank Governor Tarisa Watanagase said she was ``confident'' the measures will reduce inflows. The currency, Asia-Pacific's best performer, had surged 16 percent this year before yesterday as overseas investors bought the nation's stocks.

``Foreign investors will rush to take money out as they're afraid the baht may weaken further,'' said Visit Tantisuthorn, Secretary General of the Government Pension Fund, the country' biggest fund with more than $7.8 billion in assets. ``It'll help exporters and the country's trade balance.''

The baht climbed this year to a nine-year high yesterday amid optimism the economy will accelerate after a Sept. 19 coup ended a political deadlock that curbed spending and confidence. Exporters including Thai Union Frozen Products Pcl, the world's second-biggest tuna canner, on Nov. 16 asked the central bank to stem baht gains that are undermining their competitiveness.

The baht lost as much as 1.5 percent, the biggest fluctuation of any currency today, to 36.08 against the dollar. It traded at 35.66 at 10:03 a.m. in Bangkok. It last fell more on Sept. 14, 2003. The Stock Exchange of Thailand index slid the most since February 2003.

Lock Up

Starting today, overseas investors buying the baht will only be able to invest 70 percent of what they transfer and recoup all of their funds if they keep the money in Thailand for more than a year. Those who withdraw the reserved amount in less than a year will be fined 33 percent of that 30 percent portion.

A stronger baht hands overseas investors greater capital returns when they convert proceeds from sales back to dollars or their own currencies. China's yuan has added 3.1 percent against the dollar this year, Malaysia's ringgit has gained 6.3 percent and Singapore's dollar has climbed 7.9 percent.

``It's basically as if they're putting a tax on any trades less than a year,'' said Magnus Prim, a senior foreign-exchange strategist at Skandinaviska Enskilda Banken in Singapore. ``It's going to stop any buying pressure and with the stock market likely to be hit, we could see the baht falling some more.''

A rising baht hurts exporters by cutting the value of their local currency-denominated profits and making their products more expensive compared with those of Asian rivals.

A military coup on Sept. 19 ousted prime Minister Thaksin Shinawatra and ended seven months of political turmoil. Prime Minister Surayud Chulanont, installed by the military junta after the coup, is planning record spending on roads, subways and other infrastructure projects.