PETALING JAYA: The weakening of several Asian currencies since Monday and the declines in the Asian bourses yesterday was a “knee-jerk reaction” by investors fearing that other Asian economies may impose capital control measures, economists said.
The Thai baht fell 1.3% in two days, its sharpest drop since April 2005, while the ringgit moderated to 3.5747 against the US dollar at 5pm yesterday.
On Monday, the Thai central bank ordered banks to lock up 30% of new foreign currency deposits for a year and also imposed a 10% penalty for withdrawal of foreign funds that had been in Thailand for less than a year.
Standard Chartered (HK) Ltd regional head of economic research Nicholas Kwan told StarBiz via telephone from Hong Kong that the sell-off in the regional equities and currency markets was a “knee-jerk reaction'' to the Thai move.
He doubted that Malaysia and other countries in the region would follow Thailand’s actions.
“Thailand is an isolated case. The country using a non-conventional method to stem speculation on its currency. Other central banks in Asia are also monitoring the strengthening of their respective monies, but they are very much leaving it to the market,” Kwan said.
He said with domestic demand being relatively weak in Thailand but exports continuing to be strong, it was important for Thailand to curb currency speculation to “preserve'' the competitiveness of its export sector.
“We do not see any threat of a repeat of the crisis of the late 90s. Asian economies are now strong fundamentally that it is now a totally different scenario, with the pressure on currencies to strengthen, as opposed to in 1998. There was also a lot of overheating,” he added.
Kwan said the slide on the regional currencies should be a short-term occurrence, as December was a typically “quiet” month. He expects the Asian currencies to begin to strengthen in a month or so.
RAM Consultancy & Services chief economist Dr Yeah Kim Leng said Thailand’s move was reminiscent of the capital controls Malaysia imposed during the1998 financial crisis, and thus was cause for the knee-jerk reaction.
He said with the baht having appreciated 16% year-to-date before this week, Thailand might have felt the currency had risen too sharply and was keen to prevent any sharp reversals, especially in terms of foreign investments.
“The spillover effects are being felt in Malaysia, but we do not think Malaysia needs to follow Thailand and impose such controls. However, it is important that capital flows are sustainable,” he added.
Yeah said the move would have a short-term dampening effect on the market, but added it could also mean that investors could turn to other countries in the region for opportunities, and that the baht would probably appreciate less if foreign investments fell.
“There is no danger of any recession because the Asian economies are now much stronger fundamentally, with high trade surplus and domestic savings. Foreign reserves are also high. The 1998 crisis had been partly caused by Thailand’s excessive foreign borrowings but it is different now,” Yeah added.
OSK Securities economist Sia Ket Ee concurred that Malaysia need not follow Thailand, but said the country could receive knock-on effects due to an “image problem” as Malaysia had also imposed such measures before.
“We are now in a better shape than 8 to 10 years ago. Our balance of payments is healthy. We have growth potential and the Government is keen on expansionary monetary policy. We believe Malaysia would maintain the status quo as such moves by Thailand are potentially damaging,” he said.
Sia said the sell-down yesterday could be no more than “just a reaction,” since investors were also keen to lock in profits come year-end.
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