Thai currency's wild ride echoes '97 crisis

The last time global investors sat up and paid attention to the baht, Bill Clinton was in the White House and the Republicans were running Congress. The collapse of the Thai currency in July 1997 triggered a run on Asian markets that led to a biting recession in Asia and spread to Brazil and Russia.

Last week, the baht popped back on radar screens as Thailand's central bank imposed capital controls to keep foreign investors from betting on its currency. The result was a meltdown on Bangkok's stock exchange, which shed 15 percent on Dec. 19, and an uproar among shareholders that forced Thailand's military-backed government to partially reverse its decision to impose controls. The turmoil briefly roiled other Asian markets and revived uncomfortable memories of the 1997-98 financial crisis.

This time around, though, the battle for the Thai baht is not about propping it up, but keeping it down. Before Thailand introduced the capital controls, it had hit a nine-year high against the dollar on speculative buying, to the dismay of Thai exporters who fear being priced out of overseas markets. It has since fallen off, though not as rapidly as it rose.

The rationale behind Thailand's move has plenty of sympathizers in Washington: When China pegs its currency so low, how else can other Asian counties stay competitive? As the US dollar trends lower, it's an argument that is echoing across the region's export-led economies, which are increasingly measuring themselves against China's output.

"It's all relative: It doesn't matter so much if the dollar is weakening against us, if it also weakens against our trading partners and competitors," says Korn Chatikavanij, deputy secretary general of the Democrat Party and a former investment banker. "China, as the dominant economy in Asia, has an unrealistically weak currency."

Thailand isn't the only country grappling with currency appreciation: South Korea and Singapore have also seen their currencies' values rise sharply against the greenback this year. The upward trend reflects the overall buoyancy of Asian economies, unlike in 1997 when many were saddled with sky-high debts that ultimately triggered an outflow of foreign capital.

But while China continues to outperform the rest of Asia, its currency has barely moved. Despite continuous US pressure, Beijing has only allowed a modest 5 percent adjustment in the yuan since it relaxed a dollar peg in July 2005. US critics say this policy hurts American manufacturers, unfairly subsidizes Chinese exporters, and contributes to a yawning $200 billion-plus annual trade gap between the two countries.

With China effectively off limits to currency speculators, investors have instead sought out other Asian currencies with freer markets. Similar "hot money" flows were blamed in 1997 for destabilizing the region – most famously the scorn heaped on hedge-fund manager George Soros and other speculators by aggrieved politicians seeking scapegoats for the crisis.

"Currency movements are more volatile today. Capital flows are much bigger than even 10 years ago, so countries need more [control] instruments," says Chalongphob Sussangkarn, president of the Thailand Development Research Institute, an independent think tank, and an economic adviser to the Thai government.

Faced with a rapid increase in the value of its currency, Thailand resorted to tough restrictions on capital inflows. Foreign investors were told Dec. 18 that any money brought into Thailand would be subject to a 30 percent withholding tax, to be repaid without interest after one year. The next day, Thai stocks went into free fall – the biggest crash in the exchange's history.

On Tuesday evening, Finance Minister Pridiyathorn Devakula abruptly reversed course and announced an exemption for money invested in equities, while maintaining the 30-percent rule on bonds and currency purchases. Stocks have since clawed back some of their losses, but analysts say foreign buyers may write off Thailand in the short term.

The measure did stop the appreciation of the baht, at least for now. Mr. Pridiyathorn, a career banker who previously headed the Bank of Thailand, told the Associated Press in an interview this week that the controls were necessary to protect exporters. "A small nation like ourselves – if we don't protect ourselves, who else will protect us?" he asked. He added that it would be "helpful" if China revalued its currency.

While the stock market has calmed down, the political fallout in Thailand may be gaining pace. Critics have assailed the credibility of the interim government installed after a Sept. 19 military coup ousted Prime Minister Thaksin Shinawatra, who was accused of graft and incompetence. By using a sledgehammer to crack a nut, the incident cast the new government as meddling politicians instead of apolitical technocrats, say analysts.

"It's a major mess-up," says Chris Baker, a political scientist and coauthor of a critical biography on Mr. Thaksin. "Given that the legitimacy of this government is so low anyway, and a lot of business people have got doubts about this kind of 'bureaucratic' government, this confirms their fears."