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Today's post is on Thailand and Scotland. The former is on virtually everyone's
radar while the latter is on almost no one's. Let's take a look at Scotland
first.
The Financial Times is reporting Scotland
weighs chance to go it alone.
Just under three centuries ago - in 1707 - the parliaments of England and
Scotland united after centuries of conflict, signing a treaty called the
Act of Union. Today, both nations - along with Wales and Northern Ireland
- comprise the UK.
Next May the Scottish National party (SNP), a movement committed to taking
Scotland out of the UK, could become the largest party in the Edinburgh parliament.
If that happens - and latest opinion polls suggest it is a real possibility
- then the struggle for Scottish independence could start to dominate the
UK political landscape in a manner few could have imagined.
In recent weeks, Mr Blair has expressed mounting concern about the sudden
surge in support for the SNP, saying victory for that party could "plunge
us into constitutional nightmare". He told a Labour audience on November
26 that it should not take the SNP's ambition for independence lightly. "I
hear you scoff: 'They say it, but they're not serious. They wouldn't do it.'
But they are deadly serious and they would do it."
Alex Salmond, the SNP's combative leader, says that if his party forms a
government, it would within 100 days publish proposals for a referendum on
independence. The prospect of such a referendum has resonance with Scots.
An ICM poll for the Sunday Telegraph last month found that 52 per cent of
Scots favoured the idea of independence against 32 per cent against.
What is pushing the SNP forward? Two forces are key. First, there is the
natural pendulum of politics. Labour is deflated after nearly a decade in
power both in London and Edinburgh.
Another factor is the rise in world oil prices. The SNP has always argued
that 90 per cent of North Sea oil in the UK sector belongs to Scotland. High
energy prices have therefore given a mark of respectability to the party's
economic plans, although these are contested by Labour. If the SNP proved
victorious next year, oil would be a main point of friction between London
and Edinburgh. Mr Salmond argues that, within 10 years and using only half
Scotland's oil income, the country could have a £90bn ($177bn, €134bn)
trust fund. "The choice for Scotland is clear," he says. "Those revenues
either flow south to London or they can be invested for the people of Scotland."
Another area of potential discord concerns Trident, the nuclear weapons
system based on submarines that operate from the Firth of Clyde west of Glasgow,
Scotland's second city. The SNP says an independent Scotland would be non-nuclear.
It therefore pledges that Trident - which the Blair government has just decided
to renew - would have to move south of the border.
Mr Blair understands this demand by the Scots for economic betterment. One
of his central arguments against the SNP is that the Union is economically
good for the Scottish economy. Though the SNP disputes the calculation, official
figures for, the latest available, show Scots receive £11bn more in
total government expenditure than they give back in revenue.
This argument creates a problem on another front, however. While the £11bn
of net receipts may persuade some Scots to remain part of the Union, this
cash benefit is increasingly resented in England. Indeed, one of the new
difficulties facing the UK is growing English irritation about the freedom
devolution offers Scotland. This means the Scots, unlike the English, promise
free care for the elderly and have rejected university tuition fees.
Hmmm. A fued over oil and WMDs, now where have we seen that before? It is
ironic that Blair telling Scotland how good the Scottish have it led to resentment
from some of the British who respond "just let them go". Is anyone happy?
Thailand
In Thailand we have a different situation known as EDAA (Every Day Another
Adventure).
Let's have a recap.
Mon Dec 18
Annoyed over a currency up 16% this year vs. the U.S. dollar, the Thailand
central bank said that investors based abroad would be able to invest just
70 percent of funds transferred to Thailand, and recoup all of their funds
only if they kept the money in the country for more than a year. The rule
said any withdrawals within a year would be penalized 10 percent of the original
investment. The stock market plunged 15% in response.
Tue Dec 19
Thailand
will not reconsider measure to halt baht rise
The Thai government will not reconsider draconian measures introduced to
halt the baht's rise, the finance minister said, despite stocks plummetting
to record losses on the news.
"The government will not reconsider the policy; let the market take (its)
course and it will adjust itself," Pridiyathorn Devakula told Agence France-Presse,
adding that the move would only affect brokers and short-term currency speculators.
"The Bank of Thailand had no choice since we found that there was speculation
in short-term debt instruments," he said.
In the face of the unprecedented losses, dealers and the Stock Exchange
of Thailand (SET) had asked the central bank to reconsider the new currency
control measures announced yesterday.
The Stock Exchange of Thailand composite index plummeted 108.41 points,
the biggest one day drop in the 31-year history of the bourse, shedding 14.84
pct to close at 622.14 after being down nearly 20 pct at one stage.
Tue Dec 19
Thailand
Abandons Limits on Foreign Stock Investments
Thailand scrapped currency controls on international stock investors one
day after their imposition by the central bank prompted the biggest stock
market plunge in 16 years.
Thailand's government exempted stocks from the central bank rule that international
investors must pay a 10 percent penalty unless they keep funds in the country
for a year. The policy reversal illustrates Thailand's dependence on foreign
investment and the degree to which investors resent restrictions on their
investment decisions.
"The stock market has fallen too much today," Pridiyathorn told reporters
at a press conference. "This is the side effect of the central bank's measure,
but we have fixed it already."
The currency controls triggered declines in other emerging stock markets
by highlighting the risks of investing in developing economies.
Thailand in 1997 untied the baht from a U.S. dollar peg, triggering currency
collapses in South Korea and Indonesia and leaving much of Asia in a financial
crisis that required an international bailout.
Wed Dec 20
Thailand
Discovers Fury of Investors Scorned
In a span of 24 hours, the Bank of Thailand first outraged investors by
slapping a Chilean-type tax on capital inflows and then tried to placate
them by taking equity investments outside the purview of the levy.
The capital lockup rules revived memories of what Malaysia had done in 1998,
although curbing the profit potential of new money entering Thailand is nowhere
near as draconian as Mahathir Mohamad's trapping of existing foreign investment
by fiat.
Nevertheless, the Bank of Thailand's actions have raised the specter of
more widespread use of monetary shock therapy in Asia. The Thai authorities'
flip-flop shows the level of desperation with a world awash with money.
Monetary-Policy Challenge
Consider the overwhelming challenge for the Bank of Thailand in controlling
the growth of domestic money supply in the face of ever-increasing sums of
incoming capital.
From May to October this year, the expansion in the monetary base -- currency
in circulation and bank reserves -- remained restricted at about half a percent
even as net foreign assets in the banking system grew 6.5 percent.
Central bank Governor Tarisa Watanagase couldn't possibly have kept her
foot on the money brakes forever. One option was to let the currency keep
rising. That would have eventually shut down exports, the only economic engine
that's still firing. Or, the authorities could let the monetary base expand
to a point where they lost control over inflation.
The Bank of Thailand's move, thus, is a desperate attempt to prevent its
monetary policy from being compromised by capital inflows that had, until
last week, caused an intolerable 16 percent surge in the baht, making it
this year's best-performing Asian currency.
Wed Dec 20
Thai market
rebounds 11%
Shares on the battered Bangkok market staged a recovery this morning after
Tuesday's 15% plunge, but dealers said confidence remains fragile amid fears
of a re-run of the Asian financial crisis a decade ago.
By the close local time, the Thai SET Index had jumped 11% to 691, its biggest
gain in almost eight years. The market crashed by 15% on Tuesday as the Bank
of Thailand and the finance ministry imposed currency controls in an attempt
to curb the strength of the Thai baht.
Wed Dec 20
Tarisa
Watanagase, governor of the Thai central bank, Defends actions.
Speaking as the Thai stock market rebounded from its record-setting plunge
of 15 percent on Tuesday, Ms. Tarisa defended event that seemed to touch
off the plunge, an attempt by the government to cut off short-term foreign
investment in the country, sometimes called hot money.
Ms. Tarisa dismissed criticism that the move had tarnished Thailand's reputation
among international investors. Rather, she said Thailand was a victim of
the huge imbalances in trade and savings that send trillions of dollars sloshing
in and out of developing economies.
"This is not a problem unique to Thailand," Ms. Tarisa said during an interview. "I'm
sure that if this sort of problem is not cured in a cooperative manner, we
could see similar measures elsewhere. Each country will have to find a way
to take matters into its own hands."
The goal of the bank's policy was to slow the upward trend in the baht to
give Thai exporters, particularly in the agricultural sector, time to adjust.
Money had been pouring into the Thai bond market at a rate of $1 billion
a week, Ms. Tarisa said, compared with $300 million a week last year. It
remains to be seen whether the country can succeed in stemming that tide.
Thu Dec 21
Thai
Stocks Drop as Baht Slumps
The baht today posted its biggest decline in more than seven years after
the Bank of Thailand this week introduced curbs on the purchase of local
assets. International investors yesterday sold more Thai shares than they
bought for a ninth straight day.
"The baht has dropped sharply today and that reflects the declining confidence
among investors in the Bank of Thailand's measure," said Visit Ongpipattanakul,
a strategist at Trinity Securities Co. in Bangkok. "We could see overseas
investors continue to sell Thai stocks for a while."
The SET Index fell 19.66, or 2.8 percent, to 671.89 as of 11:14 a.m. in
Bangkok. The gauge yesterday surged 11 percent, the biggest advance since
February 1998, after the government rescinded its restrictions on the purchases
of stocks by foreign investors. It had slumped by the most in 16 years a
day earlier.
The baht lost 1.9 percent to 36.49 per dollar today, its biggest drop in
more than seven years and the weakest since Nov. 24. The decline reduced
its gains this year to 12 percent. A weaker currency makes baht-denominated
assets less attractive to international funds.
Overseas investors yesterday sold 2.87 billion baht ($78.7 million) more
of Thai stocks than they purchased, the ninth straight day of net sales.
A day earlier, they sold 25.13 billion baht more of Thai stocks than they
bought, according to data from the Stock Exchange of Thailand.
Lost in the shuffle of these gyrations is the fact that curbs on foreign investments
in bonds and other debt instruments remain. Can a policy that allows one set
of capital inflow rules for the stock market but another set of rules for the
bond market possibly work?
Thailand proved over the past few days what can happen to a country where
there are enormous capital inflows followed by sudden capital outflows. That
is exactly one of the things China has been fearing with all the hot money
flowing into that country. It is also one of the reasons that China simply
must keep a lot of U.S. dollar reserves until it first floats the RMB and thing
stabilize.
Yet every Tom, Dick, and Harry keeps telling China to move it's reserves to
the Euro and float the RMB. This little exercise just might show why that might
not be such great advice. Imagine what might happen if China dumped the dollar
for Euros and then later floated the RMB. Would that hot money exit without
China having enough dollar reserves?
Yes China does need to do something. China can not stay pegged to the dollar
forever. But as long as the RMB is pegged to the dollar China needs to keep
sufficient dollar reserves.
Let's flashback to the 1997
East Asian financial crisis.
From 1985 to 1995, Thailand's economy grew at an average of 9%. On 14 May
and 15 May 1997, the baht, the local currency, was hit by massive speculative
attacks. On 30 June, Prime Minister Chavalit Yongchaiyudh said that he would
not devalue the baht, but Thailand's administration eventually floated the
local currency, on 2 July. The baht dropped very swiftly and lost half of
its value. The baht reached its lowest point of 56 to the dollar in January
1998. The Thai stock market dropped 75% in 1997. Finance One, the largest
Thai finance company collapsed. On 11 August, the IMF unveiled a rescue package
for Thailand with more than 16 billion dollars. The IMF approved on 20 August,
another bailout package of 3.9 billion dollars. The baht has only recently
in November 2006 reached pre-crisis highs of 36.5 to the dollar.
This appears to be the reverse of 1997. Note that the Baht now floats but
in 1997 was pegged to the dollar. In 1997 hedge funds were shorting the Baht.
Recently hedge funds were plowing into the Baht and it is the U.S. dollar is
that is perilously perched just above its multi-decade support levels. Still,
the high probability bet is that support for the US dollar will hold (for now),
but if it does break hard, the consequences could be momentous. EDAA (Every
Day Another Adventure) and one of them will eventually matter.
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