Since the coup earlier this year (see our past commentary: "Could a Thai Coup Overthrow the Markets?"), Thailand's new military-installed government has made a major economic policy gaffe. Effectively a hefty tax on foreign investors, Thailand instituted a new policy to slow the rapid appreciation of its currency (the baht) to support the country's exporters. But the experiment went horribly wrong and the Thai markets closed over 15% lower for the day. Baht were they thinking!? Here are the facts:
The worry is that these events will lead to a "contagion" similar to the 1997 Asian Financial Crisis. That's a long shot. The current economic expansion and equities bull market in Asia rests on a number of positive factors vastly outweighing this small event.
Central banks in Malaysia and the Philippines have already stated they have no plans to follow Thailand's lead. Besides, the events leading to the Asian Financial crisis were very different: back then most Asian countries were facing weakening currencies, not stronger ones. And as a region, Asia is much more economically healthy and stable today.
This appears to be an isolated event, not a symptom of a pervasive policy mistake by many nations. And anyway, the Thai policy restricting equity investment only lived about a day—all that's left are restrictions on bonds and commercial paper. Also, consider that Thailand represents only 0.13% of the MSCI All Country World Index by market capitalization.
So, it's just not a very big event in broad economic or market terms. But it is a very big mistake for a fledgling government trying to gain legitimacy. These events, in conjunction with September's coup, aren't likely to instill much confidence in the Thai market going forward.
So, baht the heck were they thinking? It's another example of unnecessary government intervention into a market-based system. The Thai government tried to strengthen its currency and help its exporters through regulation. As we've seen many times before, markets abhor such practices because they create inefficiency, additional costs, and barriers to the free flow of capital.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.