Analysis: Risk rises in Asia that FX controls will spread

By Rachel Armstrong

SINGAPORE (BestGrowthStock) – Thailand served notice on Tuesday that Asia’s emerging economies will impose controls in coming months to stop speculative capital inflows from firing up their currencies.

Thailand will impose a 15 percent withholding tax on foreign investments in government debt from Wednesday, alarmed at an 11 percent rise in its currency this year to a level not seen since before the 1997/98 Asian financial crisis.

Indonesia, South Korea and Taiwan have introduced controls in recent months. Asian central banks are also intervening in currency markets to control the rapid rise in their currencies.

But with Asian currencies climbing and last weekend’s IMF meeting failing to produce a clear strategy to deal with the growing global currency tensions, more measures seem likely from emerging markets facing a tide of investment money.

“The use of targeted measures is likely to spread in the coming months especially as the IMF, in contrast to the 1990s, has now endorsed their calibrated use as a way of managing capital inflow,” said Kevin Grice, international economist at London-based Capital Economics.

Analysts say South Korea, Taiwan and Indonesia are likely to impose further regulation on capital flows in the coming months while India and the Philippines are the most likely to join them.

“Most countries in Asia are deeply focused on this problem and if currency intervention and other macro-prudential measures such as controls on property markets fail to stem the flows then capital controls are the other main possible policy option,” said Robert Subbaraman, chief economist for Asia at Nomura in Hong Kong.


Asian policymakers are highly sensitive to investment inflows, fearing that they could just as easily flow out. That’s what happened during the Asian financial crisis when capital flight brought several economies, including Indonesia and South Korea, to their knees.

But they are expected to pick any controls carefully, wary of adopting draconian measures that would scare off foreign investors for good.

Thailand imposed tough capital controls in late 2006 that triggered the biggest one-day sell-off in its stock market, striking alarm in Bangkok. Those controls have since been lifted.

Robert Prior-Wandersforde, head of Indian and South East Asian economics at Credit Suisse in Singapore, said countries will focus on the specific markets and products that attract the bulk of the speculative flows.

“Governments will concentrate on bond rather than equity flows and they certainly don’t want to do anything that would impact direct investment flows,” he said.

This is likely to mean countries will stay away from quantitative forms of capital controls where blanket ceilings are imposed on the level of foreign ownership of certain assets.

“Countries will probably go down the Tobin tax route or look at measures on certain products such as currency derivatives – they’re getting quite imaginative in this field,” said Prior-Wandersforde.

The Tobin tax is named after Nobel laureate economist James Tobin who suggested a tax on foreign exchange transactions to dampen speculation.


While specific targeted measures are unlikely to deter long-term foreign investment, analysts say the big risk is if countries follow one another simply to avoid being at a regulatory disadvantage.

“There is a risk of contagion effects – if one country imposes controls then others will follow to prevent the inflows coming to them instead – so you get a problem of beggar thy neighbor controls,” said Nomura’s Subbaraman.

For now though, countries are expected to tread slowly ahead of the Group of 20 leading economies meeting in Seoul this November.

With emerging market economies finally getting a greater say on the global platform, they will be reluctant to be seen circumventing attempts to find a co-ordinated approach to the problem.

“Any kind of pre-emptive move ahead of the G20 may not be taken by the rest of the global leaders in a favorable light,” said Rahul Bajora, Asian regional economist at Barclays Capital in Singapore.

(Editing by Neil Fullick)

Analysis: Risk rises in Asia that FX controls will spread