TWN Global Economy Series no. 15 Hot Money and Capital Controls in Thailand By THAWATCHAI JITTRAPANUN & SUTHY PRASARTSET Publisher: TWN (ISBN: 978-983-2729-79-2) Year: 2009   No. of pages: 72

ABOUT THE BOOK

A surge in capital flows into Thailand over the last few years has aroused concern among Thai policy makers anxious to avoid a repeat of the financial crisis which struck the country in 1997. The crisis had erupted from a situation of instability in asset markets generated by the influx of volatile short-term capital or "hot money", coupled with huge unhedged dollar debts. Drawing lessons from that painful episode, the Thai monetary authorities have, to varying degrees, resorted to capital controls, among other measures, in order to stem the recent capital surge and limit upward pressure on the domestic currency.

This paper analyzes the evolution of the capital account regime in Thailand from the liberalization process in the pre-crisis period to the most recent capital control measures. The authors assess the effectiveness of the capital controls and find that the measures have had limited success in attaining their objectives. This, they contend, points to the need for a more judicious and better-planned mix of control measures. It also reflects the difficulties in managing volatile capital flows and the exchange rate faced by emerging market economies which are deeply integrated into the global economic system. These difficulties, conclude the authors, only serve to strengthen the case for regional and international cooperation to address the challenges posed by highly volatile global financial flows.

ABOUT THE AUTHOR

THAWATCHAI JITTRAPANUN is Assistant Professor of Finance, and SUTHY PRASARTSET is Associate Professor of Economics associated with the Centre for Policy Study, at the Faculty of Economics, Chulalongkorn University in Bangkok.

Contents

1.      BACKGROUND  

2.      THAILAND'S CAPITAL ACCOUNT LIBERALIZATION AND CAPITAL FLOWS      

3.      FACTORS CONTRIBUTING TO THE 1997 FINANCIAL CRISIS          

         a.      Explosion of private short-term dollar debt      

         b.      Weak financial system          

         c.      Misuse of capital      

         d.      The state's ineptitude under global financialization     

         e.      Money politics - the crisis's trigger   

         f.       The outbreak of the crisis    

4.      STABILIZATION AFTER THE 1997 FINANCIAL CRISIS       

         a.      The current account           

         b.      Foreign reserves and short-term debt           

         c.      External indebtedness         

         d.      Fiscal sustainability 

         e.      Financial restructuring         

5.      RECOVERY AND SURGE IN CAPITAL INFLOWS AND THE POLICY RESPONSE

         a.      Hot money returns  

         b.      Sterilization

         c.      Capital account measures   

6.      A QUANTITATIVE ASSESSMENT OF THE EFFECTIVENESS OF CAPITAL CONTROLS   

         a.      Capital control index           

         b.      Short-term capital flows defined                  

         c.      Empirical estimates 

7.      CONCLUSIONS

         Policy implications           

REFERENCES

APPENDIX 1: Summary of regulations on the measures to prevent Thai baht speculation

APPENDIX 2: The Bank of Thailand's capital account measures

PRICE

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