What on earth is going on in Thailand? First the government tried to implement draconian capital controls; when the stock market plunged, it changed its mind, and now everybody is just confused:

“The current government and the Bank of Thailand have lost all credibilty,” said Andrew Beal, director of pan-Asian equities at Henderson Global Investors. “It will not be possible to undo the damage until a new government is in place. In the meantime, investors will have no confidence in the market.”

The whole episode has reminded people in the most painful and idiotic way possible that foreigners are a very important part of the Thai stock market (net equity flows into Thailand are some $12 billion over the past three years). Gene Frieda of RBS says in a research note today that

Removal of the restrictions on equity-related investments leaves our call for a rerating of the Thai equity market - still the cheapest market in Asia on a trailing P/E basis - intact, but the perception of policy ineptness within the BOT and the lack of coordination between BOT and the government will likely leave a risk premium hanging over the Thai equity market that we had not previously expected.

On the other hand, Thailand might indeed have succeeded in diminishing the amount of speculation in the baht, says Frieda – something which was its declared intention all along. The problem for the central bank is that even if speculation goes down, appreciation will continue:

We had previously recommended long THB/SGD positions as one of our intra-regional trade ideas on December 1st and we expect that cross to perform fundamentally well over the course of 2007. But the one enduring legacy from the BOT's measures announced yesterday will be the destruction of liquidity in the offshore THB market. While market participants discuss the formation of an NDF market, we will steer clear of recommending Baht trades, less out of a fundamental belief that the Baht, along with other Asian currencies will continue to appreciate, but rather out of a recognition that recommending a currency with uncertain liquidity characteristics. In that respect, both the BOT and the market lose from the latest round of measures. The Baht's appreciation will continue, but the "speculators" will watch from the sidelines, or perhaps the confines of an NDF market. Touché BOT!

Personally, I just find it refreshing that occasionally policymakers can still get things utterly, spectacularly, obviously, wrong. I was beginning to think that the whole world was being run by boringly predictable technocrats, but evidently there are still pockets of the emerging markets where crazy decisions can still result in decimated markets. Anybody fancy an Ecuadorean default?

Bank of Thailand Struggles with Baht Speculators