This case was written as a case for consideration during the first year of economies and global markets. It is written as a comprehensive policy review of cases in a small open face in an increasingly globalized world economy choice. It can be used in a course in open economy macroeconomics and international finance. Later in the day of December 18, 2006, the Bank of Thailand (BOT), the central bank, announced that, effective next day it imposes an unremunerated reserve requirement of 30% (URR) of capital inputs short term. Measuring controls necessary capital for financial institutions to maintain reserve represents 30% of capital inflows that exceeded $ 20,000 for a period of one year. Restricting capital flows represented a major escalation of the struggle of Thailand to halt the appreciation of its currency, the baht (THB). On December 19, the Stock Exchange of Thailand (SET) composite index fell 14.84% record, erasing THB800 million or USD22 billion market capitalization. The sell-off affected the regional stock markets as well, Jakarta (Indonesia) to 2.85%, Kuala Lumpur (Malaysia) by 2% and Singapore 2.23% decline. In the currency market, the baht has lost 2% of its value against the U.S. dollar, reaching approximately THB36 dollar. Massive capital inflows and the appreciation of the Thai baht caused had led to the decision taken by the interim government to impose capital controls. The dramatic reactions in financial markets, however, have led the Thai officials to reassess the situation and consider strategic options for 2007.
Source: Darden School of Business
Date Posted: March 13, 2007. Prod #: UV0765-PDF-ENG
Coping with Capital Flows: Thailand 2006 Case Solution