International Finance Course project Research Paper

International Finance course of action project - Research Paper ExampleSince early 2006, The BOT tried several policies to curb the phenomena but to no avail, and in the end, in December 2006, it introduced this policy. Below is a more detailed discussion of this. After 2004, as access to credit became easier in developed countries due to lower interest rates, investors began to look for opportunities to invest in developing countries where the interest rates were mellow. As a result, nearly on the whole East Asian countries had naughty inflows of foreign investment, as did Thailand. While this investment rump help in the development of countries, they can be equally discouraging and even disastrous if bulk of these investments be short-term and speculative in nature. The reasons for this are explained below 1) Local currency grip With more inflow of foreign investments, the local currency tends to prise making local exporters less competitive. 2) Large inflows Large injectio ns of investments in a small providence can cause distortions and even havoc if pulled out suddenly 3) Hot money If the investments are pulled out suddenly, the economy can crash 4) Asset bubbles Large investments in one sector can cause unsustainable suppuration on sector assets (example real estate) 5) Household credit With inflows, households tend to borrow more leading to high household debt than they can possibly service In 2005 and 2006, Thailand saw unprecedented increase in large(p) inflows. This is illustrated below in table 1. However, as the FDI component (long term investments) was not in line with all the investments, it was clear that most investments are short-term in nature. Also, according to the Bank of Thailand, a large grapheme of this money was going into currency (Thai Baht - THB) speculation which is illustrated by the continuous appreciation of THB against the US dollar sign (USD) as shown in flesh 1. Table 1 Annual Flow of Foreign Investment in Thailan d 2003 2004 2005 2006 Current Account 4784 2767 -7852 3240 FDI 4608 4952 7297 9563 Debt securities -827 17 487 -267 Equity securities 583 180 2158 4744 Others (Corporate & government loans + trade credit) -9293 -7232 3042 3758 Total -145 684 5132 21039 Source FPRI both 2005 and 2006 saw a huge increase in investments in equity securities, which is typically a short-term investment. While the FDI did register and increase, it was relatively only a small proportion of the total flow of capital. Figure 1 Exchange rate of THB against USD from mid 2005 to December 2006 As seen in figure 1, on the left, the THB was infinitely appreciating against the USD from around 42 THB/USD to below 36 THB/USD. This appreciation of the THB meant that the local companies were losing competitiveness. The BOT tried several policies to prevent appreciation of THB, was unable to stem it. The key measures tried were (BOT 19-20) Permitting a larger amount of residents investments abroad, as well as discourag ing short-term capital inflows through raising the total permissible outstanding balance in the foreign currency deposit (FCD) accounts of corporate residents. On 4 December 2006, the Bank of Thailand implemented measures on short-term capital flows which required non-residents to hold securities for longer than 3 months and allowed domestic financial institutions to borrow baht from non-residents without underlying trades or