Capital controls eased only slightly

Business News - Tuesday December 18, 2007

Capital controls eased only slightly

Central bank : Some curbs still needed

DARANA CHUDASRI

The Bank of Thailand yesterday announced a minor easing of its capital control measures, but ruled out any outright lifting of the controversial measures given ongoing volatility in the global financial markets.

The changes, which come one year after the central bank first imposed the controls, ease rules on individual holdings of foreign exchange and corporate investments abroad.

Suchada Kirakul, an assistant central bank governor, said external factors remained highly volatile due to instability in the US sub-prime mortgage market and tightening conditions in the international credit and financial markets.

The central bank viewed that its capital controls, known as the URR (unremunerated reserve requirement), remained necessary to maintain the stability of the Thai economy, she said.

''[The URR] has been to buy time for the economy to recover. If not for export growth, economic recovery would have been much slower this year,'' Dr Suchada said.

The central bank wants to see clear improvements in domestic demand before considering further easing of the capital controls.

According to the bank, economic growth from 2006 through the third quarter was 4.8%, with net exports contributing 3.7% and domestic demand 1.1%. In contrast, economic growth from 2001 to 2005 averaged 5.1%, with domestic demand contributing 5.4% and net exports -0.3%. Dr Suchada added that the controls had helped slow capital inflows and restrain appreciation of the baht.

In 2006, the baht rose 16.6% to the dollar up until mid-December. For the year to date, the baht was up 7.4%, but had moved in line with other regional currencies.

The reserve rule requires that 30% of foreign inflows be set aside with the central bank for investments in the debt market, property funds and other asset classes. Investors can avoid the reserve rule by fully hedging their inflows for the duration of the transaction, and investments in equities are waived from the rule.

Effective today, foreign company borrowings of up to US$1 million and with a maturity of at least one year by Thai companies would be exempted from both the reserve rule and the fully hedged requirement.

Companies seeking to borrow in foreign currency and with foreign currency earnings from trade and services to cover the borrowing can also seek waivers from the capital controls.

Foreign currency deposit limits were also eased for Thai residents, with no limits for funds originating abroad.

Thai companies can also transfer up to $100 million abroad for investment or loans to offshore subsidiaries and affiliates per year. Listed companies can transfer to overseas affiliates and subsidiaries with no amount and lend up to $100 million per year.

Foreign unitholders in existing property funds can also participate in rights issues without having to comply with the controls or the fully hedged rule.

Tak Bunnag, an executive vice-president with Bank of Ayudhya, said the baht was mostly stable onshore. In the offshore market, the dollar appreciated to the baht ahead of the central bank announcement.

''It's clear that the central bank is moving gradually to ease the URR. It's a positive step,'' he said.

Dealers quoted the baht yesterday at opening at 33.58/60 to the dollar and closing at 33.63/65 with normal volume.

Analysts said the eased measures would have little impact on the market, but agreed that they were a positive step towards a full easing.

Maris Tarab, chairman of the Association of Investment Management Companies, said the change would help foreign investors in registered property funds exercise their rights to new issues, but added the market was still awaiting a full waiver for new and existing funds.

Ariya Tiranaprakit, an executive vice-president for the Thai Bond Market Association, said the changes would have little impact on the market.

Trade had already thinned ahead of the year-end holidays, she said, adding that an easing would help reduce volatility in pricing and attract new capital to the market.

Bangkok Post