BoT still wants foreign investments fully hedged

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BoT still wants foreign investments fully hedged

New minister still sees need for controls

 

PARISTA YUTHAMANOP & WICHIT CHANTANUSORNSIRI

 

The Bank of Thailand will still require non-residents to fully hedge their investments, even if it lifts 30% reserve requirement on foreign inflows. Tarisa Watanagase, the central bank governor, said regulators would review the reserve rule after March 15, the date when an exemption for foreign investment in bonds and unit trusts takes effect.

 

Starting next Thursday, foreign investments in bonds and unit trusts will be exempted from the 30% reserve rule, so long as investments are fully hedged with currency swaps with durations of at least three months.

 

Dr Tarisa said that even if the central bank scraps the Dec 18 capital rule, requirements to have foreign investors hedge their investments would be maintained to reduce volatility in the currency.

 

The capital rule requires foreign inflows to set aside a 30% interest-free deposit with the central bank, with transactions of less than one year subject to a 10% penalty. Authorities have since eased the rule to exempt intercompany loans and investments in listed equity, property and other asset classes, although inflows must be made through special custodian accounts to facilitate monitoring by regulators.

 

Meanwhile, Chalongphob Sussangkarn, the new finance minister, yesterday disappointed investors who had hoped that the Dec 18 rule would be unambiguously revoked.

 

Dr Chalongphob, who earlier criticised the capital controls while serving as president of the economic think tank Thailand Research Development Institute, took a softer line yesterday on the need for capital controls.

 

''I think that measures are needed for capital flows. But what measures are most appropriate remains a question with no clear answer,'' he said.

 

''But I think that whatever we do, we must do it gradually. Financial policy is sensitive and has a considerable impact on the markets. We won't do anything to shock the markets or to quickly change the existing situation.''

 

Dr Tarisa said the central bank would assess whether market liquidity was sufficient to meet hedging demand once the exemption for bond and mutual fund investments takes effect.

 

Regulators would also monitor transactions closely to see whether investors were strictly complying with the rules, she said.

 

Under the exemption, investors must deposit investment funds in a Special Non-resident Baht Account for Debt Securities and Unit Trusts (SND), and buy swap contracts with respective custodian banks. Swaps must be matched with portfolios, and cannot be unwound before three months.

 

Dr Tarisa said she did not believe market demand would significantly affect liquidity or interest rates, particularly as deposit growth last year was relatively high and lending growth slow at 6% to 7%.

 

''If we see that the [exemption] does not cause the baht to become more volatile, we will maintain only the hedging option and remove the 30% reserve requirement,'' Dr Tarisa said.

 

Lifting the reserve rule would depend on the stability of the baht, which weakened slightly to 35.21 to the dollar yesterday compared with 35.19 on Thursday.

 

''We need to be sure that the baht is well taken care of without the reserve requirement. The objective of [the Dec 18] measure was for the baht to move along with regional trends,'' Dr Tarisa said.

 

A full hedging requirement on foreign currency transactions would also help exporters by creating a cushion against the baht volatility.

 

Dr Tarisa insisted that the central bank had viewed capital controls as a temporary measure from the start, in contrast to countries such as Chile, which maintained similar controls for as long as seven years.

 

She added that the Dec 18 measure had proven effective in curbing pressure on the baht, which appreciated 1% against the dollar from Dec 19 to the end of February. By contrast, the Philippine peso appreciated by 2.4% to the dollar over the same period, while the Hong Kong dollar fell 1%.

 

The baht gained as much as 17% to the dollar in 2006.