Wednesday, February 6, 2008

Thailand's new minister asked to scrap reserve rule

Finance Ministry officials will propose that new minister Surapong Suebwonglee review the Bank of Thailand's 30% reserve requirement on capital inflows, according to Pannee Stavarodom, the director of the ministry's Fiscal Policy Office (FPO).

The governing People Power Party (PPP) promised in its campaign last year that it would scrap the capital controls that took effect in December 2006. Their main aim at the time was to slow the appreciation of the baht.

Mrs Pannee said the controls should be lifted if they are no longer deemed necessary because compliance had increased operating costs for businesses.

''[The government] should review whether the measure remains necessary. If not, it should lift it,'' she said.

''The option to fully hedge is an additional cost to businesses. And the central bank regards the capital controls as virtually non-existent.''

The 30% rule initially required foreign investors to set aside 30% of their inflows with the central bank for one year as an unremunerated reserve, meaning they would receive no interest. Transactions of less than one year in duration would be subject to a 10% penalty.

The central bank has since eased the rule to exempt inflows into the Stock Exchange of Thailand, but maintains the reserve requirement for investments in the debt market and property funds. Investors can also choose to fully hedge their transactions against the duration of their transactions to bypass the rule.

Mrs Pannee said the FPO would propose options to Dr Surapong to help ensure that the baht moved in line with regional currencies even if the capital controls were scrapped.
PPP officials, meanwhile, said that the government could pressure the central bank to reduce its interest rate to narrow the gap with US rates. The local one-day repurchase rate is now 3.25%, against the Fed Funds rate of 3%.

Mrs Pannee declined to comment on central bank monetary policies, but agreed that the baht could appreciate if domestic rates were higher than offshore rates. ''Capital flows move in line with returns. Inflows will prove beneficial when the economy is in need of liquidity. Otherwise, it will be an additional cost.''

She said the government should ensure that the baht moved in line with regional currencies.
''The FPO will propose various options to the government. It depends on the ministry's decision, whether the measure will be adopted or not,'' she said.
Suparut Kawatkul, the ministry's permanent secretary, agreed that existing capital controls cannot completely block volatile capital inflows.

''We can't halt capital inflows, but we can slow them,'' Mr Suparut said recently. ''The question is whether we can really control these flows, and what the side effects might be.''

He said the waiver for equities even as the 30% rule continues to apply for the bond market created disparities. Foreign participation in the bond market has fallen sharply, hindering the development of the country's debt market.

Another cost of the controls has been added administrative expenses for financial institutions as well as companies with offshore subsidiaries or borrowings.

''The fact is, it's still an open debate on whether the 30% rule has helped or hurt. Without the rule, the baht could be stronger. But I don't think that this measure alone will help address the issue of currency appreciation,'' he said.

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