Thai central bank eases bond controls

05-Mar-2007 Intellasia | AP) | 9:11 AM

The Bank of Thailand said Thursday it will further ease capital controls on inflows of foreign funds that were imposed in December to weaken the Thai baht.

The bank said that, effective March 15, it would exempt from the controls fully hedged inflows into local debt markets, mutual funds and property funds.

Assistant Bank Governor Nitaya Pibulratanagit told a news conference that a previous outright ban on foreign purchases of local short-term debt will be removed on the same date.

In order to qualify for the new exemption, the inflows must enter the country fully hedged via foreign exchange swaps with a maturity of at least three months, she said.

When the controls—which imposed a one-year, 30% withholding requirement on many types of capital inflows—were implemented in December, they caused an uproar and sent the Thai stock market plunging a record 15%.

In response, authorities quickly rescinded aspects of the controls, exempting stock buying and foriegn direct investment, while maintaining the measures on bonds.

“Nonresident players still want to buy and sell debt instruments to make profits, but we want to keep control (of the funds), so we will allow those transactions to be executed through special accounts,” Nitaya said.

What remains covered by the controls are purchases of baht currency by nonresidents with foreign currency in amounts of more than US$20,000 which aren’t for documented purposes related to trade or services, equities, debt, unit trusts, allowed property and futures investments, or offshore borrowings of local companies.

In a speech on the financial sector late Wednesday, Bank Governor Tarisa Watanagase said the controls aren’t permanent but added they would remain in place until one-way speculative flows into the country ceased, and the baht is moving with regional currencies.

Tarisa said she is comfortable with movement in the baht recently, because it is more in line with the movement of regional currencies against the US dollar, after a period of excessive outperformance last year.

But it isn’t yet time to remove the capital controls, she said.

“The 30% reserve requirement is still in place, and the central bank will review the situation regularly,” Tarisa said.