The Baht: Onshore Now Closer To Offshore

[george]

Onshore now closer to offshore

Recent BOT measures have effect

BANGKOK: -- The gap between the onshore and offshore rates for the currency has narrowed, thanks to recent Bank of Thailand (BOT) permission for eligible non-residents to settle swap obligations locally.

The baht closed yesterday at 34.06/34.08 to the US dollar in onshore trade and 31.55/31.57 in offshore markets.

The offshore rate had been almost Bt4 stronger than locally for the past week.

TMB Bank executive vice president Satian Tantanasarit said the difference between the onshore and offshore quotes narrowed due mainly to central-bank relaxation of non-resident controls.

The central bank has begun allowing non-residents with underlying deals made before last December 19 to hedge baht-denominated transactions with local financial institutions without being subject to the 30-per-cent reserve requirement.

"In my opinion, this is one instrument the bank has used to intervene in the offshore market. And the measure is successful. The gap between the two rates is getting smaller," he said.

He forecast the baht strengthening to a peak of 33.60 against the dollar within the next two weeks, then weaken to about 34.60 or 34.70 within the next month.

Satian said the gap would eventually disappear in the absence of arbitrage.

Standard Chartered Bank (Thai) senior economist Usara Wilaipich echoed those sentiments, adding that offshore demand had been reduced due to the BOT's relaxation.

She predicted baht weakness, based on current concerns surrounding the US sub-prime lending market. This negativity will spill over into the stock market and lead to an outflow of foreign capital.

"The baht will weaken to meet its psychological range of between 34.35 and 34.50 [to the dollar] within a couple of months. As a result, exporters should wait for this; it's better than selling dollars now," she said.

In a separate development, authorities approved the purchase of foreign stocks by local institutional and individual investors, up to US$50 million and $5 million (Bt1.7 billion and Bt170 million), respectively. The companies in which shares are purchased must be listed on markets regulated by "credible supervision entities".

"This is the first time the Securities and Exchange Commission has allowed individuals to invest abroad. They can make the purchases directly. But if they want to buy securities traded in limited communities or risky, complicated investments, such as sub-prime loans, they need to invest through private funds," commission secretary-general Thirachai Phuvanatnaranubala said.

Association of Investment Companies chairman Maris Tarab yesterday said his organisation estimated there were private funds totalling at least Bt120 billion with the potential to be invested abroad, or about 5 per cent of total bank deposits.

Meanwhile, Finance Minister Chalongphob Sussangkarn said the National Legislative Assembly (NLA) would today deliberate amendments to the Currency Act.

If the Finance Ministry amendments pass, they will "have a positive effect on the foreign-exchange appraisal of each account" of the BOT, and its balance sheet will not be affected by appreciation or depreciation of the baht during the year, he said.

"Current law is unbalanced. When we appraise international reserves, and it records a profit, this means the baht has depreciated. But the net profit was not put into a special account. When the baht appreciates, or it records a loss after appraisal, the BOT needs to book it as a loss on its balance sheet," Chalongphob said.

"After amendment, whether it makes a profit or loss after foreign-exchange appraisal, it will be booked in a special account, not on the balance sheet."

The Currency Act is one legislative amendment proposed by the central bank and the ministry as part of financial-system reform.

The Council of State has completed its scrutiny of the legal language and framework of the Deposit Guarantee Corp Act and the Financial Institutions Act. Both have been returned to the government for tabling in the NLA.

The key issue for amendments to the Currency Act is transparency and accountability by the BOT in its foreign-reserve management.

A recent Citibank report said the Currency Act, once approved, would require the central bank to value its foreign-reserve position every month, which would increase transparency.

At present, the central bank only values its foreign reserves at the end of its financial year. If this coincided with a massive revaluation - either a loss or a gain - in a volatile environment, the impact on the financial markets would be substantial.

-- The Nation 2007-08-15