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EDITORIAL

No material impact from latest forex liberalisation

By The Nation

Published on February 3, 2010

BANGKOK: -- Moves to allow greater capital outflows will not have a great short-term impact on the strength of the baht

The Bank of Thailand has just announced a series of measures to further liberalise its controls on capital outflow. This process has been going on over the past three years as the banking authorities try to combat the baht's upward trend. The fundamental problem is that there is more capital flowing into than out of the country. Net exports, in particular, have resulted in the increase of Thailand's international reserves. With more money flowing in than flowing out, this has put pressure on the baht to rise. The end result is that a higher baht hurts the competitiveness of the Thai economy as a whole.

Under the latest capital liberalisation package, the central bank has removed limits on direct investment abroad by Thai companies. This measure will help boost the competitiveness of Thai companies, which are being encouraged to make more investments overseas to expand their businesses. At present, most Thai companies are concentrating on the domestic market.

The central bank has also lifted the overall ceiling on portfolio investment abroad by Thai residents from US$30 billion to US$50 billion. This area is under the supervision of the Securities and Exchange Commission.

Securities companies or mutual fund companies will have more room to carry out their own proprietary trading in the overseas markets. Moreover, Thai investors can also increase their investment exposure in overseas financial markets. However, the outflow in this portfolio investment sector still proceeds at a cautious pace. Even with the cap of $30 billion, Thai securities companies, mutual fund companies and individuals still only have a combined exposure of slightly more than $20 billion in overseas portfolio investments.

In addition, the central bank has also allowed exporters and importers to unwind foreign exchange hedging transactions without having to ask for prior permission. It has also relaxed regulations on transfer of funds from corporate treasury centres to affiliated companies in Thailand.

The amount that Thai individuals wishing to purchase overseas properties can remit outside the country has been increased from $5 million to $10 million. This measure is likely to create more outflow for wealthy Thai individuals or companies to invest in foreign properties. This relaxation has also been approved by the Ministry of Finance, which is likely to issue a regulatory announcement by the end of this month.

All of these liberalisation measures represent gradual steps towards the central bank allowing capital out of the country more freely. The Bank of Thailand has taken lessons from the 1997 financial crisis seriously, when it lost most of its foreign reserves from a sudden capital outflow. So any new moves to facilitate capital outflow are going to be handled cautiously, in step with the development of the Thai financial markets.

In effect, these regulations may not significantly alter the balance of payments position of Thailand because capital inflow will still outpace the outflow. Moreover, the long-term trend is still in favour of the baht against the US dollar. The baht is now moving in tandem with the regional currencies. Any hope that the regulations will result in a weaker baht is not likely to come to pass. Thai exporters will still have an incentive to hedge their expected receipts. Allowing exporters freedom to unwind hedges would technically put pressure on the baht to depreciate. However, such unwinding would be unlikely as long as long-term expectations are for the baht to appreciate.

"On the whole, the measures announced thus far are not expected to materially alter the balance of payments in the next couple of years, although they might lead to larger outflows eventually," said DBS Global Research in its report issued yesterday.

We quite agree with this assessment.

-- The Nation 2010-02-03

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