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BOT seeks balance in capital flows

Achara Deboonme

The Nation

Listed companies to be freed from need for central bank approval for overseas investment

BANGKOK: -- The Bank of Thailand is drafting strategies to deal with capital flows, amid anticipated global volatility in light of economic imbalances.

Listed companies, potentially in 2015, will no longer need the central bank's approval for overseas investment while individual Thais could later be allowed to make direct investment in foreign securities. Companies will no longer be required to repatriate foreign currency income to Thailand if they want to retain the amount for overseas investment.

BOT Assistant Governor Pongpen Ruengvirayudh said that the strategies are aimed at balancing capital inflows and outflows, to maintain the baht's stability as the central bank can no longer play a pivotal and sometimes "lone" role like it has done in the past 10 years, which resulted in ballooning foreign reserves and accounting losses. She was speaking at a seminar hosted by Bangkok Bank yesterday

"Capital flows would be volatile and quick. We need a safety valve, to put a brake on both inflows and outflows," she said. "It's time to change the game as we have witnessed that as Thai direct investment [overseas] increased since 2008, this has had a direct impact on the baht.

"We need to ensure that Thailand's financial and economic system are flexible enough to withstand any shocks, whether they are caused locally [like the 1997 crisis] or overseas."

She noted that the balanced state of capital flows in 2011 inspired the central bank to come up with plans to sustain the movement, after years of net inflows - thanks to growing trade and portfolio investment - which appreciated the baht against other major currencies, mainly the US dollar.

However, without any action, net inflows could reappear, she said.

According to Pongpen, the strategies will deal with the integration of foreign exchange-related policies, which require cooperation with related government bodies like the Finance Ministry. To maintain balance, Thai investments overseas must be facilitated, to balance inflows from trade and portfolio investment. She also envisioned the need for a regional centre in Asean to provide investment information, given the diverse rules and regulations and associated costs for companies.

She said that the liberalisation of Thai direct investment is supported by the fact that most Thai companies are familiar with tools to mitigate foreign exchange risks and are utilising the tools efficiently.

The focus is now on small companies who should be educated more on risk management as well as the increase in financial products to accommodate associated risks from cross-border transactions. This year, currency futures would be traded in the Thailand Futures Exchange, while companies with forward contracts will be soon allowed to close or open their positions at any preferred period.

To facilitate the investment, the central bank would also encourage financial institutions to take a more active role in narrowing the spreads on the exchange rate of the baht against regional currencies. Pongpen noted that the spreads must be attractive enough to encourage businesses to make transactions in regional currencies, rather than in the US dollar.

According to the Bank of Thailand, at present 78 per cent of imported goods is paid for in US dollars, though imports from the US account for only 6 per cent of total. The export ratio is at the same level. Thailand exports 13 per cent to China, but yuan-denominated transactions account for a small amount.

Pongpen noted that all the strategies would be implemented with sound economic and financial structure, appropriate monetary and fiscal policies that do not allow attacks, the availability of financial tools, appropriate level of financial literacy as well as the central bank's efficient surveillance system.

"The foreign exchange rates would be volatile as a result, particularly when we invest more overseas when inflows are declining. Still, we will have two influential forces…It's a challenge to all, whether they are in the public or private sectors," she concluded.

-- The Nation 2012-03-10