Some custodians will not open special non-residents' baht ac-counts for debt securities (SNDs), as foreign investors are not expected to invest in the Thai debt market due

to the 30-per-cent withholding measure.

Bordin Unakul, chairman of the Custodian Club, said last week that the recent relaxation by the central bank of the capital-reserve requirement was unlikely to benefit either the custody business or foreign investors.

Last week the central bank announced an exemption of the withholding measure for non-residents wishing to invest in debt securities, all kinds of mutual funds and property funds, provided they fully hedge their money by swapping contracts for at least three months.

Bordin said if the Bank of Thailand (BOT) maintained its 30-per-cent reserve requirement on capital inflow, foreign investors would still delay their investment in the country's bond market. Although the BOT has relaxed its measure for bond-market investments, foreign investors are unlikely to respond positively.

"The BOT's relaxation is likely to create further complications for both foreign investors and custodians because now the custodians have to open three accounts to follow the central bank's rule. It also creates confusion for investors," he said.

The relaxation is likely to come with many conditions.

Recently, the BOT announced exemption of the 30-per-cent withholding measure for foreign investment in stocks, but investors are required to open non-residents' baht accounts for securities. Thus, custodians have to open one more account to cover the exemption. Before the measure was announced, custodians had only one account for non-resident baht accounts for payment transactions for all financial products for foreign investors.

The banking industry has 17 custodians, of which five have been significantly affected by the BOT's 30-per-cent withholding measure because their main customers are foreigners. These are the custodians of Bangkok Bank, Standard Chartered Bank (Thai), HSBC Thailand, Citibank and Deutsche Bank.

The remainder of the custodians, however, have not been affected much by the reserve requirements, particularly in the case of foreign bond and mutual fund investments. Foreign investors do not normally invest in Thai mutual funds. They almost always invest directly in the stock market, Bordin said.

In addition, overseas investors are expected to slow down their investment in the country's bond market because the returns on these investments have fallen as a result of the central bank's measure and the lower interest-rate trend. Amid several negative factors, foreign investors are expected to further reduce their investments in the Thai bond market.

With the central bank's option for SND accounts, if foreign investors do not fully hedge their capital inflow, their investment will be 30-per-cent withheld. Both options will increase their funding costs, Bordin said.

"The country's bond yields remain at a low level. If investors have to pay hedging fees, their returns from the bond market are likely to be only around 1 per cent. Thus, it would better for them to look to other markets," he added.

Somruedi Banchongdaung

The Nation