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Published on December 18, 2007

The Bank of Thailand (BOT) is relaxing three channels of its unremunerated reserve requirement effective today and says the measure could go far to slow down capital inflows of US$8 billion to $10 billion (Bt269 billion to Bt336 billion) putting pressure on the baht.

The announcement today also marks the first anniversary of the measure's implementation.

Assistant Governor Suchada Kirakul said the BOT would revoke the measure only on condition of domestic-demand recovery, balance of capital flows, lowering of risk from the amount of capital inflows incurred by the US dollar's depreciation and further measures to manage the baht and liquidity.

"If the new government introduces good and clear policies, the economy would pick up rapidly. At that time, we could remove the measure," she said.

An entire revocation would contribute to a further appreciation of the baht, which so far has strengthened 7.4 per cent against the dollar this year. The baht appreciated 16.6 per cent last year before the measure was introduced, Suchada said.

The central bank yesterday said from today it would allow Thai companies with external debts of more than one year of maturity worth less than $1 million to be waived from the 30-per-cent withholding reserve and full-hedge requirements. This would lessen the impact on the operating costs of small companies, which have few choices of funding sources.

Each Thai company that has future foreign income in an amount that allows it to repay all external debts can ask for an exemption from the 30-per-cent reserve and full-hedge requirements on a case-by-case basis. The natural hedge will encourage efficient risk management and reduced financial costs.

Moreover, existing foreign investors of existing property funds will also be waived from the withholding reserve and full-hedge requirements for additional unit trust sales of the same funds.

Suchada said the central bank would loosen its regulations on capital outflows today, in order to facilitate the business sector's financial transactions and encourage a balance of capital movement.

Meanwhile, Bank of Ayudhya executive vice president Tak Bunnag said the BOT's 30-per-cent withholding measure had had both positive and negative effects on the Kingdom's money market.

The measure relieved pressure on the baht's appreciation, and the central bank managed the currency at a proper level. However, the measure has affected the capital market, in particular reducing foreigners' confidence in Thai market investment, even though the measure has been somewhat relaxed.

One analyst at a foreign research house said the 30-per-cent withholding measure had negatively affected the country's bond market. Trading volume in the bond market sharply decreased after foreign confidence was reduced following the measure. Thus, companies so far are not confident about offering new bonds.

Anoma Srisukkasem,

 Somruedi Banchongduang

 The Nation