Record bond market inflow

oreign investors brought US$1.85 billion (Bt58.5 trillion) into the country's debt securities in February, marking a historic record of monthly inflows into the market and leading to the highest monthly net capital inflow by the private sector.

The huge capital inflow into the bond market resulted from high anticipation in February of the Bank of Thailand's (BOT) revocation of some capital controls. Foreign investors believe they can make a huge gain although they must comply with the withholding reserve requirement of 30 per cent or the fully hedged requirement.

This was the major reason for the largest monthly net private-sector inflow in history, worth $5 billion.

"The foreign investors put the money into both government and BOT bonds in the secondary market," said Amara Sriphayak, the BOT's senior director.

As a result, the baht rapidly made a repeated historical appreciation, putting pressure on the central bank to revoke the unremunerated reserve requirement on February 29. The baht averaged 32.60 to the dollar in February.

The situation was a repeat of what happened in November when foreigners carried $1.3 billion into the bond market in anticipation that the newly appointed finance minister Chalongphob Sussangkarn would lift capital controls. Earlier, BOT assistant governor Suchada Kirakul had said more than $30 billion had flooded into the bond market this year. The BOT registered more than $20 billion in March and early April.

Foreign investment in debt securities was worth $6.6 billion in total last year but $13 billion was withdrawn from the Kingdom.

Amara said the Thai bourse was attractive to foreigners as it was relatively less volatile.

The country's equity securities marked foreign inflows of $5.8 billion in February, compared with $3.7 billion the previous month.

Last year, the Kingdom registered a net inflow in equity securities investment of $2.3 billion compared to $44.5 billion for funds that had flooded into the market.

Moreover, exporters increased their forward transactions in February for fear of the effects of the lifting of capital controls, which would bring about an appreciation of the baht, Amara said.

Commercial banks, therefore, reduced foreign-currency exposures in accordance with risk management over concerns of the appreciating baht and the US economic downturn.

This caused a net inflow of $2.2 billion into bank portfolios, compared with $337 million in January.

Thai debtors, meanwhile, expedited their debt repayments as the appreciating baht would help lower their debts in terms of US dollars.

In February, the debt-repayment recorded a monthly historical level of $2.7 billion. But new borrowing of $1 billion caused a net outflow of $1.7 billion.

The country marked a loan net inflow of $1.3 billion for last year.

Despite the strong baht, foreign direct investment continued to flow into the Kingdom, amounting to $1.4 billion in February, with a net inflow of $575 million.

Amara expects more huge capital inflow in March, based on a balance-of-payments surplus of $8.6 billion.