Wednesday, January 9, 2008

Thailand’s controversial capital controls

BANGKOK: The Bank of Thailand (BoT) has gradually relaxed capital controls imposed in December 2006 to curb speculation in the baht, whose appreciation threatened the country’s export-driven economy.

The controls required that 30% of all currency inflows without underlying business deals should be deposited with the central bank, interest free, for a year. However, the baht has continued to rise despite market intervention, five interest rate cuts and the BoT’s tinkering with the measures to encourage capital outflows.

The baht, which has evolved into a two-tier market, rose about 7% against the dollar last year after a rise of nearly 14% in 2006. Here are more details on the controls and exemptions:

2007

Dec 17: Bank of Thailand scraps $100 million limit on overseas investments by Thai-listed companies. Raises limit on parent companies investing or lending to overseas subsidiaries or related firms to $100 million from $50 million.

* Exempts foreign currency loans if they are fully hedged in the form of swaps contracts covering the entire loan amounts and maturities. Loans to Thai firms for up to $1 million and a maturity of at least one year are also exempt.

* Exempts investments in newly issued units of existing property funds by unit holders, whose names appear on the unit holder registration as of the book closing date.

July 24: BoT moves to slow baht’s rise by allowing exporters to hold foreign currency onshore indefinitely, scrapping a 15-day limit.

* Exporters are also allowed to hold foreign currency offshore for up to 360 days. The previous limit was 120 days.

March 15: Foreign funds destined for bonds, treasury bills, bills of exchange, promissory notes, mutual funds and property funds are exempt if they are fully hedged for up to one year.

* BoT lifts requirement that non-residents hold government and central bonds and treasury bills beyond 3 months.

Jan 15: BoT raises annual limit for Thais investing offshore to $50 million from $10 million. Institutional investors must keep outstanding foreign investments at $50 million.

2006

Dec 19: Bank of Thailand backtracks on currency controls, exempting equity investments after a near-15% stock market plunge, the biggest one-day fall in Thailand.

Dec 18: Bank of Thailand announces new measures to force speculators to keep their money in the country for at least one year or face stiff financial penalties.

* Thirty% of non-trade-related foreign exchange sold for baht must be deposited with the central bank for a year. The measure takes effect on transactions worth more than $20,000.

* Customers seeking to repatriate funds earlier than a year would get back only two-thirds of the money put aside.

* The reserve requirement does not affect trade in goods and services or residents repatriating investments from abroad.

Among other exemptions:

* Foreign direct investments, including long-term investments by non residents — both personal and corporate — if they own at least 10% of the business and help manage it. This includes the purchase of property, such as land and condominiums.

* Foreign currencies bought from customers or authorised dealers in the form of travellers cheques and notes.

* Foreign currencies bought from foreign exchange rollover swap transactions made with the same financial institutions.

* Foreign currency bought or exchanged against baht amounting to less than $20,000.

* Foreign currencies bought from Thai embassies and consulates outside Thailand, as well as foreign embassies, consulates or international organisations in Thailand.

* Foreign currencies bought from government agencies.

* Foreign currencies bought from Thais holding foreign currency deposit accounts and wanting to exchange them into baht if they can prove the deposits are exempted, such as foreign currencies paid for goods and services.

source: bank of thailand. reuters

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