Thailand’s central bank is entertaining the idea of capital controls as pressure from trade and capital markets groups rises. But measures are likely to be soft and the most likely is a three or six month holding period for foreign investors in Thai bonds, according to economists.
On May 7, local press reported that the Bank of Thailand (BoT) has submitted a plan to the Ministry of Finance (MoF) with its suggestions about how best to slow capital inflows. According to the Bangkok Post, citing finance minister Kittiratt Na-Ranong, the BoT plans to introduce a lock-in period and a fee for foreign bond investors.
The finance minister on the other hand, has openly stated he would prefer a rate cut. Economists argue that the introduction of capital controls is the more likely solution.
“My feeling right now is that you will see capital controls but it will be in a relatively soft form. One of the controls you might see is the introduction of a minimum holding period. You don’t want foreign investors holding T-Bills. They’re inherently volatile and usually they have a maturity of three months,” said one head of economic research for Asia Pacific.
As quantitative easing continues across the developed world, international inflows have caused the Thai baht to appreciate. The currency reached a 16-year high of THB28.57 per dollar on April 19 and April 22, according to Bloomberg data. However since then, the baht has fallen over concerns that capital controls may be introduced. The currency opened at THB29.62 on May 7.
Opinion is divided about the most appropriate form of capital controls for Thailand. On May 3, the Federation of Thai Capital Market Organisations (Fetco) asked the government to ban foreign investment in bonds with a maturity of less than six months.
The industry body argued that if foreign investors are prevented from speculating on short-term Thai bonds, the baht will come under less pressure. A lock-in period would have a similar impact, according to Santitarn Sathirathai, economist at Credit Suisse.
“A holding period is one thing they could do because it makes short-term currency speculation more difficult to do. If you want to invest in the short end of the curve to benefit from the potential appreciation, but is forced to holding the positions for a few months then you face the risk that the currency could move other way,” he said.
In the past, capital controls have mostly been discouraged but industry advice is gradually shifting in their favour. The International Monetary Fund (IMF)’s latest annual report on Asia Pacific published on April 29 says that in many instances, macroprudential instruments are considered a necessary complement to more conventional monetary tools.
“Capital flow measures have offered economies a swift way to safeguard financial system stability and enhance resilience to a sudden reversal of flows,” said Tao Sun, senior economist at the IMF.
Time for action
The finance minister’s statement, reported on May 7, that the central bank governor is keen to implement capital controls is the strongest confirmation yet that Thailand’s authorities are ready to act. But economists still believe that action is unlikely, at least while the baht remains at current levels.
“Prasan [Trairatvorakul – governor of the BoT] has confirmed that the implementation of a holding period is on the table, but our view is that they probably will try not to use it. If they’re going to do anything the first line of defence will be forex intervention,” said Sathirathai.
As of April 25, the Bank of Thailand is able to invest its reserves in the dollar bonds issued by state-owned enterprises as well as high quality emerging market credits and fixed income products. This change was made because the expense of sterilisation due to negative carry was one of the key constraints on FX intervention.
“But with scope to invest in higher yielding assets that means the negative carry will be less. It was a combination of this and the rumour about capital controls that stopped the baht appreciating,” said Sathirathai.
“There have been all kinds of rumours in the market but the BoT does appear to be seriously considering this. My own view is that it will be done if the baht reaches 28.5 to the dollar but as long as it’s above 29 there will be no real push,” said one chief market strategist for Thailand at a global bank.
The baht’s movements this quarter will be subject to a series of forces.
The Federal Reserve decided last Wednesday (May 1) to maintain its monetary-easing policy and the European Central Bank (ECB) cut its benchmark rate by 25 basis points (bp) to 0.5% on Thursday. The ECB also suggested that further easing is possible. As a result of this, further inflows into emerging markets including Thailand are likely.
However, the fundamental support for the baht will gradually ease along with its recent strength. This will encourage more imports and Thai corporates will begin investing abroad, which will lead to natural outflows.
Secondly, now that the BoT is able to intervene in the FX markets without incurring so much negative carry, it is now able to talk about intervention with more credibility, according to Sathirathai. This means that speculators will be less certain about the direction of the currency and less inclined to take a punt.