The Bank of Thailand (BoT) hopes to remove the capital controls introduced in December 2006 if conditions permit, Emerging Markets has learnt.
This follows a decision earlier in the week to allow renewed access to onshore baht swap markets for non-residents who had hedged exposure at the time the baht market was split between onshore and offshore transactions.
A spokesman for the central bank’s foreign exchange compliance team told Emerging Markets: “BoT is in the process of constantly reviewing the currently implemented capital control, and will remove this capital control measure when we deem the proper markets and economic conditions are in place.”
The capital controls were introduced late last year to curb appreciating pressures on the Thai baht, which had strengthened by around 14% against the US dollar during the course of 2006. The onshore baht has since stabilized, but the offshore baht has continued appreciating, partly due to demand from non-residents who were forced to roll over their pre-December 2006 hedges for Thai exposure in the offshore market.
“The objective of the announcement on July 9, 2007 is to alleviate non-residents’ cost of FX hedging that was done offshore and to reduce unnecessary volatility in the offshore FX/THB exchange rate and interest rate,” the BoT spokesman confirmed.
Non-resident investors who need to roll over existing hedges now have one month to apply for permission from the BoT, which will consider each application on a case-by-case basis. If approved, offshore contracts can then be refinanced in the onshore market whenever they fall due. The BoT emphasized that only investors who held hedged baht assets before December 19, 2006 would be eligible.
Usara Wilaipich, senior economist at Standard Chartered in Bangkok, believes that the latest move could ease the appreciating pressure on the offshore baht, and allow its exchange rate to converge toward the onshore rate. But she noted that this would only be a gradual process, as existing contracts fell due and were rolled over in the onshore market.
Moreover, Wilaipich told Emerging Markets that the capital controls did not change the fundamental pressure for baht appreciation, presenting the BoT with a medium-term policy dilemma.
“The capital controls have been successful in reining in speculative transactions on the baht. However, in terms of the current account surplus and stronger inflows into the Thai stock market than others in the region, that will continue to cause the baht to rise, especially given global dollar weakness that accelerated this week,” said Wilaipich.
She also observed that a stronger baht showed no signs of undermining the competitiveness of Thailand’s export sector, which has grown by 18% year-on-year in the first five months of 2007. Indeed, the BoT this week urged exporters to reduce the selling of dollars from their substantial export earnings, which had itself contributed to a stronger local currency.
In an interview with Emerging Markets in April, BOT governor Tarisa Watanagase admitted that the imposition of capital controls has not stopped the appreciation of the baht. But she added that the speed of the baht’s appreciation rather than the target level for the currency was the bank’s primary concern.
“The rate of appreciation of the Thai baht is now lower. The point is, now we’re moving more or less in line with the rest of the region, which is the way is should be.”
(See article entitled “Hostages to fortune” for the rest of this interview with Tarisa Watanagase).