UPDATE 2-Thai central bank eases capital outflow controls

Mon Feb 1, 2010 4:10pm IST

Related Topics

* Allows Thai firms to directly invest more abroad

* Raises limit on foreign investment by mutual funds

* Allows exporters to freely unwind fx hedging transactions (Adds comment from economists)

By Orathai Sriring

BANGKOK, Feb 1 (Reuters) - Thailand's central bank further relaxed controls on capital outflows on Monday in a widely telegraphed move aimed at helping companies invest overseas and reversing the effects of disastrous controls imposed in 2006.

The Bank of Thailand ended restrictions on the amount Thai firms can invest abroad, raised the foreign investment limit for Thai mutual funds to $50 billion from $30 billion and cleared the way for wealthy Thais to spend more in overseas property markets, Deputy Governor Bandid Nijathaworn told a news conference.

The changes could help exporters by holding down the baht, which has risen 0.4 percent against the dollar this year after gaining 4.6 percent in 2009 as Asia's third-strongest currency.

Pimonwan Mahujchariyawong, an economist at Kasikorn Research Center, said the immediate impact on the currency might be small, but the measures could help ease upward pressure in the future.

"They are aimed at facilitating investment overseas and at reducing the impact from fund inflows if the central bank raises interest rates. They will help slow the baht's rise," she said.

Bank of Thailand Governor Tarisa Watanagase flagged the move on Thursday, saying she wanted to moderate fluctuations that could come in response to steps to gradually reverse controls on inflows imposed by an army-appointed government in 2006.

Bandid said exporters would also be allowed to unwind foreign exchange hedging transactions freely, ending a previous $20,000 limit on hedging contracts exporters and importers could unwind.

By allowing unlimited unwinding of these hedged dollar positions, Thai traders can choose the best time to unwind contracts, giving them freedom to speculate on currency moves.

When exporters start buying dollar hedging contracts, they basically sell dollars for baht in advance. In reverse, when they unwind these contracts, they buy back the same dollars, effectively slowing baht gains.

The Thai currency strengthened slightly on the news. Traders said the easing of the controls was already widely factored into the market. The baht stood at 33.12-15 per dollar at 0848 GMT from 33.21 before the announcement.

Penn Nee Chow, an economist with UOB in Singapore, said the measures could help weaken the baht but not in a big way.

"The announcements are very controlled, with incremental changes, so there should not be too much change in the baht."

GRADUAL RELAXATION

The changes are the latest in a recent series of steps to relax controls on outflows.

In Dec. 2007, the Bank of Thailand took a step in this direction by allowing greater foreign currency holdings and encouraging capital outflows, in part by scrapping the $100 million limit on overseas investments by Thai listed companies.

Last August, the central bank relaxed controls further by allowing large Thai companies with a minimum 5 billion baht ($151 million) in assets to invest directly in foreign securities without going through mutual or private funds.

It also imposed at that time a $50 million ceiling on outstanding investment in foreign securities that could be made by a Thai corporate entity engaging in non-speculative business.

Also on Monday, the central bank raised the limit on offshore property investment by Thais to $10 million per year from $5 million per year.

Other emerging market governments from Taiwan and Russia to Brazil have imposed controls in recent months to curb speculative flows which they fear could create potentially destructive bubbles in property and stock markets.

For a list of controls announced by Taiwan in recent months, click on [ID:nTOE60506L]. For controls imposed by other countries around the world, click on [ID:nLJ437424]].

In December 2006, shortly after Tarisa became governor, the government spooked markets by imposing draconian capital controls to rein in the baht, Asia's fastest-rising currency at the time, to help the export-driven economy.

The curbs required that 30 percent of all currency inflows without underlying business deals be deposited at the central bank, interest free, for a year, or face a stiff penalty.

The initial measures triggered a drop of nearly 15 percent in Thai stocks, the biggest-ever one-day fall, and tarnished the country's investment reputation.

Equity investments were quickly exempted from the controls and other measures were lifted in March 2008, to be replaced by measures to make the baht more accessible to foreigners and encourage capital outflows. ((For a TIMELINE, click on [ID:nSGE60T024] ($1=33.10 Baht) (Reporting by Kitiphong Thaichareon; Writing by Orathai Sriring; Editing by Jason Szep and Alan Raybould)

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