Thai bond markets reinvigorated
after capital controls end in Thailand
By Jon Fernquest |
The Bangkok Post business section has an update on the end of capital controls today.
The reaction of financial markets to the official end of capital controls yesterday was rather quiet and subdued:
"The baht was relatively stable yesterday at 31.60 to the US dollar on the first day of trade without the Bank of Thailand's capital controls.Dealers said market sentiment was mixed as traders took a wait-and-see approach to whether the central bank would issue any additional measures affecting capital flows.
The baht fluctuated between a low of 31.68 and 31.50, with traders suspecting central bank intervention to keep rates from appreciating further."
Even though the timing of the announcement on Friday came as a surprise, the end of capital controls had been anticipated for a long time:
"The central bank surprised the markets on Friday with the announcement that it would scrap the 30% reserve rule on foreign inflows first imposed in December 2006...it had been easing the rule over several months,..."
The end of capital controls has reinvigorated Thailand's fledgling bond markets:
Local bonds, meanwhile, continued to rally, with yields falling across the curve on heavy activity. The five-year government bond yield was quoted down 12 basis points to 3.59125%, while the 10-year bond was down 7.54 points to 4.39044%....restrictions remained in place until yesterday for investments in the bond market, property funds and other assets.
...the rally in the bond market would open opportunities for more private businesses to reduce funding costs."
The end of capital controls may be most important as a signal of a new investment friendly climate in Thailand:
Finance Minister Surapong Suebwonglee said he expected that it would take only one week for the markets to adjust to the change."Even though the central bank exempted inflows into the stock exchange from the 30% rule, so long as the rule remained in place, it raised questions about our stance on foreign investment," he said.
"Scrapping the rule has clarified our position that Thailand definitely welcomes foreign investment." ...
Pakorn Malakul Na Ayudhya, the SET chairman, said...
"The SET only benefits indirectly from the change [in the capital controls]. But market sentiment has improved, with foreign investors definitely more confident now than before"
The end of capital controls also marks the end of special bank accounts and complicated regulatory red tape:
"...since December 2006, $5.2 billion in non-resident funds were subject to the 30% rule. Of this, holders of $1.2 billion set aside reserves with the central bank, while the remainder chose to fully hedge their transactions.Foreign investors can seek refunds of any reserves pledged with the central bank through local financial institutions. The central bank would give refunds seven working days after the application is made.
Customers can also apply to the central bank for permission to unwind hedging contracts."
...the policy shift would considerably simplify back-office operations for local banks.
Rather than having to maintain four separate types of non-resident accounts, banks now only have to maintain two: non-resident baht accounts for securities (NRBS) and general-purpose non-resident baht accounts (NRBA).
The central bank is still worried about the destabilizing effects of speculation and is working with financial institutions to make sure this does not become an issue:
"Central bank officials met with local commercial bankers yesterday to discuss the policy changes, which still maintain limits on non-resident accounts to deter speculation.Mrs Suchada [assistant central bank governor] said the central bank asked for co-operation from financial institutions to not speculate on the currency and help ensure stability in the market."
Steps are also being taken to make foreign investment by Thais easier. Thai investment overseas will increase the supply of baht being changed into foreign currencies and help to weaken the baht:
The Securities and Exchange Commission, meanwhile, yesterday clarified the impact of measures aimed to facilitate foreign investment by local residents, a policy announced on Friday to ease upward pressure on the baht by increasing demand for foreign currency.The central bank has allocated an additional $12 billion for outbound foreign investment by local funds, on top of $10 billion approved last year, with a total ceiling at $30 billion.
The SEC said foreign investments would be classified into four categories, starting with investments by companies, mutual and provident funds. Second are individual investments made abroad through mutual funds, private funds or brokers, followed by a classification covering foreign firms listing locally under cross-border listings. The fourth category includes baht-denominated debt instruments with foreign underlying assets.
The central bank would allow individuals to invest in foreign securities through local brokers, while listed companies can invest in bonds. Brokers must comply with central bank reporting regulations.
Thirachai Phuvanatnaranubala, the SEC secretary-general, said the rules would help support links between regional markets and give local brokers added opportunities to develop their businesses.
Pakorn Malakul Na Ayudhya, the SET chairman, said the increase in foreign outflow limits to $30 billion would increase flexibility for investors.
(Source: Bangkok Post, business section, page B1, post reporters, 04-03-08, temp-link)
Vocabulary:
reinvigorated - get energy once again, regain energy
subdued - quiet, with a low level of activity
market sentiment - whether investors are optimistic or enthusiastic about investment potential or not
took a wait-and-see approach - because the situation is currently uncertain, wait and evaluate and when things become more certain make a decision and commit for the long-term
fluctuated between X and Y - moved within the range from X to Y
suspecting - believing that something may be true but not sure
central bank intervention - when the central bank buys and sells foreign currencies to influence or control the value of the country's currency
the timing of Y - when exactly Y will happen (Y will surely happen but when is not sure)
anticipated Y - realise in advance that event Y might occur and be prepared for this
scrap - get rid of, eliminate
easing the rule - making the rule less strict and severe
fledgling - new and without experience, like a baby bird learning to fly (See glossary)
rally - begin to recover and improve after being weak
rally in the bond market - bond prices going up, investors are buying bonds again
yield curve - the curve that describes how the interest rate or cost of borrowing changes on bonds of different maturity (See The Economist Glossary and Wikipedia)
the maturity of a bond - the time when the money borrowed with a bond is repaid, the end of the bond
the yield of a bond - the interest rate of the bond, the annual income from a bond expressed as a percentage of the current market price of the bond, the annual coupon of the bond divided by the market price of the bond (See The Economist glossary)
yields falling across the curve on heavy activity - there was heavy trading of bonds and the yields on all bonds fell, which means that the price of bonds rose (just think of the relationship between bond price and yield as: yield = coupon / price , price = coupon / yield, bond yields falling means bond prices rising, this makes sense after capital controls are removed, bonds with less restrictions are more valuable)
investment friendly climate - the country wishes to invite and encourage investors to come to the country, rather than drive them away
exempted - do not have to follow a rule (See glossary)
stance on Y - opinion about Y, position on Y
clarified our position on Y - made it clear to people what our opinion is about Y
X marks Y - X indicates (is a sign or signal of) Y
red tape - official rules and procedures that cause delay and that often seem unnecessary (See glossary)
non-resident funds - money in Thailand belonging to foreigners
working days - Monday through Friday, the days that people work in western countries
seven working days after Y - from day Y seven working days (Monday through Friday, exluding Saturdays and Sunday's) have passed
a position - assets that an investor holds temporarily
unwind a position - sell assets to end the position
unwind hedging contracts - sell the options or futures contracts being used to hedge
back-office operations - the part of a company that does not deal directly with clients and the public, parts of a company such as accounting and computer staff
destabilizing - make unstable, make situation
deter - discourage people from doing something
baht-denominated debt instruments - lending money in baht rather than a foreign currency
foreign underlying assets - there are foreign assets that that back up or support the Thai assets
comply with Y - follow rule or law Y, do not break or violate rule Y
reporting regulations - regulations about what information has to be presented on reports issued by companies
