Thailand orders banks to stay out of offshore currency forwards

International Herald Tribune

Move made to stop speculation on baht

Bloomberg News, International Herald Tribune, Reuters
Published: January 29, 2007

BANGKOK: Thailand closed a potential loophole in its tough capital
controls Monday, banning Thai banks from participating in an offshore
derivatives market that the government said had been used by foreign
investors to speculate on the baht.

The Bank of Thailand ordered Thai banks not to execute offshore
forward currency contracts with foreign entities, saying that doing so
could help speculators bypass foreign exchange restrictions announced
Dec. 18.

“Overseas investors have been doing more of this kind of contract
because of a baht shortage in the offshore market,” Suchart
Sakkankosone, director of the Thai Exchange Control Department told
reporters in Bangkok. “The central bank wants to reiterate that the
contract is still banned for Thai banks.”

A two-tier market has emerged for the baht since the restrictions
were imposed. The baht traded at 35.79 to the dollar in Bangkok on
Monday, but it appreciated offshore, with the dollar falling to 33.46
baht elsewhere.

Under the restrictions, foreigners bringing in non-trade-related
funds into Thailand must hand over 30 percent to the central bank for a
year, interest- free. Only two-thirds is returned if the funds are
withdrawn early — effectively a 10 percent penalty.

The
sudden imposition of capital controls has rekindled interest in the
offshore baht market as a means to capitalize on the strengthening baht
without having to surrender capital in Thailand.

But dealers said the restrictions on offshore forward transactions —
which can only apply to deals done through entities in Thailand — would
have little impact on the value of the baht.

Such capital controls will not be very effective,” said Supavud
Saicheua, managing director of Phatra Securities in Bangkok. “The baht
is likely to strengthen over time in any case.”

Some analysts warned that the latest move would further alienate investors already irritated by the restrictions.

This may hurt investor sentiment again,” said Tetsuo Yoshikoshi, a
market analyst at the treasury unit of Sumitomo Mitsui Banking in
Singapore. “It’s another intervention by the central bank. Investors
don’t like it.

Forwards are agreements in which assets are bought and sold at
current prices for future delivery. Nondeliverable forwards are settled
in dollars and not the local currency.

The government cannot restrict trading between overseas parties in
the contracts, which are standardized and traded between global banks
outside of an exchange.

Of seven Asian currencies generally traded in nondeliverable forward
markets, the baht is the least active and is seldom used by foreign
companies in Thailand to hedge against foreign exchange risks, as is
the case with similar markets for the yuan and the rupee.

The baht nondeliverable forwards market has a turnover of only about
$20 million a day, said Mirza Baig, currency strategist at Deutsche
Bank in Singapore. $@

Rules on trade loans eased

The Bank of Thailand will lift restrictions on same-company foreign
currency loans and on fully hedged borrowings and funds raised from
bond sales, Bloomberg News reported.

Foreign loans with a maturity of less than 180 days that are used to
pay for exports will also be exempt from capital controls, Suchart said.

“The relaxation for some transactions will provide companies in
Thailand more options in raising foreign loans for their business, not
for speculation on the baht,” he said.

“It makes sure that those loans and borrowings will not have an impact on the baht’s volatility.”

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