Capital flows made a U-turn in the first month of the year, with a net US$79 million (Bt3 billion) flowing out of the Kingdom despite a flood of inward-bound funds from Temasek Holding's acquisition of Shin Corp shares owned by the Shinawatra and Damapong families.

The investment arm of the Singapore government injected $1.3 billion into Thailand to conclude the massive deal in January, resulting in a net inflow of foreign direct investment (FDI) of $1.72 billion.

The baht's appreciation, however, forced importers to hedge currency risks, which sparked a $5-billion net outflow in the banking sector, according to the Bank of Thailand.

A rise in the banking sector's holding of foreign currencies was the major reason for the net outflow of capital in January.

In December capital flows recorded a net inflow of $495 million.

Methee Supapongse, director of the central bank's Monetary Policy Committee, said commercial banks had sold foreign currencies in the futures market so that importers could hedge to cover currency risk.

"Some [banks'] clients, especially importers, thought that the baht was too strong. They bought the currencies in the futures market to lock the cost of imports," Methee said.

The baht averaged 39.62 against the greenback in January and 39.41 in February.

Capital inflows into the region have strengthened regional currencies, but the Shin deal resulted in the Thai currency rising more than its regional counterparts.

The baht's appreciation

has slightly weakened the country's competitiveness according to one rating. The so-called nominal effective exchange rate rose from 71.28 points in January to 72.02 in February. The rate measures a country's competitiveness based on its exchange rate.

According to the central bank, capital flows in the non-bank sector recorded a surplus of $4.61 billion and state enterprises saw a net inflow of $315 million in January.

The government received a net inflow of merely $1 million in the month.

The huge capital inflow into the non-bank sector was mainly the result of portfolio investment, which totalled $2.13 billion, followed by FDI.

Companies, particularly those in the energy sector, borrowed heavily from foreign creditors, which resulted in a net capital inflow in lending of $735 million. The non-bank sector continued to receive trade credits, with a net inflow of $25 million in January.

For all of last year, Thailand recorded a net inflow of $7.5 billion, mainly due to portfolio investment of $5.2 billion and FDI of $2.9 billion.

In the first half of last year, a net $2.9 billion flowed in, $2.8 billion of which came through portfolio investment and $1.5 billion through FDI.

Anoma Srisukkasem

The Nation