The Bank of Thailand (BOT) has threatened to slap a tax on short-term capital if it exhausts its measures to curb the fierce baht speculation.

Suchart Sakkankosone, a senior director of the BOT's Financial Markets Operations Group, said the BOT is studying several measures to slow down the short-term capital inflows including slapping withholding tax on capital inflows.

The measure, however, needs final approval from the Finance Ministry.

The central bank yesterday launched three measures to prevent non-residents (NRs) from engaging in short-term transactions that could lead to baht speculation.

These measures were launched after the BOT discovered there had been a significant amount of short-term investment in debentures in order to speculate on the baht.

The measures took effect yesterday amid the sharp volatility of the Thai currency, which has become the strongest performer this year compared with other regional currencies. The strong baht has also seriously dented Thai exports.

Yesterday, the baht opened at Bt35.91 to Bt35.93 before closing at Bt35.86 to Bt35.92. The Thai currency, which appreciated two per cent last week alone, was strongest at Bt35.81 during the day's trading yesterday.

Since the beginning of the year, the baht has strengthened by 14 per cent to Bt35.8 to the dollar, followed by 9 per cent for the Korean won, 8 per cent for Singapore dollar, and 7 per cent for Indonesia rupiah and Philippines peso.

If the withholding tax measure is implemented, the government will collect tax on all capital inflows. Those who retain their money in Thailand for the long term will be entitled to a refund.

"We have to consider first why the existing measures are not succeeding in curbing the short-term speculative inflows, and what we should do next. We have many measures in the pocket and will pick them up if necessary. We do not actually want to do this because it may cause panic," he said.

Tarisa Watanagase, the BOT governor, also said the central bank would follow and evaluate results of the measures to stem the baht speculation closely, before it plans to launch additional measures if necessary.

A BOT source said there is no country currently collecting withholding tax on short-term capital.

The Chilean government used to collect entry-withholding tax to retard short-term speculative inflows. The Malaysian government also gathered exit-withholding tax to prevent abrupt capital movements. The tax rates varied depending on the maturity of the capital staying in the country.

The BOT could not see a clear picture as to whether other Asian currencies fluctuated from the speculative inflows. However, the baht has appreciated significantly higher than other countries.

Tarisa said financial institutions were not allowed to borrow the baht from NRs, such as sell-buy swap, from contracts of less than six months without underlying transactions from the current measure of three-month contracts.

Moreover, the financial institutions were allowed to make foreign exchange transactions and baht withdrawals or deposits with NRs for the settlement of the government investment in the event that their maturities are longer than three months, she said.

The sell and buy back transactions for all maturities were prohibited for NRs as it was clarified as a repurchase agreement. The measures will take effect immediately for new investment.

Tarisa also has asked for co-operation from the business sector not to sell short-term debentures to NRs after the businesses had issued increasing debentures in the market.

"Our intention is to attract long-term inflows, not short-term. We welcome long-term capital inflows," she said.

The BOT has obviously experienced the amount of short-term investment in the bond markets by NRs - but could not exactly prove the size of private debentures in their hand.

According to Suchart, outstanding government bonds in NRs' portfolio in the middle of November amounted to US$3.5 billion (Bt125 billion) - some US$2 billion higher than at the beginning of the year.

Outstanding commercial papers were Bt200 billion as of October, compared with Bt30 billion at the beginning of the year. Outstanding debentures recorded Bt600 billion in October, compared with Bt500 billion last January.

Anoma Srisukkasem

The Nation