Amid the confusion over the Bank of Thailand's 30-per-cent reserve requirement, a number of Japanese-based companies have suspended plans to increase their equity in their Thai subsidiaries as they cannot afford the 30-per-cent withholding requirement, said Yoichi Kato, president of Japan External Trade Organisation (Jetro).

Kato also noted that the rapid appreciation of the Thai baht would affect future Japanese investment, especially if the baht rises to Bt33 per US dollar next year. Japanese investors viewed the central bank's decision to impose a 30-per-cent withholding requirement on capital inflows to halt baht speculation as "a much more serious problem than the coup', he said.

Kato said although the central bank intended to take action against speculative inflows, the measure affects several non-listed companies.

Though investors welcomed the central bank's decision to relax the measures, the draconian measures certainly affect financial transactions between headquarters and local subsidiaries in Thailand. He said Japanese investors still have three points of concern as the actual implementation remains unclear.

First, Japanese investors feared that intra-industry loans might be required to reserve the 30 per cent to be withheld. "No corporation can afford to reserve such a high proportion of capital," said Kato.

Second, he said Japanese financial companies are worried that borrowings from foreign financial institutions may be subject to the requirement, whereas borrowings from local sources wouldn't. "The treatment of loans from local and overseas sources is different," he said.

Third, the central bank has stipulated that if the transfer of shareholding equity exceeded 10 per cent, such capital inflow wouldn't be subject to the reserve requirement because it would be regarded as foreign direct investment.

However, Kato said that normally, the Japanese headquarters would gradually increase the capital in increments of less than 10 per cent of shareholding equity.

As a result, a number of Japanese headquarters and subsidiaries have put their plans on hold, pending clearer explanations from the BOT. Besides, there is the process of substantiating the actual outflows and inflows. "We have asked various Bank of Thailand officials and each of them gave us a different answer," he said.

He said the confusion over the withholding requirement might accelerate the withdrawal of Japanese foreign direct investment in Thailand next year, already marred by labour shortages, the rise of the baht, and questions over the stability of the political situation. The coup, on the other hand, didn't much affect Japanese investors' decisions.

Applications for direct investment through the Board of Investment from January to November this year totalled Bt280.25 billion, a drop of 41.79 per cent, compared to the same period last year. Japanese applications dropped by 38.78 per cent to Bt102.07 billion.

The Jetro head attributed the rise of the baht in the medium to long term to the strength of the Thai economy. However, he admitted the rapid rise of the baht from the end of November to December could largely be blamed on speculation. Kato said the withholding requirement might be necessary but the 30-per-cent requirement could be too high. The Bank of Thailand should have imposed only 10 per cent to curb speculation.

He said that as the baht was Bt40 per dollar at the beginning of the year, foreign investors based their investment on the assumption that the baht would have been at Bt38 to Bt40. Now however, they hope that next year the baht would stay at Bt36 to Bt37 to make their investment in Thailand feasible.

Jeerawat Na Thalang

The Nation