The Bank of Thailand yesterday discussed with fund managers from 20 asset-management companies a plan to revoke the remunerated reserve requirement for non-residents investing in all kinds of mutual funds, including property funds.

The two sides have not yet been able to find a complete solution, but the relaxation is likely to be on the same basis as the exemption for foreign loans and debt securities.

Under that easing of the rule, non-residents are required to do a full one-year swap for their foreign currency to be converted into baht. They are also obliged to open a new account for more than one-year investment in mutual funds and debt securities.

Maris Tarab, managing director of ING Funds (Thailand), said the relaxation would mostly benefit the mutual-fund business, which is currently bearing a cost of 40 per cent. This is calculated as an effective rate, as the hedging cost is only 0.83 per cent a year.

Fund managers would be able to push mutual funds ahead as planned, particularly property funds worth a total of Bt100 billion expected to be launched this year. The bourse would also benefit from an exemption for flexible and equity funds, Maris said.

But fixed-income funds would not gain much benefit if the central bank waived the 30-per-cent reserve requirement, because such funds' returns remain low, added Maris, who is also chairman of the Association of Investment Management Companies.

"The withholding reserve does not cost the fund investors 30 per cent, but about 39-40 per cent," he said.

Maris said fund managers could track down the money non-residents brought in, as they know the flow of funds between equity and debt markets in many companies. Tracking the flow would prevent any undesired speculative inflows.

The asset-management companies received a positive response from the central bank at yesterday's meeting, having put forward the relaxation proposal via the Securities and Exchange Commission last year.

The six types of mutual funds are property, equity, fixed-income, flexible, country and private funds. The Thai Trust Fund has already been waived from the reserve requirement. The central bank will study the results of any further exemption, particularly baht volatility.

Venture capital will be considered separately from other types of funds, as it is not counted as a mutual fund but foreign direct investment.

Maris said venture capital was good for newly established small and medium-sized enterprises, as investors put money in for the long haul - often five to seven years.

The Bank of Thailand relaxed its remunerated reserve requirement for inter-company loans and is reconsidering a waiver for debt-security investment.

Earlier, Governor Tarisa Watanagase said she wanted to ensure stability of the baht before providing further relaxation of the withholding measure. She said exemption for property funds would have to be reconsidered cautiously, as the business has grown tremendously over the past few years.

According to Maris, the size of property funds was Bt45 billion last year, an increase of Bt2 billion from the previous year. Thirty per cent is owned by foreign investors.

Meanwhile, the Stock Exchange of Thailand yesterday published a report on four long-term impacts of the 30-per-cent withholding measure.

Firstly, foreign capital inflow is expected to fall, although there is no exact evidence to tell how much is due to the measure. However, the Morgan Stanley Capital International Far East Index ex-Japan has fallen from 2.6 per cent to 2.3 per cent.

Second, the price-earnings ratio discount of the Thai stock market has increased due to the measure.

Third, the measure will encourage new companies to list on the stock markets of other countries where price-to-earning ratios are higher than the Thai market.

Last, trading volume in the Thai market is expected to decline if the measure continues in place.

Anoma Srisukkasem

The Nation