Bank of Thailand (BOT) Governor Tarisa Watanagase said yesterday that the controversial 30-per-cent reserve requirement on capital inflows must be maintained, despite Wednesday's resignation of deputy premier and finance minister MR Pridiyathorn Devakula.

However, the central bank yesterday announced exemptions for non-residents wishing to invest in debt securities, mutual funds and property funds, provided they fully hedge their money by swapping contracts for at least three months.

Tarisa said the baht had depreciated by 2 per cent and moved in line with regional currencies following the measure. It was launched in the first place to break the baht's one-way appreciation.

"The purpose and result of the measure are clear," she said. "We can prove that the measure is successful because the baht is not a concern on a day-to-day basis."

Despite Pridiyathorn's full support, the measure satisfied neither the market nor some economists. It has been blamed for destroying the capital market and worsening sentiment among foreign investors. There have been many calls for revocation of the withholding measure to restore confidence.

There has also been speculation that a new finance minister, once appointed, will revoke the measure.

Tarisa said she hoped all parties understood its purpose. The baht appreciated by about 17 per cent last year, compared with rises of 7 to 8 per cent among regional currencies.

However, the BOT's governor has never directly informed Prime Minister Surayud Chulanont of the implications of the withholding measure and Tarisa said there was no evidence of whether the military-installed government was satisfied with it.

"I just reported to the finance minister and don't know whether he informed the prime minister," she said

The BOT exempted fully hedged inter-company loans from the measure in January. Yesterday it waived the measure further for money flowing into the country to invest in debt securities, all kinds of mutual funds and property funds, effective on March 15.

Nitaya Pibulratanagit, the BOT's assistant governor, said non-residents wishing to take advantage of the new exemptions were required to open new accounts, called special non-residents' baht accounts for debt securities (SND), by March 30. They are also required to fully hedge their investments for not less than three months via custodians.

From March 15, non-residents with existing money in the country will also be allowed to buy government bonds with less than three months maturity. Earlier, this was prohibited. However, if they bring new money into the country, they must invest it in bonds with maturity exceeding three months.

Meanwhile, Standard Chartered Bank (Thai) aims to rank among the country's top-three bond underwriters, although the market has been heavily impacted by the 30-per-cent reserve requirement.

In 2006, the foreign bank ranked number one in the bond underwriting business in terms of bond issuance. The bank made Bt38.40 billion from 12 issuers, representing a market share of 25.64 per cent.

The bank's regional head of capital markets for Southeast Asia, Arthid Nanthawithaya, said that once the BOT eased its 30-per-cent withholding measure for bond investment, market sentiment and bond yield would improve. However, Thailand's political and economic uncertainties would keep foreign investors in a "wait-and-see" mode.

A banking source said that despite the central bank's partial relaxation of its 30-per-cent reserve requirement for bond market investment, the market would not receive a positive response. Most foreign investors want the BOT to abrogate the harsh measure. 

Anoma Srisukkasem,

Somruedi Banchongduang

The Nation