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Published on March 7, 2008

Psychologically, it is believed to have a positive effect on the capital market.

Although the Bank of Thailand relaxed its measure for foreign investment in the Stock Exchange of Thailand (SET) immediately after the bourse's biggest one-day sell-off, which was triggered by the imposition of the measure in December 2006, trading by foreign investors on the SET has not improved much.

Average daily non-resident trading on the SET was Bt11.3 billion last year, up from Bt10.9 billion in 2006 before the enforcement of capital controls.

Foreign trading of bonds, which were not included in the relaxation schemes, fell drastically from a daily average of Bt2.8 billion in 2006 to Bt600 million last year. The removal of controls will to a certain extent restore confidence among foreign investors enough for them to enter the market. In fact, the surge of outright bond-trading value by foreign investors from 600 million last Friday to Bt1.47 billion on Monday seems to be such a sign.

However, it is questionable whether foreign participation in the bond market can recover to the same level as before the capital rules. Statistics show non-resident investment in the bond market to be much smaller than in the equity market. Due to its relatively small market size and low liquidity, non-resident investors normally park their money in the bond market pending appropriate timing for stock investment rather than invest directly in bonds. Due to these unfavourable factors, a rush of foreign money into the capital market is not expected to occur immediately. And it will not be easy for non-resident holding of bonds to increase sharply from the level of Bt54 billion last Friday to the level of Bt130 billion prior to the capital-control measures. Taking the current economic and investment situation into account, foreign bond holdings are expected to remain about Bt70 billion this year.

This story was contributed by the Thai Bond Market Association.