Curbs on capital inflows more likely
BOT expected to opt for controls amid positive data
When Thailand's net capital inflows hit a high note at more than US$2 billion in December, an interesting development occurred that coincided with pressure on the Bank of Thailand for a deep cut in the policy rate.
However, the possibility of a rate cut to deter foreign-capital inflows is low given positive economic data released yesterday, and this makes capital controls more likely than ever.
According to the Bank of Thailand's data, while inflows to the government sector and deposit-taking institutions (commercial banks) changed only slightly from the previous month, the "others" category produced significant outflows.
Against net inflows of $332 million in October and $713 million in November, that category saw net outflows of $97 million in December. As the "others" category covers all non-deposit-taking institutions - state enterprises, private companies and non-financial juristic entities - this raises the question of what kind of transactions these entities - which could involve some individuals - were engaged in that month.
"There was a 70-per-cent probability that the outflows were geared towards dollar purchases," said a treasurer who asked not to be named. "They must have anticipated that the dollar would rise after Temasek Holdings' divestiture of Intouch shares. Certainly, Temasek needed to convert the baht-denominated proceeds into dollars. Plus, there were expectations that Thai companies would buy something overseas in a matter of a month or two."
In December, TCC Assets was the only Thai company reporting purchase of overseas assets. However, it is also known that the entirely debt-financed deal for Singapore's Fraser and Neave did not involve any Thai bank, which hence limited outflows for the deal. Meanwhile, no other big-name companies have completed overseas transactions in the past two months.
Around the same time, Singapore's investment arm Temasek unloaded its stake in Intouch, formerly Shin Corp, for Bt20.8 billion or US$690 million. If anything, converting that amount into dollars and bringing those dollars home would help weaken the baht, in light of heavy inflows that month into Thai bonds and equities. However, unofficial data showed that inflows to the bond and equity market in January were around $400 million, part of the $5 billion flowing to Asia as a whole. Together with normal inflows to the government and deposit-taking institutions category, this was enough to allow further appreciation of the baht, not the opposite.
"For those striking forward contracts in December to sell baht, betting that the currency would weaken over the next month, that means a loss," the treasurer said. "Financial institutions are proved quicker in closing the position, but not individuals. If they are speculating on the dollar/baht exchange rate, they are entitled to losses when the baht moved from 31 per dollar in December to nearly 29 in January."
The outflow development coincided with the government's pressure for the Bank of Thailand's Monetary Policy Committee (MPC) to cut the policy rate at the February 20 meeting.
Speaking at a seminar yesterday, Finance Minister Kittiratt Na-Ranong said that while the central bank was blocking inflows through the relaxation of rules to promote overseas investment and lengthen exporters' foreign-income conversion into baht, the government was rushing repayments of foreign debt. He reiterated his call for a policy-rate cut.
"A cut in the policy rate is one of the ways to reduce inflows," Kittiratt said, before adding that it was a matter for the MPC's decision.
Earlier this month, he surprised the market by writing to BOT chairman Virabongsa Ramangkura, saying the central bank should cut the interest rate to reduce the cost of foreign-exchange stabilisation, and that all BOT board members were responsible for forex-related losses.
He might be disappointed. Several economists are convinced that the MPC will maintain the current policy rate at its meeting tomorrow and, on anticipation of export recovery in the fourth quarter, they expect a gradual rate increase in the second half. Moody's Analytics also believes that the rate will be maintained at 2.75 per cent at this week's meeting.
HSBC economist Su Sian Lim also said "With growth this strong, it is difficult to make a case for more policy accommodation, no matter what the government may say about the need to compress interest rate differentials and keep Thai baht from strengthening".
Absent a cut in the policy rate, the baht has apparently weakened. Yesterday, it slightly declined to 29.89 per dollar. Yet most economists expect further appreciation in the currency.
The National Economic and Social Development Board's 2012 economic data and 2013 forecast just confirmed the rosy outlook. As interest-rate cuts may spur consumption and inflation, economists envisage the Thai authorities instead coming up with capital controls.
"Thailand and [South] Korea are the most likely, in my opinion, given their proclivity to implement such restrictions in the past," said Glenn Levine, a senior economist of Moody's Analytics (Australia). "Korean policy-makers are particularly fond of using capital restrictions to regulate the value of the won and capital flows.
"The [International Monetary Fund] recently shifted tack on this issue, essentially flagging that the benefits of some modest and temporary capital controls - regulating local liquidity and currency values - can outweigh the negative efficiency loss. Capital restrictions are typically concerned with how quickly capital can move in and out of the country, including possible tax/financial penalties if it moves too quickly."
He noted that capital controls need not affect long-term economic prospects "as long as the measures are modest and temporary and this is well communicated by policy-makers".