Thailand Moves to Cool Baht Rally That Threatens Pandemic Recovery

Thailand relaxed rules on capital outflows and will increase scrutiny of fund flows into bonds to help cool a currency rally that threatens its economic recovery from the pandemic.

The Bank of Thailand moved forward measures that were supposed to begin early next year, most of which will now take effect from end-November. The rules will make it easier for Thai citizens to move money overseas and invest in foreign assets, and to hold foreign currency in Thai banks. It will also require the registration of local and overseas bond investors.

“Following the U.S. elections and positive news on Covid-19 vaccine development, investors have turned toward investing in emerging markets, including Thailand,” the bank said in a statement Friday. The situation has “resulted in strengthening the baht quickly and can impact economic recovery.”

The registration of bond investors “will allow close monitoring of investor’s behaviors and thereby enable the implementation of targeted measures in a timely manner,” it said.

The move follows a central bank assessment earlier this week that the baht’s recent rapid gains could affect the country’s “fragile” economic recovery. The government has called on the central bank to restrain the baht to protect exports.

Thailand Moves to Cool Baht Rally That Threatens Pandemic Recovery

The baht gained as much as 0.5% to 30.276 to a dollar after the BOT announcement, trimming its losses this week to 0.4%.

“The issue here is that local investors have a very strong home bias. Making it easier to invest overseas may not actually encourage them to do so,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group.

The central bank also will continue to resort to direct intervention in foreign-exchange markets, “but they need to be careful as they are skirting close to meeting the U.S. Treasury’s three criteria for currency manipulation,” he said.

Hot Baht

The baht has been the second-best performer in Asia this month after foreign investors turned net buyers of almost $2.4 billion of bonds and stocks as appetite returns for riskier emerging-market assets amid a weak dollar. The Thai currency had recently rallied 8.8% from this year’s low in April, hitting a 10-month high last week.

With its borders closed to most visitors, Thailand is betting on trade to minimize the blow from the coronavirus pandemic. The government will focus on supporting exports, which have shown signs of revival, as its only source of external revenue, Finance Minister Arkhom Termpittayapaisith has said.

Measures announced Friday include:

  • Allows free deposit and transfer of funds in foreign currency for Thai citizens
  • Residents can use foreign currency deposit transactions to diversify investments in overseas equities and gold denominated in U.S. dollars
  • The overseas investment limit for retail investors will be raised to $5 million per year, from $200,000 now
  • Sets no investment limit in foreign securities through local financial institutions such as brokerage firms and asset management companies
  • Allows local listing of foreign securities such as exchange traded funds that track foreign securities

The steps will help create an ecosystem for the foreign-exchange market, balancing capital flows and increasing market stability, Bank of Thailand Assistant Governor Vachira Arromdee said.

“The measures should work in theory, but until we see more details it is hard to tell how effective they will be,” said Mitul Kotecha, senior emerging-market strategist at TD Securities in Singapore. “Previous measures to increase outflows have had limited impact. To be effective there also has to be strong demand for FX deposits and to push money overseas, which is not guaranteed.”

©2020 Bloomberg L.P.

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