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Bank of Thailand May Impose More Controls

Thailand is prepared to impose additional measures to stem speculation should the baht appreciate more quickly than the currencies of its Asian trading partners, central bank Governor Prasarn Trairatvorakul said.

“The best way for us is to have a variety of policy tools, and then be able to use the mixture of them in a good proportion, hopefully at a good time too, and retain some flexibility to adapt the combination and degree” Prasarn said in Bangkok, noting that he sees no immediate need to impose new measures.

Emerging countries from Asia to Latin America have taken steps to stem gains in their currencies that may make their goods more expensive relative to their competitors. The baht has surged more than 10 percent against the dollar this year, the biggest gainer in Asia outside Japan, threatening exports by companies including General Motors Co. and Siam Cement Pcl.

The Bank of Thailand has additional tools it could use, Prasarn said. He said these could include a tax on financial transactions, sometimes termed a Tobin tax after James Tobin, the Nobel Prize-winning U.S. economist who first suggested the idea in 1971.

“We liberalized the outflow, we reintroduced withholding tax on capital gains for foreign investment, but not yet to the degree of imposing the so-called Tobin tax” Prasarn said in a media briefing today. “Logically you have to keep these policy tools in your pocket, but whether to use it is another matter.”

Every Tool

Pressure on the baht to rise has eased since the currency reached a 13-year high this month as concern European nations will struggle to pay their debt encouraged investors to seek safety in the dollar, cutting demand for emerging-market assets. The baht has weakened 1.6 percent since Nov. 10.

“Central bankers have to keep every tool on the table at all times” said Usara Wilaipich, a Bangkok-based economist at Standard Chartered Plc. “But when and how they will use them depends on market conditions. The fear about additional measures will also help cap movements in the market.”

Investors are pouring funds into Asia, where growth and interest rates are higher than those of major economies such as the U.S. and Japan. Stock markets in India, South Korea, Taiwan and Thailand have attracted more than $53 billion from foreign institutional investors this year.

Asia’s developing economies will expand 9.4 percent in 2010, compared with 2.7 percent in advanced countries, the International Monetary Fund forecast in October.

Interest Rate “Dilemma”

Thailand’s benchmark interest rate is 1.75 percent, compared with near-zero rates in Japan and the U.S., contributing to an inflow of net $7.8 billion into the local bonds in the first 10 months of this year, according to data from the Thai Bond Market Association.

“There’s a dilemma here” Prasarn said. “The more you increase the rate, the more you attract. It’s like giving our benefits to these undeserved investors”

The Bank of Thailand will maintain a “flexible” monetary policy as it weighs the threat of a weakening global economy against the inflation risk at its meeting on Dec. 1, Prasarn said. Thailand kept its benchmark interest rate at 1.75 percent in October after raising it in July and August.

To curb appreciation pressure on the baht from the capital inflows, the government last month removed a 15 percent tax exemption for foreigners on income from domestic bonds.

“No country will be successful in fixing its rate” Thai Prime Minister Abhisit Vejjajiva told reporters today, ruling out a fixed exchange rate. “We can only slow the foreign- exchange movement at most.”

Indonesia, Brazil

Indonesia is studying options to manage capital inflows, including the possibility of taxing such funds, Agus Suprijanto, acting head of fiscal policy at the Finance Ministry, said last week. Brazil tripled a tax foreigners must pay to invest in fixed-income securities last month.

“One important criteria we use is to look at the trade- weighted exchange rate movement compared with our trading competitors” Prasarn said. That rate “is still, in a way, manageable” he said.

Thai export growth slowed to 15.7 percent in October, the slowest pace in a year, a report showed last week. Gross domestic product increased 6.7 percent in the three months through September from a year earlier, after growing 9.2 percent in the second quarter, the government said this week.

Foreign Reserves

Seasonally-adjusted GDP, which contracted for a second consecutive quarter, may shrink again in the final three months of 2010 because of the global growth slowdown, the baht’s strength and the impact of floods on the local economy, Kasikornbank Pcl’s research unit said Nov. 22.

Thailand has begun diversifying its foreign reserves away from the weakening dollar, Prasarn said. The country’s foreign reserves increased to $171.7 billion as of Nov. 12 from $137.8 billion as of Dec. 25, 2009, according to central bank data.

“We already started that exercise for quite some time” he said. “You have renminbi, and you’d like to be able to invest. The question lies in how much the Chinese government will allow other people to do.”

China requires foreign investors to obtain a qualified foreign institutional investor license to buy stocks and bonds.

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