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szdaily -> Currency Focus
Thailand sets bond tax to curb inflows, tame baht
     2010-October-14  08:53    Shenzhen Daily

THAILAND will impose a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai bonds, the finance minister said Tuesday, the latest bid by an emerging economy to tame its currency.

    From export-dependent Thailand to fast-growing China and Brazil, governments are moving to rein in their currencies as investors, turning their backs on low interest rates in the developed world, pour money into higher-yielding markets.

    “Foreign investors have used the bond market to park their money, therefore it’s not necessary to grant them privileges,” Thai Finance Minister Korn Chatikavanij said. “Foreigners will understand if their tax burden is similar to that borne by Thai investors.”

    He conceded the baht could rise further, given the prospect of more monetary easing in the United States. Analysts agreed.

    “It won’t change its direction because the strong baht is in line with other currencies worldwide,” said Thiti Tantikulanan, head of capital markets at Kasikornbank Pcl.

    Exporters at the heart of Thailand’s economy are alarmed at the baht’s 11 percent rise against the dollar this year to levels not seen since the 1997 Asian financial crisis.

    The baht’s real effective exchange rate, which measures its value against trading partners’ currencies after adjusting for price changes, is near a record high.

    A currency trader attributed this to last-minute inflows before the tax becomes effective yesterday, applicable to bonds issued by the government, central bank and state enterprises

    “But we have many questions on whether the funds rushing in today to buy Thai bonds will be taxed after tomorrow if they generate profits later. These implementation details need to be clarified,” the trader added.

    Thailand is treading carefully after imposing tough capital controls in late 2006 that triggered the biggest one-day sell-off in the stock market. Those have since been lifted.

    Korn said the government would consider more measures if there was “excessive speculation” in the currency.

    Rahul Bajoria, an economist at Barclays Capital in Singapore, doubted Thailand would respond with draconian measures this time.

    “The prime minister and the finance minister at various forums have made it clear that policymakers can try to smooth volatility but not change the fundamentals, which are for an appreciation in the Thai baht,” he said.

    Tuesday’s Cabinet meeting approved measures, including soft loans, to help small businesses cope with the baht’s rise.

    The government will also help smaller exporters take out forward contracts of up to US$50,000 with state banks for a year, Korn said, adding these measures should benefit 17,000 firms.

    Apart from currency intervention to smooth fluctuations, the authorities have recently focused on relaxing capital outflows, after foreign investors ploughed more than US$4 billion into Thai bonds in the first nine months of 2010, compared to just US$730 million for all of last year.

    That raised their holdings to about 200 billion baht (US$6.7 billion), still only about 3 percent of the total 6.6 trillion baht market, compared to just 1 percent last year.(SD-Agencies)

 

Caption:

A bank employee counts Thai baht notes at Kasikornbank in Bangkok on Tuesday. The Thai Government agreed Tuesday to impose a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai bonds, the latest bid by an emerging economy to tame its surging currency. From export-dependent Thailand to fast-growing China and Brazil, governments are moving to rein in their currencies as investors, turning their backs on low interest rates in the developed world, pour money into higher-yielding markets.SD-Agencies

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