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Baht falls sharply after BoT action
30% reserve against short-term inflows
PARISTA YUTHAMANOP
The baht fell sharply yesterday as the Bank of Thailand imposed harsh new reserve measures on local banks in a bid to curb short-term capital inflows. Effective immediately, financial institutions must deduct 30% as a reserve requirement from short-term foreign exchange transactions against the baht. Transactions related to trade in goods and services, or repatriation of investments, are exempt.
After one year, customers whose funds have been withheld can request a refund of the reserve by submitting evidence that the money has been in Thailand for at least one year, said Tarisa Watanagase, the central bank governor.
Customers seeking repatriation of reserves before one year would receive only two thirds of the withheld amount. Financial institutions must remit the reserves to the central bank on a monthly basis, with all earnings gained by regulators to be earmarked for public use.
The baht, which had traded at a nine-year high of 35.11 to the dollar yesterday morning, fell promptly after the measure was announced, and traded late at 35.51/53 compared with 35.25/28 on Friday.
Dr Tarisa said the central bank would monitor market trends and could adjust the reserve requirement if necessary.
\'\'The measure will basically reduce [market] liquidity. It should help reduce short-term flows because it increases investors\' costs. This is a measure to discourage short-term flows, while long-term investments are still welcome,\'\' she said.
Earlier this month, the central bank imposed several measures limiting foreign investment in short-term debt instruments to help slow the appreciation of the baht, one of the best performing currencies this year with a gain of nearly 15% against the dollar since January.
Dr Tarisa said the baht had risen \'\'beyond economic fundamentals\'\', with capital inflows of $950 million in the first week of this month against an average of $300 million per week in November.
The central bank had indicated that it was considering a withholding tax on short-term inflows, but had decided to impose a reserve requirement instead due to greater flexibility if changes in the reserve ratio are needed.
Dr Tarisa said the 30% ratio was calculated based on returns on investment in the money market and the recent appreciation of the baht.
Full article http://www.bangkokpost.net/Business/19Dec2006_biz32.php