beyondbrics

The Thai government’s attempts to relieve the upward pressure on the baht by reinstating a 15 per cent withholding tax on foreign bond holders has had little intended effect so far. On Tuesday the baht continued its inexorable climb hitting Bt29.82 after opening at Bt29.92, an increase of 0.3 per cent on the day.

Now, it looks as though government officials may be considering an additional tax on short-term fund flows, following the lead of their Brazilian counterparts.
The baht has appreciated by nearly 11 per cent against the dollar so far this year, rattling the exporters who account for 65 per cent of GDP.

The Thai government did warn that it was expecting the baht to continue to rise, but the way that the markets have brushed the new measures aside is feeding speculation in Bangkok that the finance ministry is looking at other measures it could use.

Satit Rungkasiri, the director-general of the ministry of Finance’s revenue department, was quoted in today’s Bangkok Post saying that the government may consider a 2 to 4 per cent tax on short-term fund flows strikingly similar to the tax which Brazil recently doubled. But he also said,

It doesn’t mean that a tax must be imposed immediately. The law will simply serve as a framework giving the government the authority to act as necessary.

While an act of parliament would mean a long process in the current chaotic and confrontational state of Thai politics, it shows that the government regards the withholding tax as the beginning of a process of tightening regulation of capital flows rather than the end.

Like so many of Asia’s emerging economies, Thailand is being squeezed between strong fundamentals – export demand remains strong and industrial investors are gearing up for Asian demand growth in coming years – and the west’s loose monetary policies, which have unleashed a wave of money that is looking for better returns.

On the bright side, for exporters at least, sentiment seems to be turning against another interest rate rise when the Bank of Thailand meets next Wednesday. The Bank had been sending clear signals that it was more worried about resurgent inflation than the baht’s rise and would lift the reference rate by 25 basis points, but analysts now believe they may hold off until December in light of the baht’s strength.

Related reading:
Thai bond tax: bid to cool hot money, beyondbrics
Fears of global currency war rise, FT