BANGKOK—The Bank of Thailand took steps to ease foreign-exchange rules in an effort to boost capital outflows, which included proposing the removal of the $200 million annual limit on investment and lending to affiliated companies offshore.
The effect of the amended outflows regulations on the foreign-exchange market isn’t expected to be substantial. But analysts warned that corporations could use the more convenient hedging tools as speculative channels, increasing baht volatility.
Starting Tuesday, importers and exporters will no longer have to provide an explanation and seek approval from the central bank when unwinding positions larger than $20,000. That will allow them to freely unwind foreign-exchange hedging transactions, helping them better manage their exchange-rate risks.
“Such relaxation aims at providing more flexibility for importers and exporters in managing their exchange-rate risk, as well as enhancing their ability to manage the risk,” the central bank said in a statement. “Another objective is to promote the development of the foreign-exchange market to better reflect demand and supply of foreign exchange in the market.”
But the new rules may have some unintended consequences.
“If there’s no restriction whatsoever for corporates to unwind their positions, we’re probably going to see more speculation activities from these corporates, and volatility will inevitably increase,” a senior currency dealer at a local bank said.
In addition, a dealer at another bank said, “With the restriction removed, we’ll probably see more single-direction orders from every party in the market—not two-way movement as intended by the central bank.”
If the baht strengthens, importers could join the buying spree by unwinding their long-dollar positions and seeking to build them back up later, at a more favorable rate.
Another change the central bank made was to raise the limit on total overseas portfolio investment to $50 billion from $30 billion, also effective Tuesday.
The Bank of Thailand also plans to scrap the $200 million annual limit on investment and lending to affiliated companies abroad.
Thai-listed companies were already allowed to make unlimited direct investments abroad, but the changes extend the rule to unlisted companies as well, which have faced the $200 million limit.
The Finance Ministry must approve the change, but Minister Korn Chatikavanij last week indicated his support for the central bank’s proposals.
Bank of Thailand Deputy Governor Bandid Nijathaworn said the investment limit in offshore property would be raised to $10 million a year from $5 million. Thai companies also would be allowed to lend as much as $50 million a year to non-affiliated firms abroad. These changes are expected to take effect before the end of February.
“These relaxations are expected to add more balance to the country’s capital flows, provide more investment alternatives to Thai companies and individuals, as well as enhance competitiveness of Thai companies,” Mr. Bandid said.
The Bank of Thailand expects the baht to be more volatile this year, and the new rules come at a time when the local unit is under appreciation pressure, in tandem with other regional currencies, which could lessen the need for the central bank’s regular interventions.
The release of details of the new rules—which were flagged by Bank of Thailand Governor Tarisa Watanagase last week—had little impact on the baht. In New York trade early Monday, the dollar was at 33.16 baht, down from 33.179 baht late Friday.
Write to Phisanu Phromchanya at email@example.com