Thai cabinet considers curbing inflows with bond tax

Tue Oct 12, 2010 12:49am EDT

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* Cabinet to consider 15 percent withholding tax

* Baht eases ahead of meeting; but bond yields dip

* Government facing pressure from exporters

By Jason Szep

BANGKOK, Oct 12 (Reuters) - Thailand's cabinet met on Tuesday to consider a 15 percent withholding tax on interest payments 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.

"A 15 percent tax on bonds will be discussed at the cabinet meeting today," Finance Minister Korn Chatikavanij told reporters on the way into the cabinet meeting.

The baht THB=, at 13-year highs against the dollar after months of inflows, eased slightly to 30.05 per dollar ahead of the meeting, expected to end around 0500 GMT.

Exporters at the heart of Thailand's economy have expressed repeated concern over the baht's 11 percent rise to levels not seen since the 1997 Asian financial crisis.

Hedging by exporters has helped insulate Thailand's trade-dependent economy, Southeast Asia's second biggest, in its strongest expansion in 15 years. But most are fully hedged only for another 1-3 months, said KE Institutional Research. "After that, the pain will start," the stock broker said.

Perhaps more worrying for the authorities is the rise in Thailand's real effective exchange rate to near an all-time high. The rate measures the baht's value against all of its big trading partner currencies after adjusting for price changes.

EXPORT PRESSURE

"There has been a lot of pressure from the export lobby recently," said Rahul Bajoria, an economist at Barclays Capital in Singapore. He expected another rise in government bond yields if cabinet approves the withholding tax, after a jump on Monday.

But he added that he did not expect Thailand to try to halt its galloping currency.

"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.

Ten-year yields TH10YT=RR were off 20 basis points on Tuesday at 3.10 percent, after jumping 30 basis points on speculation about the withholding tax on Monday.

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 controls have since been lifted.

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

That raised their holdings to about 200 billion baht ($6.7 billion), still only about 3 percent of the total 6.6 trillion baht ($220 billion) market, compared to just 1 percent last year.

Foreign investors have also snapped up $2.2 billion in Thai stocks .SETI since July 23 following weeks of aggressive selling during civil unrest on Bangkok's streets that killed 91 people and wounded nearly 2,000 over April and May.

Net foreign stock buying this year totals $1.6 billion.

The Thai authorities are facing even greater pressure to act after meetings of world finance leaders in Washington at the weekend ended with no quick fix for global currency tensions.

On Friday, Prime Minister Abhisit Vejjajiva told reporters that Korn would propose measures to the cabinet this week to deal with the baht's rise, but he appeared to mean measures to help exporters and other companies cope with the rise in the baht rather than steps to curb inflows. [ID:nSGE6970B4].

Korn told Reuters in Washington on Saturday that the authorities realised "the era of cheap currency for us is over and we need to make the necessary adjustments". (Additional reporting by Kitiphong Thaichareon; Editing by Alan Raybould)

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