At the beginning of February, the BOT announced it was liberalising the rules controlling overseas investment, hedging transactions and corporate treasury centres to facilitate currency risk management. These measures aimed in part at encouraging capital outflows to reduce the impact of steady current and trade account surpluses.
Last year, Thailand posted net capital inflows of $1.5bn through the bond market and $1.1bn through the stock market, compared to the $20bn that came as a result of the trade surplus. Currently, the baht is trading at around 33 to the dollar, with relatively strong local currency threatening the competitiveness of Thai exports and the broader economy.
Under the reforms, local companies are free to make direct investments overseas; the Securities and Exchange Commission (SEC) can now allocate up to $50bn – rather than the previous limit of $30bn – for portfolio investment with investors such as asset management companies establishing foreign investment funds; and importers and exporters can unwind foreign exchange hedging transactions without prior approval.
Announcing the reforms, the bank said in a statement that easing the restrictions would provide more flexibility for importers and exporters in managing their exchange-rate risk.
"Another objective is to promote the development of the foreign-exchange market to better reflect demand and supply of foreign exchange in the market," the bank said.
One of the reasons the BOT acted was to put in place an additional safety valve for the economy, seeking to absorb some of the high levels of liquidity currently in the market, which could create asset bubbles.
According to Tarisa Watanagase, the BOT's governor, capital flows will be even more volatile this year than in 2009, with funds flowing to countries that show signs of fast recovery from the economic downturn.
"Excessive inflows can lead to asset bubbles if we're not careful," she said on January 28. "We must not have too much liquidity for too long. When we see early signs of a bubble, we need early action to pre-empt it."
SEC secretary-general Thirachai Phuvanatnaranubala said the central bank's package of reforms was a positive move, giving Thais more options for investments, which could be spread out through different vehicles or instruments. Thailand's capital markets will have to come up with new products, such as a gold exchange-traded fund or a gold fund, and investments in commodity products will also be expanded, he said in an interview with The Nation in early February.
"This will help local business operators manage their risks more efficiently. Brokers can also take foreign products and list them in the local market," said Thirachai.
"While the increased liberalisation of capital movement presents many opportunities, it also entails risks, both in the domestic market and for Thai investors moving their funds overseas," he said.
"Investors will have to learn how to manage risks," said Thirachai. "They must spread out the risks in their portfolios. However, this kind of investment will not hurt the system. Since investors are the ones who take the money out, they have to assume responsibility for their investment. It might sound like swimming in the sea with the sharks. But it is a learning process for investors."
It is not yet clear to what extent Thai investors will raise their overseas exposure. Even with the previous ceiling of $30bn, domestic securities firms, mutual fund companies and individuals still only have overseas portfolio investments with a combined worth of around $23bn, as of the end of 2009 though this was 30% up on the $17.9bn of a year before.
Though not having approached the previous limit, Pravej Ongartsittigul, the senior assistant secretary-general for the SEC, says the amount of portfolio diversification abroad has increased substantially in recent years as products and promotions from around the world have been introduced locally.
"Investors have benefitted from the development of alternative investments and returns better tied to their own risk appetite," Pravej said in early February.
With funds able to move more freely Thai investors will be better positioned to take advantage of opportunities abroad while the domestic capital markets too should benefit from the increased competition that will push them to expand and mature, which in turn will make them less susceptible to volatility.