The Bank of Thailand provided on Monday a one-month window for foreign businesses to borrow baht onshore from a Thai counterparty to roll over hedged offshore positions.
Foreign businesses or banks will be allowed from July 16 to seek central bank approval to borrow baht from domestic banks to extend hedged offshore positions made before December 19, 2006 - the date when Thailand imposed capital controls, a central bank official told reporters.
Since the controls were imposed, the baht has developed an onshore and an offshore market. The baht trades at a higher level against the dollar in the offshore market. "From what I can see, the measure helps anyone who was short baht in December, and will take some stress out of the offshore market," said Sean Callow, a strategist at Westpac Bank.
The announcement, which appeared to be a response to investors who have to trade in the higher offshore baht, would offer little reprieve, some analysts said. "It's not going to help if they are only doing it for one month," said a Singapore-based currency analyst.
A dealer at Bank of Ayudhya said: "With the relaxation, the central bank is in effect trying to transfer baht/dollar swap transactions currently made offshore to onshore," he said. The central bank called in commercial bankers on Monday to give them details of the new rules.
"We have seen so far the offshore baht and its offshore premiums have been unnecessarily volatile, especially when foreign investors need to obtain baht to square their hedged positions," said Suchart Sakkankosone, head of the Exchange Control and Credits Department of the central bank. "We hope that the relaxation would make the offshore baht more stable," he said.
CASE-BY-CASE The capital controls imposed in December have created a two-tier onshore and offshore baht market by restricting baht supply outside of Thailand and creating a wide disparity between onshore and offshore baht rates.
The baht was trading at around 33.77/80 per dollar onshore on Monday compared with 31.60/70 offshore. Offshore baht traders said the one-month dollar/baht swaps reacted the most to the news, falling to 20 points from 33 points. Implied one-month yields fell 0.5 percentage point from Friday's levels to a range between 6.7-7.2 percent.
Under the regulations, foreign borrowing of domestic baht would need Bank of Thailand approval on a case-by-case basis, Suchart said. A BoT official said foreigners seeking to close hedged baht/dollar positions offshore with baht borrowed onshore can also roll them over with local counterparties. "The borrowed baht must be used specifically for settling offshore hedged positions of the same value and the non-residents can roll them over with local counterparties," an official said.
Another official said non-residents seeking BoT approval can be either commercial entities or banks, provided they show proof of outstanding hedged foreign exchange contracts made before December 19 last year. The foreigners can borrow local baht only up to the amount needed for settling each hedged position, he said.
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