Unremunerated Reserve Requirement (URR)
URR required that all international transactions deposit 30% of foreign exchange with BOT with exception of those dealing with goods and services, repatriation of investment abroad by residents and foreign direct investment. After deposit requirement was fulfilled, 70% capital transfers left were to be invested domestically. The capital of 30% withheld was returned after the funds remained in Thailand for more than a period of one year (Ilan, 180). Funds repatriated before the end of one year faces a refund of two-thirds. FDI were also subjected to 30% capital withholding until it was verified as being a genuine foreign direct investment. In summary, 30% URR pertains to all capital assets valued more than $ 20,000.
Motivation for introduction of URR
The main objects of URR were: to allow baht movement be in line with other regional currencies by breaking rapid one – way speculation on baht, regulate inflows and finally to allow private sector respond to rises in baht. BOT designed URR in such a way that it will affect currency speculators while on the other hand boosting the moral of genuine investors and traders. Many world economies focus on three economic goals of stabilizing their exchange rates, integration of financial markets, and achieving independence in the local monetary values. It is equally difficult to realize all these goals thus a country will always focus on reaching one of the goals.
In order to bring stability in both internal and external balances, Bank of Thailand opted to target on stability of exchange rates and autonomy of the local market. This necessitated introduction of capital control which had to take effect from 19th December, 2006. The control gave regulatory authority exemption to put in place policy framework aimed at gaining stability of macroeconomic variables such as output, inflation, local currency in relation to major world currencies and employment of factors of production i.e. labor, wage, and time.
Impact of URR provision on the exchange rate of Thai Baht
Before implementation of URR, the baht was under strong speculative forces giving way to currency appreciation which could have destroyed Thai’s exports. An appreciation of currency makes the price of exports expensive. This means that locally manufactured goods cannot find market in other nations. In the same note, there is a possibility of more imports and damping of products in the local market. Damping means availability of cheap and less quality goods in the market. The excess of imports as compared to exports brings about a balance of payment deficit. At the introduction of URR, baht gained stability against its competitors and trading associates. This increased Exports to the Middle East and other parts of East Asian. Speculative force which had made the baht to appreciate was minimized after introduction of URR.
URR reduced inflows of short term capital and allowed prices to adjust with internal price levels. Furthermore, exports expanded thus taking back the economy to growth and development. A country like Thailand depends entirely on export market with more than 60% of its GDP from the sector.
Impact of URR on Thai financial markets
After the announcement of URR, there was an instantaneous fall in the stock market but recouped following its exemption. The fall in stock market was attributed to a fall in investor confidence since they could no longer hold their stock for speculative purposes. Subsequent to the lifting of URR on 3rd march 2008, there was more inflow from foreign investors who were attracted by profits/ earning ratio. The instantaneous impact of URR was on marketable securities. Strict disclosure requirement stipulated in the URR policy drives away investor’s confidence apart from increasing the cost of capital investment.
Impact of URR on neighboring financial markets
URR in Thailand depreciated the currencies of its neighbors (Indonesia, Philippines and Vietnam) thus making them to underperform. The financial markets in the East Asia stabilized for a short period of time and became more responsive to trade due to relaxed speculative aspect in the market. This was further attributed to stability in local currency against US dollar. It is important to note that prices of bonds and other marketable securities depend entirely on the rate of currency fluctuation.
URR also had a positive impact on the republic of South Korea. Its regulatory agency made an announcement on January 15th to let go rules pertaining to external investment i.e. overseas investment by local companies. Encouraging outflows by means of capital account liberalization instead of regulating inflows is another approach to build effective trading partners. The republic of Philippines also considered the prospect of opening up its stock market so as to control appreciation of PHP. Nonetheless, Thailand has evaluated the option of a gradual and step by step liberalization of the capital market which will lead to financial integration in the global market (Crispin, 1). The measures stated must be removed under favorable conditions and during an appropriate time.
Works cited
Crispin, Shawn. Mixed reviews for Thai cap controls. Asian times 14th March 2008: 1-2.
Ilan, Noy and Vu, Tam. “Capital Account Liberalization and Foreign Direct. Investment.” North America Journal of Economics and Finance, Vol.18. No. 2, (2007): 175-194.