Tax curbs foreign trading in Thai bonds

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Tax curbs foreign trading in Thai bonds 
Bangkok Post: 26 Oct 2010
Tax curbs foreign trading

Trade by foreigners in the local bond market has fallen by 70%, to an average of 2-3 billion baht a day, since the government reintroduced the 15% capital gains tax on foreigners, according to the Thai Bond Market Association.

The government imposed the measure on Oct 13 as part of its effort to slow foreign capital inflows that had been pushing up the value of the baht. The 15% withholding tax applies to interest income and capital gains on foreign investment in government and state enterprise bonds.

However, foreign investors still had outstanding portfolios worth more than 200 billion baht in Thai bonds, said Ariya Tiranaprakit, an executive vice-president of the Thai BMA.

Total bond trading including commercial bank bills of exchange is valued at 40-50 billion baht per day.

Foreign investors' desire for better returns has been reflected in a shift to one-year bonds from the three-, five- and 10-year maturities they favoured in the past, she added.

"They were holding their investments in the Thai market to see if the government may impose more capital controls," said Ms Ariya.

"The market has been so quiet since the government resumed imposing withholding tax for foreign investors. New money has not been coming in."

However, she noted that the Bank of Thailand's decision to keep its policy interest rate unchanged at 1.75% had already been affecting bond prices in any case.

Low rates have encouraged more issues of corporate debt, which is expected to reach 250 billion baht this year, based on 200 billion recorded in the first nine months.

Government bond issues will total 500 billion baht, similar to last year.

The government hopes to soon issue its first 50-year bond to set a new market benchmark. However, the issue size would be small, at no more than 5 billion baht, she said.

http://www.bangkokpost.com/business/economics/203217/tax-curbs-foreign-trading