VI Capital Account Liberalization in Selected Asian Crisis Countries

R. Johnston, and Mark Swinburne
Published Date:
September 1999
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Capital account liberalization is generally seen as a beneficial move for an economy. In opening the capital account it is also necessary, however, to anticipate and minimize the risks that such liberalization may pose. For example, both the 1994 Mexico crisis and the recent crises in Asian countries were preceded by a sizable buildup of short-term foreign liabilities. A substantial amount of work, inside and outside the IMF, has been undertaken already, or is under way, on the Asian crisis. This section investigates one aspect of the events leading up to the Asian crisis—namely, whether the nature of regulation of capital movements and, in particular, the sequencing of the liberalization of the capital account, contributed to the buildup of short-term debt in the three main Asian crisis countries, Indonesia, Korea, and Thailand. It discusses implications for the management of capital inflows, and notes in particular that capital account liberalization must be seen as part of a broader strategy of economic liberalization, achieved in conjunction with the strengthening of key institutions and appropriate macroeconomic and exchange rate policies. An appendix provides a chronology of developments in the exchange systems of five Asian economies—the three main Asian crisis economies plus Malaysia and the Philippines—from June 1997 to March 1998.

Overview of Liberalization in Indonesia, Korea, and Thailand

Boxes 46 depict the sequencing of the liberalization of capital inflows since 1985 and the regulatory framework for such flows as at mid-1997, in Indonesia, Korea, and Thailand.52 An important general point to note first is that, contrary to some perceptions, Indonesia, Korea, and Thailand adopted markedly different approaches to the liberalization of their capital account regimes in the years leading up to the crisis.

Indonesia liberalized outflows relatively early, and liberalized inflows relatively gradually. After 1985, liberalization of capital account movements proceeded steadily: successive measures progressively liberalized foreign investments in Indonesian companies (both listed and unlisted in the Stock Exchange), and widened the range of opportunities available to foreign direct investments. Regulation of commercial credit was progressively eased, while financial borrowing remained broadly restricted for both banks and corporations. Bank borrowing was liberalized in 1989, but tightened again in 1991 after concerns emerged about the excessive buildup of foreign liabilities. However, there is no strong indication that regulations favored any particular maturity, especially shorter over longer maturities. In some instances (e.g., Presidential Decree No. 39 in 1991), ceilings were imposed on foreign commercial borrowing, except for financing of long-term projects.

Korea followed a very gradual approach to liberalizing the capital account regime beginning with capital outflows, and only in the mid-1990s began the cautious liberalization of capital inflows into its security markets.53 Restrictions were progressively removed on a range of transactions and operations, including forwards and futures, currency options, and various forms of bonds and loans. Most transactions, however, remained subject to the approval of the Ministry of Finance and Economy or the Bank of Korea. In 1992, nonresidents were permitted limited access to the stock market, and the types of securities that residents could issue abroad were expanded. Foreign exchange banks were authorized to borrow abroad, but direct foreign borrowing by corporations was controlled. While some forms of trade credit were deregulated (and trade credits grew rapidly), beginning in 1994, the ceiling on banks’ foreign currency loans was lifted, but the Bank of Korea applied window guidance in the form of ceilings on banks’ medium and long-term borrowings from international financial markets. One explanation that has been offered for the maintenance of controls on longer-term external borrowing by banks is that the Ministry was seeking to prevent a loss of control over financial institutions through possible debt-equity swaps. The letter of the law, however, did not entail preferential treatment for short-term inflows, per se. Frequently the law established detailed quantitative limits on the amount of the transaction or on the size of the firms that were allowed to trade on international markets. Indeed, on joining the OECD in 1996, the authorities expressed their reluctance to ease capital controls further and explicitly stressed that they wished to maintain controls over short-term capital inflows that may “hamper macroeconomic and financial market stability.” For this reason the authorities resisted the liberalization of access by nonresidents to domestic money market instruments during the accession to the OECD. The Korean regulations did, however, favor foreign borrowing (and onlending) by banks, over direct access by corporations to international capital markets: credits from nonresidents to nonbank residents—with the exception of trade credits—were subject to prior approval, which apparently discouraged this kind of operation.

Box 4.Indonesia: Capital Account Liberalization, 1985–96, and Capital Controls, 1997

Sequence of Capital Inflow Liberalization, 1985–96

1985 FDI: Procedures and requirements for foreign direct investments (FDI) projects are somewhat eased.

1986 FDI/PI: Rules on foreign ownership of firms are relaxed in a number of sectors and some foreign companies become eligible for treatment equivalent to the domestic investment scheme.

1987 FDI: Rules on foreign ownership are further eased and more sectors are open to FDI.

1988 FDI/PI: Foreign investors are allowed to establish joint ventures in financial companies, banks, and insurance companies where they have the majority of the capital.

1989 FDI: More sectors are opened to FDI and rules are again eased. PI: Foreign investors are allowed to purchase up to 49 percent of listed companies. OIF: Direct ceilings on offshore borrowing by foreign exchange banks are replaced with a limit on open foreign exchange net position of 25 percent of capital.

1991 OIF: Limits on banks’ foreign currency swaps are increased from 20 percent to 25 percent of capital. Ceilings on foreign commercial borrowing by major banks and companies are established. Trade-related credit, private project financing, and transactions below $20 million are exempted. Banks’ foreign exchange short-term liabilities (less than two years) are limited to 30 percent of capital. The limit on banks’ foreign currency net open positions (including off-balance sheet items) is lowered to 20 percent of capital. At least 80 percent of the total foreign loans is to be allocated to business earning foreign exchange. FDI: More sectors are opened to FDI while regulations on FDI are loosened.

1992 OIF: Foreign participation in the capital of banks’ is raised to 49 percent and in the capital of nonbanks financial companies to 85 percent. FDI: Rules are once again slackened and more sectors are opened.

1993 FDI/PI: Licensing and procedures for FDI are simplified while rules on foreign ownership are eased.

1994 OIF: The limit on banks’ foreign currency net open positions (including off-balance sheet items) is increased to 25 percent of capital and the limits on individual foreign currencies are eliminated. FDI/PI: Further liberalization of FDI and foreign ownership is enacted.

1995 OIF: Dealing by banks in foreign exchange derivatives is allowed.

1996 PI:6 Foreign ownership of corporations is raised to 85 percent of capital. Mutual funds can be totally foreign owned.

A Synopsis of Capital Inflows Regulation in Mid-1997

The system of controls on capital inflows is pervasive. The inflows are de jure strictly controlled by the Bank of Indonesia and specifically by the Commercial Offshore Loan Team (COLT).

Capital markets: No restrictions on issues abroad; if securities are listed on the Indonesia stock exchange, they should comply with the Capital Market Act. Purchase of shares by nonresidents is limited to 49 percent of the capital.

Money market instruments: Approval by COLT is required for offshore issues with maturities over two years or for amounts exceeding $20 million a year, and in any case total issuance cannot exceed 30 percent of the bank’s capital.

Derivatives: Derivatives transactions other than those associated with foreign exchange and interest rates are forbidden unless permission from Bank Indonesia is granted.

Commercial credits from nonresidents are supervised by COLT and must be reported periodically. Prior approval is necessary for foreign loans taken by any public enterprise, commercial bank, or public sector bodies. Authorization is required for (1) certain borrowing related to development projects; (2) borrowing related to development projects with financing based on build-operate-transfer, build-and-transfer, and similar schemes; (3) borrowing related to government or state-owned companies.

Financial credits from nonresidents to residents are restricted.

Foreign exchange operations by banks have limits: (1) the weekly average total net open position (including off-balance sheet items) cannot exceed 25 percent of the bank’s capital; (2) the average weekly off-balance sheet net open position cannot exceed 25 percent of the bank’s capital.

Foreign direct investments are subject to a host of requirements and ownership regulations and investments in several key sectors are restricted.

Note: FDI = foreign direct investments; OIF = other capital inflows; PI = portfolio investments.Sources: Johnston and others (1997); IMF, Annual Report on Exchange Arrangements and Exchange Restrictions.

Box 5.Korea: Capital Account Liberalization, 1985–96, and Capital Controls, 1997

Sequence of Capital Inflow Liberalization, 1985–96

1985 OIF/PI: Currency swap operations between domestic and foreign entities are permitted. Regulations on foreign loans taken by shipping companies are eased.

OIF/PI: Korean companies are allowed to issue warrants and depository notes up to 15 percent of their outstanding share volume provided that no single foreign entity can acquire more than 3 percent of the capital by exercising conversion rights.

FDI: The number of sectors where foreign direct investments are admissible is substantially raised.

1986 OIF: More liberal regime for swaps is enacted. Regulations on foreign currency loans are tightened.

1987 OIF: Futures and option contracts on foreign exchange are allowed. The limit on the forward contract period is eliminated. The ceiling on foreign banks’ swap operations is lowered by 10 percent. The government directs financial institutions to repay foreign short-term borrowing and bank loans that bear “unfavorable conditions.” Special deposits by the central bank are made at Korean foreign exchange banks for this purpose.

PI: Inward remittances greater than $20,000 are monitored to discourage investments in the stock exchange. Nine additional foreign banks are allowed to enter the trust investment business.

FDI: 26 manufacturing sectors are opened to FDI; tax breaks on FDI are reduced.

1988 OIF/PI: Limits on banks’ foreign exchange loans to small and medium-sized enterprises and export firms are strictly enforced. Nonresidents are prohibited from converting in won amounts withdrawn from their accounts. The limit on swaps by foreign banks is lowered again by 10 percent. Sales by nonresidents of foreign currency to domestic banks is limited to $10,000.

FDI: Advertising and motion pictures sectors and, to some extent, the insurance industry are opened to FDI.

1989 OIF: A limit of $200 million is set on special foreign currency loans granted to a firm during a year. The ceilings on swap operations by foreign banks are lowered by another 10 percent. The amount of foreign currency allowed in the country without notification to the tax authorities is raised in two steps to $10,000. A U.S. dollar call market is opened. Currency loans are now admissible for investment operations abroad, subject to a ten year maturity limit and ceilings of 60 percent and 80 percent of the investment for large and small firms respectively. Foreign exchange banks are allowed to issue foreign currency bonds offshore and to underwrite and trade foreign currency bonds issued by nonresidents. The limit on investments by foreign security firms was raised to 40 percent.

PI: Foreigners are allowed to trade among themselves. Korean shares acquired through the exercise of bond conversion rights. FDI: Other six manufacturing sectors are opened to FDI and the limit on automatic approval is raised to $5 million from $3 million.

1990 OIF/PI: Central bank loans for the redemption of the foreign currency loans by banks and firms are abolished. The government allows each of the three domestic investment trusts to set a $100 million fund (of which $60 million to be raised abroad) to invest in Korean companies (70 percent of the capital) and foreign securities.

FDI: The limit on automatic approval is raised to $100 million from $3 million. Two other sectors are opened to FDI.

1991 OIF: Limits on foreign currency loans for investments abroad are reduced to 40 percent and 60 percent of the total for large and small enterprises respectively.

PI: Nonresidents are allowed to convert in won up to $100,000 to invest in development trusts with a maturity of more than 2 years. Securities in foreign currencies can be issued by residents to finance import of inputs and machinery for which no domestic substitute is available. Nonresidents who had acquired Korean shares through convertible bonds are allowed to trade them in the stock exchange.

FDI: Only a notification is required for projects with foreign participation of less than 50 percent. Exemptions are granted to foreign firms on corporate profit taxes and to their foreign employees on income taxes for three years, while a 50 percent exemption is established for the two successive years. Restrictions on foreign ownership of retail businesses are relaxed.

1992 OIF/PI: The range of forward exchange contracts admissible is extended. The maximum amount of loans for overseas investments is increased to 60 percent and 70 percent for large and small enterprises, respectively. Residents can issue abroad negotiable certificates of deposits and commercial papers. The authorization for the issuance of these securities, as well as bonds, callable bonds, warrants, and stock depository receipts, is simplified and funds can be maintained in accounts abroad.

PI: Investments in stocks by resident foreign financial institutions are subjected to the same limits as those of institutions owned by nationals. The stock exchange is opened to nonresidents subject to quantitative limitations.

FDI: The general approval requirement is replaced by a notification system for investments in most business sectors.

1993 OIF: Nonresidents are allowed to hold won accounts. The central bank raises the amount of foreign exchange reserves earmarked for supporting foreign currency loans by domestic banks from $1 billion to $4 billion. Regulations on forward foreign exchange transactions are relaxed; ceilings held on foreign exchange deposits payable in domestic currency are abrogated. Overseas branches of domestic banks are allowed to supply loans to residents who trade commodities futures and financial futures. Issues of securities denominated in foreign currency are not subject to permission but only to a reporting requirement; the class of eligible issuers is widened to include those with positive cumulative profits over the past three years. Manufacturing companies can obtain loans in foreign currencies for all imports of inputs and equipment; the Bank of Korea earmarks some foreign exchange reserves to support these loans. 1994 PI: Nonresidents can purchase up to 12 percent of Korean firms’ capital, up from 10 percent. Ceilings held are abolished on borrowing by resident corporations and their foreign branches from nonresident financial institutions located abroad. Foreign-financed general manufacturing companies are eligible for short-term overseas borrowing, while the overseas borrowing by foreign-financed, hi-tech firms is raised to 100 percent of the foreign capital share.

FDI: The Foreign Capital Inducement Act is amended to streamline application procedures and facilitate stock acquisition and sales by foreigners. Rules on land ownership are relaxed.

1995 OIF: Issuance of exchangeable bonds overseas is permitted provided that they do not exceed 15 percent of the firm’s capital. Eight leasing companies are allowed to undertake medium and long-term borrowing offshore without intermediation from foreign exchange banks. Limits on offshore security issuance by small and medium-sized companies are lowered. Direct foreign borrowing by enterprises engaged in social projects and foreign-financed, hi-tech firms is allowed up to 100 percent of capital (90 percent for large corporations) for redemption of import-related debts. Ratio of foreign currency loans taken by large companies for import of inputs and machinery is lowered to 70 percent of total cost.

PI: Nonresidents can hold up to 15 percent of private Korean firms’ capital and 10 percent (up from 8 percent) of public corporations. Brokers are allowed to engage in foreign exchange transactions related to nonresident investments in the stock market.

FDI: Investment in 101 sectors is permitted or greatly liberalized.

1996 OIF/PI: Documentation requirements for forward and futures transaction are eliminated, but transactions still need to be based on real demand. The ceiling on swaps facility provided to foreign banks is lowered by 10 percent. Swaps are allowed for portfolio investments abroad by financial and insurance companies. The yen-won spot and forward market is established. For certain small and medium-sized firms restrictions on foreign borrowing are eliminated.

PI: Foreign currency derivative transactions are opened to nonresidents on the basis of real demand. Nonresidents are allowed to open won accounts in overseas branches of domestic banks. Limits on foreign ownership of listed Korean firms is raised to 20 percent and to 15 percent for public enterprises; individual ownership is increased to 5 percent. Investment in domestic bonds by foreigners is allowed through a country fund as the $100 million Korea Bond Fund is listed in London. Up to 50 percent of won-denominated securities issued by nonresidents can be sold abroad.

A Synopsis of Regulation on Capital Inflows in Mid-1997

The system of capital controls is pervasive. All settlements with other countries can be made in any convertible currency except the won. Foreign exchange banks can conduct all form of transactions in the foreign currency market, including swaps, options, forwards and futures but the terms of forward transaction between banks and nonbank customers must be based on bona fide transactions. Export earnings exceeding $50,000 must be repatriated within six months.

Capital market securities. (1) Foreign ownership of listed companies is limited to 20 percent of the capital, with individual stakes limited to 5 percent of a listed firm. Foreigners can collectively purchase only 30 percent of convertible bonds issued by small and mediumsized companies and only 5 percent individually. The purchase of other securities is subject to the approval by the Ministry of Finance and Economy (MOFE); (2) The issue abroad of won-denominated securities requires approval by the MOFE. The issue of foreign currency denominated securities must be reported to the MOFE.

Money market instruments. (1) Foreign investment funds approved by the MOFE can purchase domestic money market instruments. Other foreign institutions and individuals require the prior approval of the MOFE, (2) The issuance abroad of other securities like certificates of deposit in foreign currency denominations require the MOFE’s approval.

Mutual funds and collective investment securities. Purchases in the domestic market by residents are subject to the same rules as capital market securities. All other transactions between residents and nonresidents and issuance domestically or abroad is subject to the MOFE’s approval.

Derivatives. Foreign investment funds and foreign banks may purchase domestic instruments in Korea. Other transactions require MOFE’s approval. Residents can purchase derivatives through a foreign exchange bank, but issuance abroad requires MOFE’s approval.

Commercial credit. Certain forms of trade credits are allowed without prior approval; however, deferred payments for the imports of goods and export advances (except those by small and medium-sized firms) are subject to binding value limits. Export down payments up to 80 percent of the value are allowed for ships and plant building during production.

Financial credit. Foreign exchange banks can borrow from abroad. Credits from nonresidents to nonbank residents require prior approval by the MOFE. Foreign-financed, hi-tech companies can borrow up to 100 percent of the foreign invested capital with maturity limited to three years. Foreign borrowing with a maturity less than three years is governed by the Foreign Exchange Act. Residents cannot lend abroad without the approval of the MOFE.

Foreign direct investments. The establishment of foreign companies and bank branches is subject to approvals by the Bank of Korea and the MOFE. Inward investments are allowed subject to a notification requirement in all industries except those specified in a negative list accounting for 5 percent of all industrial sectors and 1 percent of the manufacturing sectors.

Provisions regarding commercial banks activities. Foreign exchange banks need to report foreign borrowing to the MOFE when the maturity exceeds one year and for amounts over $10 million. Open positions in foreign currencies are subject to the following limits: (1) the overall overbought position must be lower than 15 percent of the equity capital and the oversold position lower than 10 percent of the equity capital or $20 million, whichever is larger; (2) the spot oversold positions cannot exceed 3 percent of the equity capital or $5 million, whichever is larger.

Note: FDI = foreign direct investments; OIF = other capital inflows; PI = portfolio investments.Sources: Johnston and others (1997); and IMF, Annual Report on Exchange Arrangements and Exchange Restrictions.

Thailand adopted a quite aggressive policy of attracting foreign inflows, including through the provision of tax incentives, but liberalized capital outflows more gradually. The Thai authorities liberalized capital movements and exchange restrictions in successive waves from 1989 to 1992, including promoting access to Thai security markets. In Thailand’s case too, the general thrust of the regulatory framework did not differentiate between the maturity of the capital flows, per se, but did tend to favor inflows directly intermediated by the domestic banking system. With the establishment of the Bangkok International Banking Facility (BIBF) in 1992, the government tried to improve the access of domestic entities to international capital markets through the banking system, and this helped to channel short-term inflows through the banking system. The Bangkok International Banking Facility is a government-sponsored umbrella organization through which Thai banks can conduct their foreign borrowing and lending operations. While restrictions on foreign direct investment remained in place (as indeed they do for defined sectors in most OECD countries), significant liberalization, nevertheless, occurred in this area, especially for Indonesia and Thailand. In the latter case, tax incentives were available for majority foreign investments approved by the Board of Investment. The authorities subsequently pursued a policy of promoting foreign investments into the country, and security markets were also liberalized. Nevertheless, the inflows of foreign capital through the capital and money markets, controlled by the Security and Exchange Commission (SEC), lagged behind those intermediated through the banking sector.

Growth of Short-Term Liabilities

The overall picture from the above discussion is that the capital account regulations in the three countries were not directly biased toward short-term external borrowing to any great extent, except in one respect in the case of Korea. With that exception, where credit from or securities sales to nonresidents were permitted, the capital account regulations did not directly favor shorter-term over longer-term fundings. Perhaps more important, however, is the fact that the commercial banking system played a key role in channeling foreign capital inflows, in Korea and Thailand in particular; and that in these two countries, the capital account regulations did bias flows toward the local banking system. As noted above, the restrictions on direct external borrowing by nonbank residents in Korea, and the preferential treatment of the BIBF in Thailand are major examples of these biases. This institutional bias seems to have indirectly favored short-term borrowing rather than longer-term flows, since banking institutions normally tend to rely on shorter-term finance. The heavy reliance on short-term flows also reflected inadequacies of risk assessment, management, and control.

The emphasis on bank-intermediated flows was, on the surface at least, consistent with the existing financial structure in these economies. Commercial banks dominated financial intermediation in all three countries, and the development of other financial markets was more gradual. For example, the bond markets in Indonesia and Thailand barely reach 10 percent of GDP, while in Korea it is currently equivalent to 50 percent of GDP, but with most corporate bonds guaranteed by financial institutions.54 Moreover, foreign lenders may have generally preferred to channel their loans through the banking sector to the extent that they saw it as less risky, and in view of the difficulty in assessing individual corporations because of more limited information on their balance sheets and prospects. Perhaps even more important in this regard is the possibility that banks were seen to be not just supervised, but backed more directly by the authorities.

As a number of economists have stressed, there may well have been a strong element of implicit government guarantee associated with banks in these countries.55 To the extent such a perception was indeed held, both by the banks themselves and lenders to banks, this may have been an important factor in the lack of adequate currency and liquidity risk management in the banking sector. It is likely that the institutional biases in the capital account regulations interacted with these factors to exacerbate the buildup of inadequately managed short-term liabilities. The nature of the Basle capital adequacy requirements for OECD creditor banks might also have played some role here. While lending to other OECD banks is given a risk weight of 20 percent for capital adequacy purposes, irrespective of the term of the loan, lending to non-OECD banks carries this weight only for loans of under one year, while longer-term loans carry the full 100 percent risk weight. Since all lending to corporations also carries the same 100 percent weight, there is also an incentive to favor (short-term) loans to banks, rather than nonbanks in non-OECD countries.

A second factor behind the buildup of short-term debt is that the underlying riskiness of the investments in these countries may have led to some preference by lenders for shorter maturities. Inter alia, the lack of well-developed bond markets probably made pricing of longer-term debt more difficult, while residual uncertainty about the legal and financial infrastructure and relatively costly monitoring of local developments are typical factors that would tend to encourage external creditors to favor shorter-term investments over longer-term ones. To some extent, this effect might have declined over time, as apparently robust macroeconomic trends continued to obscure underlying weaknesses. Nevertheless, as the outlook for either the specific borrowing institution or the country more generally became more uncertain, the tendency to prefer shorter-term exposure would have reasserted itself. In such a situation, the interest rates charged by lenders typically increase to reflect the higher risk or uncertainty premium, but the premium itself typically tends to rise more than proportionally with the maturity of the loan. This is particularly so when hedging instruments for foreign exchange risks are limited to very short-term maturities.

In these circumstances, the borrower would be squeezed into progressively shorter-term contracts, and could face difficulties in rolling over its obligations should conditions continue to deteriorate. Such a buildup of short-term liabilities can occur regardless of the regulatory environment, in view of the scope to effectively redenominate longer-term contracts into shorter-term ones, through derivative and other transactions. Though it is clear that relatively new and innovative instruments such as credit derivatives and options can be used to achieve this effect, it can also be done in much more basic ways. For example, as the IMF’s 1995 International Capital Markets report noted (p. 96), a “synthetic sale” of direct investments can be created relatively quickly and cheaply by obtaining a bank loan in domestic currency.

Developments in Indonesia seem to confirm a general market preference for shorter-term credit, except perhaps for the strongest and most sizable borrowers. Indonesia’s capital account regulations contained neither an obvious direct bias toward shorter-term rather than longer-term flows nor a bias toward bank-intermediated inflows (bank borrowing was more restricted than private corporate borrowing, in fact). Nevertheless, to the extent that larger private Indonesian corporations had close links of various sorts with the authorities, moral hazard issues (a perception of official support) may well have played a role in the excessive and inadequately managed external borrowing, similar to that in the buildup of bank debt in Korea and Thailand.

Beyond the underlying reasons for market preferences for shorter-term or bank-intermediated external borrowing, or both, and beyond any additional biases that may have been created by capital account regulations, a third important factor in the buildup of shorter-term external debt in the Asian crisis countries has been the incentives created by the macroeconomic environment. The three countries considered here all quite actively pursued either nominal or real exchange rate targets (a de facto peg in Thailand’s case), while orienting interest rates toward internal stability objectives (see Johnston, Darbar, and Echeverria, 1997). This resulted in significant periods of relatively high interest rate differentials, especially at the shorter end, which encouraged capital inflows that were substantially short term, and in particular in the form of foreign currency borrowing. The latter was largely unhedged because of expectations that relatively stable exchange rates would be maintained indefinitely.

Box 6.Thailand: Capital Account Liberalization, 1985–96, and Capital Controls, 1997

Sequence of Capital Inflow Liberalization, 1985–96

1985 OIF: The Bank of Thailand requires every individual to declare within seven days every loan obtained from abroad.

1986 OIF: Tax on dividends and capital gains earned by nonresidents on mutual funds investments is lowered.

1989 OIF: The first round of foreign exchange liberalization is enacted. In addition to a more liberal regime on small foreign exchange transaction, the law allows commercial banks to sell foreign exchange and transfer bahts into transferable nonresidents’ baht accounts. They can be held by foreign investors and foreign borrowers registered with the Bank of Thailand to deposit funds originated from sales of shares or dividend receipts.

1990 OIF: The second round of liberalization gives commercial banks the authority to approve the repatriation of interest payments, transfers for the repayment of foreign loans, and transfers into and from nonresidents’ baht accounts. The limit on daily transfers to nonresidents’ accounts is increased to B5 million.

PI: Three new closed-end mutual funds are approved to attract foreign capital with a maturity of 25 years.

1991 PI: The repatriation of investment funds, loan repayments, and interest payments by foreign investors is admitted without restrictions. The tax on dividends remitted abroad is lowered from 20 percent to 15 percent.

FDI: The Investment Promotion Act is amended to stimulate foreign investments. One hundred percent foreign ownership of export firms is permitted. Joint ventures and foreign ownership in certain projects is limited to 49 percent.

1992 OIF: The government establishes the Bangkok International Banking Facility (BIBF); participating commercial banks are allowed to accept deposits or borrow in foreign currencies from abroad and lend in Thailand. Moreover the banks participating in the BIBF are allowed, among other things, to conduct cross-currency operations, guarantee debt or letters of credit in foreign currencies, and manage offshore loan procurement. BIBF commercial banks are granted a corporate tax reduction from 30 percent to 10 percent, as well as other breaks.

PI: To promote foreign investments in the stock market, several taxes on dividends, interests, and capital gains obtained by nonresidents are reduced.

FDI: Requests for foreign ownership are delegated to ministries that decide on a case-by-case basis. Tax incentives are granted to projects in special sectors.

1993 OIF: Rules governing the issuance of debentures in foreign countries are set with the intent of attracting funds.

1994 OIF/PI: Foreign currency borrowed by residents through the BIBF and by nonresidents through authorized banks can be deposited in foreign currency accounts.

1995 OIF: The Provincial International Banking Facility (PIBF) is established under the same conditions as the BIBF, but with the possibility of lending domestically in baht. Restrictions are imposed on foreign currency bank lending for nonpriority projects. A 7 percent reserve requirement is imposed on nonresident baht accounts and on finance companies’ promissory notes.

PI: The Bank of Thailand requires banks to submit detailed information on risk control measures on foreign exchange operations including derivatives. Finance and securities firms’ daily net long and short open positions on exchange rates are lowered to 25 percent and 20 percent of capital, respectively. These limits for commercial banks are 20 percent and 15 percent of the capital or $5 million, whichever is larger. Criteria for the calculation of the net open positions are toughened.

1996 OIF: A 7 cash percent reserve requirement is imposed on nonresident baht accounts with maturities of less than one year and on foreign borrowing by commercial banks and BIBF banks (reduced to 6 percent in 1997). Exceptions include international trade financing, nonresident deposits at BIBF banks, overdrafts and liabilities from currency and derivatives trade. The Bank of Thailand tightens the limits on banks net open foreign exchange positions by excluding loans to high-risk sectors from banks’ assets. The preferential tax rate on BIBF profits is reduced. The BIBF is allowed to manage liquidity risks through buying forward or option contracts against the baht.

A Synopsis of Regulation on Capital Inflows in Mid-1997

Thailand’s system of capital controls is subject to numerous limitations.

Capital and money market instruments. The sale or issue of long-term and short-term securities in the domestic market is under the jurisdiction of the Security and Exchange Commission (SEC) whose approval is required. Nonresidents are subject to the same rules as residents. Foreign equity participation is limited to 49 percent of Thai corporations and 25 percent of the paid-up capital of financial institutions, banks, and asset-management companies. Stricter limits apply to individual stakes. The issue abroad of capital market securities by residents is subject to SEC approval and securities cannot be traded domestically. Money market instruments cannot be sold or issued abroad.

Collective investments. Nonresidents can freely buy mutual funds domestically, but the launch of mutual funds in domestic and offshore markets is subject to the SEC approval.

Derivatives. A security company cannot trade in derivatives unless explicitly allowed by the SEC. Other subjects need the approval by the Bank of Thailand. Issues by nonresidents of equity-related instruments and bonds are subject to SEC approval.

Commercial credits. The regime is rather liberal.

Financial credit. Residents can freely take loans from abroad.

Direct investments. Projects exceeding $10 million are subject to approval by the Bank of Thailand. Foreign capital can be freely imported into the country, but proceeds must be surrendered to authorized banks or deposited in foreign currency accounts within 15 days.

Regulations regarding commercial banks’ activities. Only 50 percent of commercial lending in foreign exchange to particular sectors can be counted in the banks’ assets. Nonresident baht accounts with less than one-year maturity are subject to a 7 percent reserve requirement. Negative balances on foreign currencies positions cannot exceed 15 percent of the capital and positive positions cannot exceed 20 percent.

Note: FDI = foreign direct investments; OIF = other capital inflows; PI = portfolio investments.Sources: Johnston and others (1997); and IMF, Annual Report on Exchange Arrangements and Exchange Restrictions.

The main implications of the above are, first, that the sustain ability of inflows depends on the efficient use of the funds, not least as regards the prudent management of the risks involved with external funding. Specifically, the channeling of funds through banking sectors where risk management was relatively weak and unsophisticated, and where there were distorted incentive structures associated with excessive lending to interrelated entities and moral hazard, ultimately brought this efficiency into question. The rapid bank credit expansions strained credit assessment procedures and resulted in banks channeling newly borrowed funds into unprofitable or speculative activities such as real estate lending, while the prudential supervision framework was not strong enough to curtail these trends effectively. And where external borrowing by corporations is guaranteed by financial institutions (as in Korea), much the same issues arise. A major concern is, therefore, to ensure that commercial banks comply with appropriate prudential standards, including procedures for the management of asset and liability (liquidity) risks, and that banks face appropriate incentive structures (e.g., moral hazard is avoided as much as possible, and appropriate controls on lending to interrelated entities exist). Overall, currency mismatches (open foreign exchange positions) were not a significant issue in Asian banks, but liquidity mismatches (arising from excessive maturity transformation) and inadequate credit assessment were.

Second, appropriate risk-management incentives are also fundamental to avoiding excessive direct external borrowing by nonbank corporations. Prudential measures applied to financial institutions may have some indirect effect here (to the extent that corporations borrowing offshore also borrow from local banks). But more central is the need to avoid implicit government guarantees of corporations and associated moral hazard, as with the banks themselves. In addition, exchange rate regimes that avoid excessive rigidity tend to create a much greater awareness, both among banks and nonbanks, of the need to manage exchange rate risk.

Third, increasing recourse to shorter-term debt can be an indicator of growing uncertainty about economic prospects. The monitoring and disclosure of such debt is, therefore, important, both as a guide to domestic macroeconomic management and as an input into better informed decision making by international financial markets. However, because of the scope to redenominate longer-term debt as short-term debt, statistical measures of short-term liabilities may not always be easy to interpret, particularly in the lead up to a crisis when private lenders may seek to change quickly the composition of their assets.

Fourth, where restrictions remained on capital market issues abroad by resident corporations and on nonresident purchases of securities on the local market, it might well have been desirable to speed up the development of the longer-term security markets both through domestic capital market reforms (including greater disclosure of information by borrowers), and by removing the capital controls. With an appropriate public sector and private sector relationship that avoids moral hazard, allowing corporations access to the international bond markets could have an important market disciplining effect, since such access would require meeting higher financial disclosure standards. More broadly, policymakers need to be careful when liberalizing capital flows so that they do not unduly favor some types of channels or instruments over others—a less-than-level playing field could skew the incentives for different groups in ways that are unhelpful for prudent competition and sound risk management.

Fifth, it is not clear that the reintroduction of controls helped much, either before the crisis, or especially once the crisis had begun. Thailand and Indonesia resorted to capital controls in an effort to reduce inflows before the crisis, and to restrict outflows during the crisis (see appendix at the end of this section). Outside the three main crisis countries, the Philippines took a number of successive measures to tighten certain capital controls from mid-1997, while Malaysia took one measure to tighten nonresident access to swap transactions. The Phillippines measures are seen as temporary, and the authorities have indicated they would be phased out. The more recent controls generally aimed to restrict forward or derivative transactions and their financing, but during the crisis they sent a negative signal to the market discouraging further capital inflows at a critical juncture. It is notable that most of the new controls introduced in Thailand were removed again in early 1998, while in Korea the emphasis was solely on liberalizing measures throughout the crisis. In Indonesia too, additional liberalization measures were taken in addition to the single restrictive measure. As regards capital controls that seek to shift the composition of capital inflows to longer-term inflows, Chile is often cited as a country that has successfully used capital controls to limit short-term inflows. While the assessment of the effectiveness of controls is difficult, these particular controls, like others, appear to have been effective mainly only as a temporary measure: short-term inflows for Chile declined in the year that such measures were introduced or intensified, only to increase in the following year. The different performance in Chile compared with East Asia may be attributable to the fact that (1) Chile had already addressed serious banking sector weaknesses following an earlier banking crisis; and (2) Chile’s somewhat more flexible exchange rate policy was rather more attuned to dealing with significant capital inflows (see Johnston, Darbar, and Echeverria, 1997).


The Asian country experiences confirm that it is necessary to approach capital account liberalization as an integral part of more comprehensive programs of economic reform, coordinated with appropriate macroeconomic and exchange rate policies, and including policies to strengthen financial markets and institutions. The question is not so much one of the capital liberalization having been too fast, since some of the countries in Asia have followed a very gradualist approach. Rather, it is more to do with the appropriate sequencing of the reforms and, more specifically, what supporting measures need to be taken.

The liberalization of inflows through the banking system clearly needed to be more fully supported with reforms to encourage stronger management and supervision in that sector. There was also clearly a need to avoid moral hazard problems as much as possible for corporations as well as banks; and, in the more liberal market environment, to have adequate transparency and improved information flows so that there could be informed market decision making, which would in turn reduce the risks of sharp shifts in market sentiment in response to uncertainties. There was also a need to develop the markets for hedging and managing risks, which are an essential part of efficient market-based financial systems, and which were notably lacking in many Asian economies.

Finally, it is also necessary for policymakers to recognize that with more open capital accounts, a country’s interest rate policy will be constrained by its choice of exchange arrangement and vice versa. Greater attention has to be given to an appropriate, internally consistent mix of macro policies to avoid creating incentives for excessive short-term capital inflows, and the risk of subsequent sharp reversals.

Appendix. Changes in the Exchange System in Five Asian Economies, June 1997-March 1998


  • Bank Indonesia widened its dollar-rupiah intervention band to 12 percent from 8 percent, creating a wider band at 2,374–2,678 rupiah, compared with the previous band of 2,430-2,622 rupiah. (July 11, 1997)
  • Forward foreign currency trading by domestic banks with nonresidents was limited to $5 million a customer. Each bank’s net open position in the forward market was also limited to $5 million. (July 1997)
  • The authorities abandoned the policy of maintaining the currency within a set trading exchange rate band and adopted a free floating exchange rate arrangement. (August 14, 1997)
  • The 49 percent limit on foreign holdings of listed shares was abolished. (September 1997)
  • The government removed all formal and informal barriers to foreign investment in palm oil plantations. At the end of March 1998, the ban on exports of crude palm oil was replaced with an export tax of 40 percent. As a temporary measure aimed at stabilizing domestic prices, the authorities asked government producers to direct their output to the domestic market and that four major, private producers reserve a proportion of their production for the domestic market. (February 1, 1998)
  • The authorities lifted restrictions on branching of foreign banks. (February 1, 1998)
  • The authorities lifted restrictions on foreign investment in retail trade and wholesale trade. (March 15 and April 15, 1998)


  • Foreign investors were allowed access to non-guaranteed bonds of small and medium-sized companies (maturities over three years and up to 50 percent of the amount listed) and of conglomerates (up to 30 percent limit of issue or a 6 percent individual limit). (June 1997)
  • The Ministry of Finance and Economy abolished regulations on the usage of long-term loans with maturities of over five years, brought into the country by foreign manufacturers. (July 1997)
  • The debt limits on corporations making overseas direct investments, whereby 20 percent of investments exceeding $100 million had to be financed by a firm’s own capital, were abolished. (August 1997)
  • The ceiling on export advances was raised from 20 percent to 25 percent in February 1997 and was abolished in August 1997. (August 1997)
  • The period for importing on a deferred payments basis was lengthened by 30 days for raw materials used in manufacturing exports commodities for SMEs in April 1997. The period was extended for large enterprises as well in August 1997. (August 1997)
  • Authorities raised the ceiling on aggregate foreign ownership of listed Korean shares from 26 percent to 50 percent and the individual ceiling from 7 percent to 50 percent; eliminated all limits on foreign investment in non-guaranteed bonds issued by small and medium-sized companies; and allowed foreign investment in the guaranteed corporate bond market (for maturities greater than three years) with limits at 10 percent and 30 percent for individuals and in aggregate, respectively. (December 11, 1997)
  • Authorities raised aggregate limits for foreign investment in non-guaranteed corporate (convertible) bonds from 30 percent to 50 percent. (December 12, 1997)
  • Korea abandoned the fluctuation margins for the exchange rate maintained under the managed floating system and floated the won. Previously, the exchange rate against the U.S. dollar was allowed to float within specified margins around the previous day’s weighted average exchange rate in the interbank market. The margins were widened five times between March 1990 and November 1997, with the most recent margin at ±10 percent. (December 16, 1997)
  • Authorities allowed foreigners to invest in government and special bonds, up to the aggregate ceiling of 30 percent, and eliminated all individual limits for foreign investment in corporate bonds. (December 23, 1997)
  • Restrictions on commercial bank ownership have been eased to encourage foreign investment in domestic financial institutions. The financial sector legislation passed on December 29, 1997 abolished the 4 percent ownership limit for commercial banks. Purchase of bank equity by foreign banks is now permitted without limit, but requires approval at three stages: 10 percent, 25 percent, and 31 percent. Domestic ownership above 4 percent is permitted provided that an equal or larger share is held by a foreign bank. (December 29, 1997)
  • Authorities eliminated all foreign investment ceilings for the government, special, and corporate bond markets, including for maturities of less than three years; lifted the restriction on foreign borrowing of over three years’ maturity; and raised the aggregate ceiling on foreign investment in Korean equities to 55 percent. (December 30, 1997)
  • Authorities removed restrictions on corporate borrowing from abroad up to $2 million for venture companies. Authorities opened up money market instruments issued by nonfinancial institutions (commercial papers, commercial bills, and trade bills) to foreigners without limits. (February 16, 1998)
  • Authorities allowed foreign banks and brokerage houses to establish subsidiaries. (March 31, 1998)


  • The Bank Negara imposed a $2 million limit on outstanding noncommercial ringgit offer-side swap transactions per nonresident customer to limit speculators’ access to the ringgit.56(August 4, 1997)
  • The government raised the quota on sales of high-end condominiums to foreigners from 30 percent to 50 percent. In addition, foreigners were allowed to acquire 2 units of condominiums (up from 1 previously). (October 1997)


  • The 30 percent cover requirement for foreign currency liabilities of foreign currency deposit units (FCDUs) may be maintained in the following liquid assets: (1) due from other banks; (2) interbank loans maturing within one year; (3) unmatured export bills purchased, except those classified by the Central Bank of the Philippines (BSP) as bad or uncollectible; and (4) readily marketable debt instruments denominated in foreign currency. (June 6, 1997)
  • The authorities announced a new exchange arrangement under which they will float the peso to allow the peso-dollar rate initially to find its own level, and then move within a target band sufficiently large to permit market forces to operate fully. Soon after the floating of the peso, the market was unexpectedly closed when the Bankers’ Association of the Philippines invoked an old rule that trading would stop when the exchange rate moves by more than 1.5 percent. This rule was eliminated on July 14, 1997. (July 14, 1997)
  • The central bank modified the allowable net open foreign exchange positions of banks. The overbought limit was reduced from 20 percent of capital to 5 percent or $10 million (whichever is lower) and the oversold limit was raised from 10 percent to 20 percent of capital. (July 22 and July 30, 1997)
  • All forward contracts to sell foreign exchange to nonresidents (including offshore banking units) with no full delivery of principal, including cancellations, rollovers or renewals thereof, shall be submitted for prior clearance to the central bank. (July 22, 1997)
  • Banks are required to submit an inventory of outstanding forward contracts with nonresidents (including offshore banking units) to sell or purchase foreign exchange with no full delivery of principal. (July 22, 1997)
  • The central bank announced a three-month suspension of the local right to sell dollars through nondeliverable forward contracts57 (NDFCs) from onshore banks to offshore counterparties. (July 22, 1997)
  • Stock dividends accruing to BSP-registered foreign investments would no longer be issued a new Bangko Sentral Registration Document (BSRD). Whenever the stock dividends are sold and the proceeds are outwardly remitted through a remitting bank other than the custodian bank, the BSRD of the mother shares, to which the stock dividends accrued, shall be the BSRD quoted in the BSRD letter-advise required to be issued under existing rules. (July 24, 1997)
  • Banks whose unencumbered foreign currency cover for liabilities in the FCDU fell below the minimum 30 percent were given a period of six months to comply. (July 25, 1997)
  • The central bank temporarily restricted access of six foreign banks to the spot foreign exchange market. These banks were permitted limited reentry on August 13, 1997. (July 28, 1997)
  • The amount of foreign exchange that can be sold (over-the-counter) without documentation and prior approval was reduced from $100,000 to $25,000. Foreign exchange subsidiaries were exempted from this ruling from September 18, 1997, provided that they sell dollars only to authorized agent banks. (July 30, 1997)
  • The central bank met foreign currency needs of foreign banks and banks with maturing NDFCs on a forward basis. These contracts have maturities of 30-90 days. (July/August/December 1997)
  • On August 20, 1997, the central bank stopped providing peso liquidity through the overnight lending window. After October 8, 1997, only banks with a reserve deficiency and squared foreign exchange positions can tap the facility. On November 5, 1997, the criteria were relaxed to allow banks with slight overbought positions (2.5 percent) to borrow from this window. (August 20, 1997)
  • Foreign exchange subsidiaries and affiliates of banks are considered as part of the banking system and, therefore, subject to all foreign exchange rules and regulations applicable to all banks. (September 5, 1997)
  • The central bank required commercial banks to submit daily their foreign exchange position, including transactions made by their respective subsidiaries and affiliates. (September 10, 1997)
  • An applicant’s income tax return is required to be submitted to support an application to purchase foreign exchange not exceeding $6 million for outward investment that does not require prior central bank approval. (September 11, 1997)
  • An investment funded by foreign exchange deposited in an investee’s FCDU account for investment purposes shall be issued a Bangko Sentral Registration Document as evidence of central bank registration only after the amount deposited had been converted into pesos as certified by the bank maintaining the said FCDU account. (September 16, 1997)
  • Foreign exchange subsidiaries and affiliates of banks are discouraged from taking net foreign exchange positions. Whatever net foreign exchange positions are maintained by them are to be consolidated into the total net foreign exchange position of the respective banks with whom they are affiliated. Foreign exchange corporations, subsidiaries, and affiliates shall not (1) sell foreign exchange to nonresidents; and (2) sell foreign exchange to resident financial institutions other than authorized agent banks of the central bank and bank-affiliated foreign exchange corporations. (September 17, 1997)
  • As a general rule, foreign exchange subsidiaries and affiliates of banks may sell foreign exchange to residents. However, they cannot sell foreign exchange to resident financial institutions other than authorized agent banks of the central bank and bank-affiliated foreign exchange corporations. (October 2, 1997)
  • The Bankers’ Association of the Philippines, which operates the foreign exchange market, introduced a 4 percent volatility band (comprising three tiers) in an attempt to stabilize the market. The first band was set at ±2 percent of the reference rate for the peso/U.S. dollar exchange rate of the previous day. If the limit of the band is reached, trades cannot be executed outside the band during the following half hour. Thereafter, the band is widened to ±3 percent. If the limit of the wider band is reached, trades cannot be executed outside the band for one hour. Finally, the width of the band is extended to ±4 percent. If this limit is reached, trades cannot be executed outside the 4 percent band for the remainder of the day. In the first week of operation the limits were reached on several occasions, and in both directions. (October 7, 1997)
  • Banks are required to submit, to the Foreign Exchange Department of the central bank, a report of all forward sales contracts entered into with nonresidents. (October 9, 1997)
  • All commercial banks are required to report to the Foreign Exchange Department of the central bank all cancellations or nondelivery of outstanding forward sales contracts. The cancellations will have to pass the following tests: (1) eligibility, (2) frequency, (3) counter party, and (4) mark-to-market. Failure to satisfy the enumerated tests will result in the exclusion of the forward sales contracts in the computation of the consolidated daily foreign exchange position of banks, where sanctions or monetary penalties, or both will be imposed in the event commercial banks should exceed the prescribed limits in the overbought-oversold position as a result of the recomputation. (October 24, 1997)
  • The central bank and commercial banks agreed to set up a pool of $ 150 million or more a day to restore supply in the interbank market. Banks contribute a minimum of $50 million in the morning (at the previous day’s rate), and the central bank matches that on a 2-for-1 basis. The pooled resources are then sold back to banks at market rates during the day, for sale to banks’ corporate clients. (December 17, 1997)
  • A temporary onshore nondeliverable forward (NDF) facility was set up to ease the pressure on the spot market. Corporations with future foreign exchange obligations can enter into a NDF contract with a bank, which in turn covers the forward contract with the central bank. The central bank takes the foreign exchange risk, while the bank takes the credit risks. (December 17, 1997)
  • All companies that have central bank registered foreign exchange obligations that are unhedged are able to enter regular forward contract or NDFCs with commercial banks. In such cases, banks can enter an NDFC with the central bank to cover their position. The provision was extended in January 1998 to (1) exporters; (2) commercial banks who bring foreign currency from offshore and use this currency to buy pesos; and (3) oil companies, up to an amount equivalent to their oil imports. (December 22, 1997)
  • Banks are required to maintain at all times a 100 percent cover for their FCDU liabilities, where at least 30 percent of the cover requirement shall be in the form of liquid assets. (December 24, 1997)
  • Two additional FCDU asset accounts may be included as among the eligible asset cover: (1) foreign currency notes and coins on hand, and (2) foreign currency checks and other cash items. (December 24, 1997)
  • Authorities introduced a 7.5 percent tax on interest income of foreign currency deposits of residents. (December 1997)
  • A law was passed that enables investment houses to open up further to foreign investment by raising the foreign equity participation from 49 percent to 60 percent voting shares. (Late 1997)
  • The authorities allowed the peso to float more freely against the dollar by lifting the volatility band system that was introduced on October 8, 1997, in an attempt to stabilize the market. The band was widened to ±6 percent on January 7, 1998, with the base changed from the afternoon weighted average to the closing rate in the previous day. (March 16, 1998)


  • The Bank of Thailand introduced a series of measures with respect to transactions with foreign financial institutions to limit capital outflows. The temporary measures, which did not apply to foreign exchange transactions with genuine underlying business related to the export and import of goods and services, direct investment, and various types of portfolio investment in Thailand, included measures (1) to limit transactions with nonresidents that could facilitate the buildup of baht positions in the offshore market, including direct loans, overdrafts, currency swaps, interest rate swaps, forward rate agreements, currency options, and interest rate options; (2) to limit outright forward transactions in baht with nonresidents; (3) to limit selling baht spot against foreign currencies to nonresidents; (4) to require payment in U.S. dollars for any purchase from nonresidents before maturity of baht-denominated bills of exchange, promissory notes, certificates of deposit, and other debt instruments such as debentures and bonds, at the exchange rate prevailing in the domestic market on the purchase date; and (5) to submit daily reports of foreign exchange transactions with nonresidents, including all spot, forward, and swap transactions, as well as purchase of debt instruments from nonresidents, to the Bank of Thailand. (May-June 1997)
  • Thailand tightened exchange restrictions by temporarily requiring that the baht proceeds from sales of stocks by nonresidents be converted into foreign currency at the onshore exchange rate. (June 1997)
  • The Thai authorities announced that the baht’s exchange rate will be managed within an unpublished band, whereby the value of the baht would be determined by market forces within the newly established band. The authorities also announced that they will try to keep the exchange rate within this band centered on a new, wider currency basket and that a baht-dollar reference rate would be announced daily, and it would be based on the baht’s trading average of the previous day. In addition, authorities introduced a two-tier currency market that creates separate exchange rates for investors who buy baht in domestic markets and those who buy it overseas. (July 2, 7997)
  • The exchange control regulation was modified as follows: (1) foreign exchange earners were allowed to deposit their foreign exchange received in their foreign currency deposit account only if they have obligations to pay out such amounts to nonresidents abroad within three months from the deposit date;58 and (2) exporters receiving packing credit from the Bank of Thailand through the Export-Import Bank of Thailand were required to sign a forward contract to sell their foreign exchange with a commercial bank selling promissory notes to the Export-Import Bank. The forward contract must specify the amount of foreign currencies in terms of baht, which cannot be less than 50 percent of the face value of the promissory note. (September 8, 1997)
  • The authorities announced the liberalization of foreign ownership rules. Foreign investors were allowed full ownership of local financial institutions for up to 10 years. (October 2, 1997)
  • The authorities unified the onand off-shore exchange markets by lifting the exchange and capital controls that were imposed in mid-1997 to stem speculative pressures on the baht. The authorities replaced the outright prohibition on baht lending to nonresidents with a B 50 million limit per counterparty not having an underlying trade or investment transaction. (January 1998)

For a more detailed discussion of the sequencing experience in these three countries, along with Chile, see Johnston and others (1997).


For some further detail, see Park (1998).


By comparison, the bond market accounts for 110 percent of GDP in the United States, 90 percent in Germany, and 75 percent in Japan.


See, among others, Krugman (1998).


The Malaysian authorities see the intention of this measure to allow domestic interest rates to be more reflective of domestic conditions rather than to curb speculative pressures.


Nondeliverable forward contracts are similar to regular forward contracts, with the exception that they are rolled over at maturity, with net settlement of mark-to-market value in peso at the date of maturity so that no foreign currency changes hands.


Under the previous regulation, deposits in the foreign currency account could be made irrespective of the proof of obligation. The limits on the outstanding balances of all foreign currency accounts remained at $500,000 for individuals and $5,000,000 for corporations.

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