Tax Cuts Aim To Stir Foreign Interest In Thai Bond Market

by Mary Swire, Tax-News.com, Hong Kong

10 September 2003

The Thai government's decision to introduce a tax break for non-residents investing in local bonds is unlikely to produce the desired effect of developing the market, according to experts, who also suggest that the measure may increase volatility and currency speculation.

Last week, the Finance Ministry announced that it will waive the 15% withholding tax on interest and the 10% capital gains tax for non-residents, in a bid to attract foreign investors into the market. However, Supakorn Soontornkit, a senior strategist at MFC Asset Management, told the Bangkok Post that with yields of just 1%, the tax incentives are not likely to tempt overseas players into the market.

"A government yield of 1% is not attractive. But if converted in US dollar terms, a 4% return might be attractive. Returns in US dollars is what global investors are concerned about," Dr Supakorn suggested, adding that investors wil be more interested in exploiting currency differentials given the recent apprciation of the baht.

"The tax exemption might give foreign investors greater opportunity to speculate in the baht, resulting in greater yield volatility in the bond market," Dr Supakorn continued, adding that the government should draft an additional rule that investors must hold bonds for a period of six or twelve months.

Nevertheless, he went on to suggest that the tax cut should certainly play a part in boosting demand for baht denominated paper from overseas. "The advantage of waiving withholding taxes is that it will create added demand for baht-denominated bonds. With increased demand from foreign investors, interest rates can stay at low levels, helping save funding costs for the private sector and the government," the MFC strategist observed.

According to Supakorn's estimate, at present foreign investors represent a mere 0.5% of the Thai bond market.

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