The new currency-control measure by the Bank of Thailand (BOT) has placed Thai stocks at risk of being dropped from international equities indexes like the Morgan Stanley Capital International (MSCI) Index, which international investors use as an indicator for their investment decisions.

However, international credit-rating firms said the measure would not have an immediate impact on Thailand's credit rating.

Yesterday, the Stock exchange of Thailand (SET) Index plunged 14.84 per cent, the biggest one-day fall in the Thai stock market's history, to close at 622.14 points, the lowest in two years.

The SET had to impose its first-stage circuit breaker - a trading halt for 30 minutes at 11.30am - and almost had to impose its second-stage breaker shortly before 3pm, when the SET Index lost almost 20 per cent. The market, however, soon rebounded.

Global index compilers Barra and FTSE said they were studying Thailand's new currency-control measure, requiring financial institutions to hold 30 per cent of any foreign-currency inflows, except those related to exports, for one year. The measure is meant to curb the soaring baht.

"We are monitoring it very closely. Obviously we need to gather all the facts if we are going to take any action," Chin-Ping Chia, MSCI Barra's head of Asian research, was quoted by Reuters as saying yesterday.

FTSE also said it is seeking more information. "We are looking into the situation, and we will be speaking to the relevant parties," FTSE Asia-Pacific research manager Sandra Jim was quoted by Reuters as saying.

ABN Amro Asia Securities (Singapore) said in its recent report there was a real possibility Thailand's weighting in stock indexes, such as the MSCI, would be reduced or even removed, due to the impact of the central bank's latest measure to curb baht speculation.

Thailand has a 2.5-per-cent weighting in MSCI Asia excluding Japan, or 2.8 per cent of MSCI-Far East excluding Japan. Year-to-date foreign net inflow is about US$3 billion (Bt108 billion) compared with SET market capitalisation of about $144 billion. If the period is extended to between January 2005 and November 2006, net foreign buying is about $6.3 billion.

Malaysia was removed from the MCSI when that country imposed restrictions on share investment after the Asian financial crisis 1997.

"However, over the longer term, we think that a potentially negative impact of the measures on real foreign investment will dampen our positive view on the Thai economy. This will likely depress Thai yields beyond the near-term market reaction," ABN Amro said.

DBS Bank said in its research that the scope for a follow-through from yesterday's selling has the potential to send the baht exchange rate lower, to 37 to the dollar.

"Longer term, we believe the central bank is still managing the baht on a trade-weighted basis. This would keep the baht appreciating as long as it is in line with the broad trend for a lower dollar against Asian currencies," DBS said.

Meanwhile, the central bank yesterday allowed foreigners to keep more baht in their

 non-resident baht accounts, in order to provide room for them to maintain their baht liquidity after the new anti-speculation measure made them shift capital out of the stock market.

The BOT late in the afternoon cancelled the ceiling for outstanding baht liquidity per person in non-resident baht accounts, which had earlier been set at Bt300 million. The ceiling was set because the BOT would like to reduce baht liquidity in foreigners' hand.

However, the central bank announced the cancellation of the ceiling, in order to allow foreigners to maintain their baht liquidity after exiting the stock market.

Standard and Poor's Rating Services yesterday said Thailand's imposition of capital controls to curb its currency appreciation would not have an immediate impact on the country's credit ratings, but the new measure would have long-term economic costs.

The measure will slow foreign capital inflows, which could reverse the country's current-account surplus and hurt the economy, said Kim Eng Tan, the primary analyst for Thailand at S&P.

"It has been very effective in stopping speculative inflows," said Tan, based on the market's performance yesterday. "Definitely, it will work, but it carries long-term costs which have to be balanced with short-term benefits."

Fitch Ratings also said Thailand's credit rating was unaffected by the country's decision to control capital inflows.

James McCormack, a senior director and head of Asian sovereign ratings at Fitch, said Thailand's public finances and ability to generate foreign exchange would remain the same despite the introduction of the measure aimed at curtailing speculative inflows that have pushed its currency to a nine-year high.

Phatra Securities said the impact would be more severe than the market might expect and noted it would apparently be applied to the equity market, unlike past experience in Latin America, where foreign loans and fixed-income investments were covered.

Given this, the negative impact will not be confined to the Thai equity market, but instead will affect the overall economic outlook for some time, Phatra said.

CB Richard Ellis managing director Aliwassa Pathnadabutr said foreign investors were worried about the intervention measures, because they were unclear about the implications that the BOT's reserve requirement on short-term capital inflows would have for the property market.

"I had a call from some major developers asking about the impact of the announcement. There was no specific reference to property in the announcement, and it's not clear how the regulations will affect foreign buyers of condominiums. It is important the Bank of Thailand clarify how the regulations will affect foreign purchasers of condominiums," said Aliwassa.

Boon Vanasin, a director of Piyavate Hospital and owner of 20 hospitals under the Thonburi Hospital Group, said the Bank of Thailand should not have launched a measure that frightened foreign investors.

He said they should have thought of other measures, such as increasing interest rates or taxes that could control baht appreciation, but more gently and more slowly than capital controls.

It would be dangerous for Thailand if foreigners thought the country would suspend or eliminate its free-financing policy, he added.