Earlier yesterday, Deputy Prime Minister and Finance Minister Pridiyathorn Devakula was still defending the central bank's capital control measures, reasoning that the country's productive sector must be saved even if that could mean a major setback for the stock market. Thailand's export industry has seen its profit margin dwindling while being squeezed out of the international market by excessive appreciation of the baht, which overshot the country's economic fundamentals.

By the end of a turbulent day yesterday, Pridiyathorn grudgingly conceded that the cure was probably worse than the disease. Thailand's credibility as an attractive venue for foreign investment had already been seriously damaged when the finance minister and the Bank of Thailand realised their costly mistake.

The authorities then backtracked from the original blanket measures to require all Thai banks to hold in reserve for one year 30 per cent of capital inflows not related to trade in goods or services or repatriation of Thai residents' investment abroad. When they came to their senses, they decided that the capital controls should be imposed specifically on foreign players in the Thai bond market who brought their short-term capital into the country to take advantage of high interest rates while at the same time speculating on the baht's rise.

After all the damage was done, Pridiyathorn said capital inflows destined for the local stock market would be exempted from the capital control measures. The authorities realised too late that the indiscriminate capital controls could have had such a devastating effect on the SET, driving away foreign investors who had accounted for about 50 per cent of daily trading volume in recent months.

The "800-billion-baht question" is why didn't Pridiyathorn and the Bank of Thailand anticipate how foreign investors would react to the unusually harsh capital controls.

For the past several weeks, the Bank of Thailand had issued warnings about impending capital control measures, which also impose a 10 per cent fee, similar to withholding tax, on foreign investors who want to take their short-term speculative funds out of the country before the required 12-month period. The measures are the most stringent since the pre-1997 crisis to curb baht speculators, who have brought in billions of dollars in the past few months and pushed the baht to a level that has damaged Thailand's exports. Last month, there were short-term inflows of US$300 million per week. These had tripled to $950 million per week earlier this month, according to the central bank.

One has every reason to believe that Pridiyathorn and the Bank of Thailand must have spent a lot of time thinking things over and carefully drawing up measures that would target speculative inflows by raising the costs for baht speculators with minimal negative impacts on the huge inflows that had gone into the SET. It boggles the mind as to why the central bank did not take less disruptive measures, such as lowering the benchmark interest rate, before taking progressively harsher ones.

The authorities should have known that the blanket capital controls would have damaged the stock market, which would in turn raise the cost of doing business for the real productive sector that they intended to protect. After all, for many companies, including those belonging to the export-oriented industrial sector, raising capital in the stock market is considerably more attractive and efficient than other methods.

It will take time for the Thai stock market to recover from this disastrous miscalculation. The consolation is that the country's real productive sector has been saved from imminent ruin, but it is regrettable that the high cost of such a daring rescue operation could have been avoided if only the capital control measures had been properly thought through.