The Bank of Thailand yesterday said the abrupt reversal in its capital-control policy to exempt portfolio and foreign direct investment might make it harder to rein in the galloping baht.

"When brokers insisted they could separate money for stock investment from other inflows, we accepted the gesture to reduce impacts on the bourse. But we are still concerned about this point and we continue to monitor the baht," governor Tarisa Watanagase said.

The relaxation of Monday's measure subjecting capital inflows to a 30-per-cent deposit caused the baht to weaken more slowly than expected against the US dollar, but it was still less volatile and weaker than earlier, she said.

The baht opened at Bt35.89/92 and closed slightly up at Bt35.75/90.

Stock investors hailed the central bank's change of heart to spare the Stock Exchange of Thailand. Local investors, mostly, returned to the bourse, allowing the exchange to salvage most of the market capitalisation that went up in smoke on Tuesday.

The SET market cap rose Bt530 billion yesterday, after losing Bt820 billion on Tuesday. The SET index ended at 691.55 points, up 69.41 points or 11.16 per cent against the free-fall of 14.84 per cent the previous day.

Monday's blanket measure was rolled back in the evening on Tuesday due to  panic selling on the bourse. While the measure had earlier required all foreigners to deposit 30 per cent of funds brought in, it was amended at the end of the day to allow free inflows to the stock market.

Yesterday, the central bank also allowed non-resident investors to open non-resident baht accounts specifically for stock investment. It also reinstated the requirement that the daily balance of non-resident baht accounts in general must not exceed Bt300 million.

The special accounts are expected to allow commercial banks to clarify which inflows are for stock investment.

Deputy Prime Minister Pridiyathorn Devakula, who also is in charge of the Finance Ministry, was satisfied with the rebound in the stock market.

"Now that the baht does not strengthen further and the market starts to recover, there should be no more measures," he said, admitting he had never thought that the capital-control rule would have such a dramatic impact.

As to who would be responsible for the damage, he said right now the market has mostly recovered and should fully recover soon. Small investors have also returned to the market and recouped losses. "Don't worry about them. They are great and some are making profits."

SET president Patareeya Benjaphol-chai said it would take a while but the exchange would reclaim all the lost market cap since the economy's strong fundamentals continued unchanged, drawing foreign investors back to Thailand.

"The Thai market's price-to-earnings ratio is 7.3 times, the lowest in Asia. Still, foreign investors are worried that there could be more measures," she said, noting that the Black Tuesday incident should encourage all parties to pay more attention to the possible effects of a measure on the capital market.

Tarisa gave assurances that the central bank would not bring in additional measures to curb baht fluctuations but would take a close look at the foreign-exchange market for a while. Anyway the yearend usually sees no big transactions. She also insisted that the central bank would not cut its policy interest rate to stabilise the baht because oil prices remain an inflation threat.

Amid calls for authorities to show responsibility for the damage from the misstep, Tarisa insisted that before introducing the drastic measure on Monday, the central bank discussed with Pridiyathorn about the details and evaluated the impacts on every market including the capital market. However, the central bank could not inform the Securities and Exchange Commission and the SET before it took action for fear of news leaks.

Pridiyathorn said that after trading closed on Tuesday, Tarisa called him from Chiang Mai and discussed a way out. "Actually, the discussion was to be called this morning [yesterday], but I said it'd be too late as we need a measure to take effect on December 20."

Tarisa then asked him to hold an urgent meeting with brokers, commercial banks, custodians, the SET and the SEC. He chaired the meeting and discussed with Tarisa all the ways through the discussion about finding an exit.

Tarisa said authorities were surprised that investors overreacted to the measure, particularly long-term investors, as the opportunity cost of the measure is only 1.5 per cent - based on a 5-per-cent annual interest rate - which is small compared to the average 20-per-cent return on investment.

"If we did nothing, the currency speculation would go on and the baht appreciation would not only harm exporters but also the country's reserves. We had to do what we could," she said. It was unfortunate that some foreign investors did not understand the measure due to bad communication.

Tarisa dismissed talk that ousted prime minister Thaksin Shinawatra was behind the baht speculation. Tarisa said no well-known politician attacked the baht directly but she couldn't say if anyone did it indirectly through nominees. There was also no inflow for tax payment in the Shin Corp deal as rumoured.

Pridiyathorn denied reports that some politicians were unloading stocks on Tuesday, further depressing the market.

"Over half of the sellers on the day were foreigners who were afraid of additional measures. When they sold, local funds followed suit to prevent losses. However, when the fear subsided, investors returned. There is nothing related to politics and right now no new money is flowing into the Kingdom," he said.

He categorically denied the report that he told the Cabinet at its Tuesday meeting about the politicians' united front to strike at the stock market.

He noted that foreign investors have regained their confidence in the country. During morning interviews with the Wall Street Journal and CNBC, he reiterated that the measure was enforced to stop baht speculation and it was working. Without it, the baht could rise above Bt34 and devastate the export sector.

Anoma Srisukkasem

The Nation