A banking executive yesterday expressed concern about foreign investors' loss of confidence in Thailand following the central bank's announcement on Monday of wholesale capital controls to rein in baht speculation. The measures, which shocked the whole world, have not only severely affected the financial markets but also hurt foreign direct investment in Thai companies and in new factories, he said.

"There are all kinds of capital inflows. For instance, there is the case of a foreign company wishing to buy shares in Thai companies or to invest in a new factory. It brings the money into Thailand and might park the money for one month or three months during the negotiation period before finally cutting the deal. How would we categorise this particular foreign capital? Since it is going to be subject to a 30-per-cent reserve withholding, everything will have to be put on hold," he said.

Deputy Premier and Finance Minister MR Pridiyathorn Devakula moved quickly on Tuesday to relax the capital controls on stock market investment to prevent further damage to Thai equities. However, the capital-control regulations are firmly in place for the money market and other investments, which have yet to be clearly defined.

"Going forward there will be loopholes in the capital controls that companies will try to get around until the controls are diluted or rendered obsolete. We can expect to see more and more people asking the banking authorities for waivers of the rules to facilitate their investments. In the end, the capital controls might not work," the executive added.

Property brokers have been the first to do so, following concerns by foreigners about bringing in money to buy condominium units. After they complained on Wednesday, the central bank announced on its website yesterday that foreign money for property purchase is not subject to the reserve requirement.

Thailand is already facing weaker foreign direct investment, an important engine of economic growth. In the first 10 months of this year, the value of foreign direct investment applications was down by almost 50 per cent. Political uncertainly has already dented the outlook.

"With the [capital controls], there is a danger that the damage to the investment climate might be more lasting. The likelihood of a private investment recovery next year now looks increasingly remote," said a report by Citigroup released on Wednesday.

The report indicated that the severe impact of the capital controls on the stock market was unintended. But it said the Bank of Thailand would have to gradually relax some of the curbs to limit the fallout.

"We believe the draconian nature of these measures will have to be scaled down to a proportion and focus that addresses the concern," it said. "Prolonged maintenance of these controls could permanently hurt the investment climate and seriously upset the prospects of any investment recovery."

 There are also other ways to reduce pressure on the upward trend of the baht, whose 16-per-cent rise since the beginning of the year has alarmed Thai exporters and led the banking authorities to introduce the draconian measures.

Ammar Siamwalla, honorary adviser of Thailand Research Development Institute, admitted the baht is too strong but said capital control should be the last measure to be enacted.

"The central bank should have used interest rates to tackle the problem. It's a pity that the monetary policy is not exercised," he noted.

Supavud Saicheua of Phatra Securities said cutting the interest rate by 0.5-1 percent was one of the options to reduce the pressure on the baht's rise.

Inflation has been subdued and the interest-rate cut should boost investment by reducing companies' borrowing costs. "I can't see any damage from an interest-rate cut. If the central bank is afraid of inflationary pressure, then its policy to keep the baht weak is self-contradictory," Supavud said.

One mutual fund wrote a report to its clients that said: "We too feel dismayed at such clumsy handling of the economy by the central bank and the new government, who have clearly been spooked by a recent appreciation of the baht, and were at a loss as to how they should respond.

"More pragmatic and sensible measures would simply have been to cut interest rates or, if inflation is felt to be a serious threat, to loosen capital controls to allow Thais to take money out of the country. This would have quickly allowed the currency to find a lower level, without turning off the taps of capital inflows."

Thanong Khanthong

The Nation