Since the 30-per-cent-reserve requirement was implemented on December 19, the Thai currency has weakened less than Bt1 against the greenback. Compared with the loss of confidence among Thai and foreign investors as well as the damage to the stock and bond markets, this is disappointing.

The BOT has been roundly criticised for using a cure that was both ineffective and too strong. Moreover, the measure had widespread side effects on the overall economy. The central bank has also been reproached for underestimating the stock market's reaction to its capital controls, with many saying this highlighted bank officials' lack of experience in market trading.

The Stock Exchange of Thailand has not yet recouped the loss it suffered on December 19, when it saw its steepest fall in its 30-year history: the index shed 14.8 per cent, as Bt820 billion was wiped off the market's capitalisation. The bombings on New Year's Eve and a steady stream of negative political and economic news since then have contributed to the index's failure to recoup this loss.

From December 19 until Tuesday, foreign investors were net sellers of Thai stocks to the tune of Bt25.44billion. Although they have been returning to the market since the beginning of the year, they are more likely to be short-term investors looking for quick profits.

Yields in the bond market have risen in response to the capital controls. On the day the controls were implemented, yields on bonds of every maturity rose 20-30 basis points. To date, yields have remained higher than they were prior to December 19 and could rise even higher, due to a downturn in investment.

Many companies and organisations have postponed plans to seek financing in the market over concerns about the higher cost, and this could damage the bond market's long-term development. Higher yields are the result of speculation, said one market expert. Meanwhile, foreign investors have been holding onto their bonds following the Bank of Thailand's move on December 19, he said.

"They still wait and see. They know they'll lose the opportunity if they sell the securities now," he explained.

The controls have had a slight benefit for the export sector. Since they were introduced, the baht has weakened about 80 satang against the US dollar, from 35.26 to the greenback on December 18.

From December 15 to January 16, the baht weakened 2.14 per cent against the dollar, to 36.03. During that period, the South Korean won depreciated 1.37 per cent and the Indonesian rupiah fell 0.22 per cent against the dollar. The Philippine peso and Singaporean dollar rose 1.23 and 0.09 per cent, respectively, against the US dollar during the same period.

Federation of Thai Industries chairman Santi Vilassakdanont said capital controls had efficiently ended the baht's volatility, even though the currency had not depreciated as much as expected. Its stability made it easier for exporters and importers to set prices, said Santi.

The controls have helped slow the appreciation of the baht, which had been rising faster than other currencies in the region. Last year, it surged 17 per cent, while other currencies in the region rose about 7-8 per cent. The baht's current level represents a 13.99-per-cent appreciation since the end of 2005, compared with 8.62 per cent for the Philippine peso, 8.09 per cent for the South Korean won, 8.02 per cent for the Singaporean dollar and 7.89 per cent for the Indonesian rupiah.

The BOT will be praised if it has the courage to soften or abolish its capital controls, considering the damage they have done to the financial market and direct investment. Abolishing the controls would provide an immediate boost in confidence.

For former Export-Import Bank of Thailand president Sataporn Jinachitra, it would be more important for the central bank to manage market psychology. Reducing its policy rate could signal that it prefers a weaker baht, although such a rate cut might not be 100 per cent effective in restraining appreciation, said Sataporn.

However, the BOT's rate cut on Wednesday failed to weaken the baht, although bond yields began to decline.

The central bank has been widely advised that if it is determined to keep a reserve requirement on capital flowing into Thailand, then it should lower it to 5-10 per cent from the current 30 per cent.

Chulalongkorn University economics lecturer Teerana Bhongmakapat has called for a 3-per-cent reserve requirement on short-term capital inflows.

Financial authorities, however, appear to be ignoring pressure to relax or scrap the measure.

Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula yesterday reiterated the virtues of the reserve requirement.

He should realise by now that his views are not universal and that along with capital controls, the economy has to deal with a steady stream of news.

Anoma Srisukkasem

The Nation