The "long-term" rules should give investors greater clarity on the central bank's policy on capital inflows and how authorities would deal with various circumstances, said the honorary adviser to the Thailand Development Research Institute.

He was speaking at a seminar at Thammasat University on the December 19 capital controls and their impact on the economy.

The rules should address all scenarios so investors were be better prepared to cope with individual situations, he said.

The Bank of Thailand shocked the markets on December 19 by introducing a 30-per-cent reserve requirement as part of its "ad-hoc" capital-control measures to retard the upward march of the baht, which gained 16 per cent against the US dollar last year.

Exporters had complained that the sharp increase in the value of the baht against regional currencies sounded the death knell for their businesses.

Ammar viewed the measure as too harsh and said the government should have introduced controls gradually instead of all of a sudden.

"A governing rule is necessary for Thailand to curb massive inflows of capital which may hit the Kingdom within a short period of time," he said.

Instead of the sudden 30-per-cent rule, the central bank should have cut the interest rate to weaken the baht, he said, adding that such a move would not fuel inflation.

"I understand that the Bank of Thailand has to follow its inflation target, but it can hold too tightly to that policy," he said.

The government should set clear directions, after considering public opinion, on how it would handle diverse cases such as Thai capital invested in overseas stocks and vice versa, he said.

"This should provide for a stable economic outlook and fairness to foreign investors, instead of temporary measures that may create risks for importers and affect foreign investor confidence," he said.

"The central bank should not get spattered with mud [by responding to the game of the market]," he said.

Once the Bank of Thailand establishes its capital policy, people will know what methods they can apply to advance their interests. This should also benefit the country, he said.

On Chile's experience in introducing capital controls, he said that country's policy had resulted in the restructuring of the debt market from short term to long term while the volume of capital inflows had not changed.

Setsaput Sutiwartnarueput, an official of the Stock Exchange of Thailand, said the central bank's measure had hurt the stock market badly. On December 19 when it was introduced, the market saw Bt800 billion of its capitalisation go down the drain. Not only did stock investors take a big hit, the five million people with their savings in mutual funds and the Government Pension Fund also suffered.

The harsh policy clobbered the value of Thai stocks, dulling the competitiveness of the Thai market, he added.

Panupong Nithiprabha, a lecturer at Thammasat University, said that although the central bank's capital measure was temporary, it had had lasting repercussions on policy risk and credibility.

The cost and benefits of this policy are not balanced because the costs outstrip the benefits, he said.

He believes that the baht will end up rising to Bt33-Bt34 to the greenback anyway because of the appreciation of the Chinese yuan.

"The measure is just to buy time," he said.

Citing the situation in Chile, which imposed a similar measure on foreign capital from 1991-1998, he said the rules had simply slowed the pace of currency appreciation for eight years.

"The measure may have proved to be successful in Chile, but it may not be the case in Thailand."

Bank of Thailand Governor Tarisa Watanagase said the central bank's measure did not aim only at helping exporters but also at ensuring overall economic stability. If the baht is allowed to strengthen, it will cause trouble for the real-estate and financial sectors, she said.

The measure worked to curb the excessive rise of the baht, she explained, for from December 19 to February 15 the baht weakened by 1 per cent against regional currencies.

Over the same period, the yen sank by 1.2 per cent, the Indonesian rupiah edged up by 0.1 per cent, the Philippine peso soared 2 per cent, the Chinese yuan moved up by 1 per cent, the new Taiwan dollar dropped by 1.2 per cent, and the South Korean won lost 1 per cent.

Last year, capital inflows here reached US$66 billion (Bt2.36 trillion), the second highest in the region after South Korea. That pushed the baht up against the dollar by 16.6 per cent.

The rise in other currencies was the result of current-account surpluses, not massive capital inflows, Tarisa said.

She said that during the first 10 months of last year non-residents had bought debt instruments totalling $10.2 billion, compared to the whole of 2005, when $7.7 billion flowed into the Kingdom.

The rising baht went against the economy's fundamentals, she said.

The central bank of any country intervenes in the market to protect its currency, she said. Last year, the Bank of Thailand bought dollars to the tune of $14.9 billion to ease pressure on the baht, she noted.

Anoma Srisukkasem

The Nation