The continuation of capital control measures and lingering political uncertainties are also factors that alleviate pressure on the baht.

Economists see the Monetary Policy Committee (MPC) trimming the one-day repurchase rate by 25-50 basis points this year on top of the 100 basis points taken off since January 1. The key policy rate now stands at 4 per cent, compared with 5.25 per cent for the US federal funds rate. Following the latest cut, foreign investors might start weighing the cost of hedging against the expected return from investing in the local capital market. When investment is no longer worthwhile, not only will capital inflow dry up but outflow might take place as investors always seek to put their money where returns are better.

The central bank's move was already factored into bond prices, as seen by the fact that yields have dropped. The debt market will remain attractive as long as investors predict that interest rate reductions have not come to an end, as they can gain from selling bonds at higher prices.

A cut of 25-50 basis points in interest rates would normally be considered enough to attract funds into bonds but that is not the case for the market here, where the Bank of Thailand has imposed capital controls. Funds brought in for all types of investments other than the stock market need 30 per cent set aside as a reserve or have to be fully hedged.

Most foreign investors are expected to choose the option with the lower cost - hedging.

Since the 30-per-cent capital reserve requirement went into effect on December 19, foreign investors, who used to account for up to 25 per cent of bond trading, now represent only one per cent. The bond market has been blamed as the channel used by foreign investors to speculate on the baht. The baht has lost some of its shine in foreign investors' eyes, since asset prices in baht terms have shot up along with the 17.4-per-cent appreciation of the currency since 2005 and about 3 per cent from the end of last year.

China's yuan has soared 6.65 per cent against the US dollar since it abandoned the rigidly pegged regime for the fixed regime with a narrow band on July 20, 2005, while Malaysia's ringgit has gained 9 per cent over the same time.

Investment here is exposed to greater risk relative to the region due to the murky economic and the political environment.

The risk from the carry trade involving the Japanese yen is also rising following clear signs of recovery in the world's second-largest economy. Carry trades are popular among foreign investors, who borrow very cheap loans from Japan to invest in debt instruments of other countries offering higher rates with the aim of reaping a double windfall from arbitrage of the interest gap and foreign-exchange rate.

Exporters should not be worried that the baht's value will climb as rapidly as last year. Capital inflows are unlikely to knock on the door, due to the gloomy economy and politics here and the widening of the US and Thai interest rate gap to 1.25 percentage points.

The currency hedging and capital reserve rules should not be revoked, as they help protect against any unexpected risk. Rather than despair, exporters should enhance their competitiveness through product differentiation, not low prices. Every enterprise should not depend on others, but try its best to survive for the benefit of the entire nation - not just itself. Anoma Srisukkasem

The Nation