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Published on August 17, 2007

He said the Bank of Thailand should keep its unremunerated reserve requirement of 30 per cent unchanged in order to prevent an adverse impact from capital inflows as long as external risk factors still exist.

The former BOT governor said that there would be a significant blow on the US financial market in the wake of the sub-prime mortgage fiasco. The widespread impact will result in the volatility of global currencies, as investors would draw their money from the US and head for Asian countries, including Thailand, which will lead to a continued strengthening of the baht.

"We must keep a close eye on it because the effect could be rapid and intense," said Pridiyathorn.

He cited global volatility as one of three risk factors affecting the country. He is also concerned about violence in the deep South and the loss of confidence among domestic investors and consumers.

He said the BOT withholding reserve requirement had been efficient in slowing the baht's appreciation. The current level of about Bt34 to the greenback has helped exporters to survive and bolstered export growth as a key economic engine.

As a result, the measure should be maintained to filter capital movement and avoid further shaking the confidence of foreign investors, said Pridiyathorn.

"Everything is being kept on track, so we should not get excited and revoke the measure amid the current external risk factors," he said.

Pridiyathorn said agencies should prepare for an inflow of capital because the withholding reserve requirement does not cover foreign investment in the Thai stock market. The central bank should prevent foreign investors from taking double profits from both the stock market and the foreign-exchange market.

"We should allow them to take profit only from the equity bourse and not in changes of the baht, otherwise the currency will swing continuously," he said, adding that the situation will not develop into a crisis but could have a negative impact on the real sector if it is not handled efficiently.

The Thai stock market - mainly dominated by active foreign investors accounting for 30-40 per cent of trading volume - could be easily affected by foreign fund flows. Therefore, more active Thai investors should be encouraged to participate in the bourse, he said.

The former governor insisted that the central bank should target not only the inflation rate but also the foreign-exchange rate. The baht should be in line with regional currencies, otherwise exporters will not progress in the market.

The BOT's measures are not enough to rein in the baht and fiscal measures will be needed, he argued. However, tax collection from capital movements is too strong a measure, compared with the withholding reserve requirement.

He added that the political situation was currently not a concern, as there will certainly be a general election and the new government is likely to be a coalition.

Anoma  Srisukkasem

The Nation