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Published on February 9, 2008

Prime Minister Samak Sundaravej said yesterday that the controversial capital controls issued by the Bank of Thailand would be abolished when the central bank meets with the new finance minister next week.

However, he was quick to acknowledge that this was a delicate issue because it involved the central bank's independence, adding that the government would need to consult with the banking authority first.

When asked if the controls would definitely be removed, Samak said: "That is what I have been told by the finance minister. He said they would be removed."

Finance Minister Surapong Suebwonglee is keen to remove the capital controls, but it is not yet clear what measures will be put in place to curb the baht's rise once they have been taken away.

"We must have the ways and means to signal this to the Bank of Thailand, because the regulation has to come from there," Samak said.

Next week, the finance minister will meet with the central bank to discuss the removal of the capital controls, which were imposed in December 2006 to curb fierce speculation against the baht with hot money flowing in from overseas.

Meanwhile, the central bank is ready to defend its stance by revealing sensitive information that shows how tough it would be to manage the baht once the controls are removed.

Pongpen Ruengvirayudh, senior director for the Bank of Thailand, said some crucial information related to the baht still had not been revealed to the public, which is why they do not realise the need for the 30-per-cent unremunerated reserve.

"They [the outsiders] don't know all the figures. We will illuminate them and clarify the consequences if these measures are revoked," she said.

The central bank will also explain the movement of the baht since the withholding reserve measure was introduced 13 months ago, Pongpen said.

However, on his first day in the job, Surapong refused to confirm whether he would revoke the 30-per-cent requirement, although he had earlier told foreign media he would do so to restore investor confidence.

Most economists and analysts have called for the Bank of Thailand to remove the capital controls, even though they have been watered down significantly over the past year, because they do not believe they can prevent the appreciation of the baht.

Pongpen said the withholding reserve was useful because it slows down foreign capital, particularly in terms of short-term speculative inflow, thereby keeping capital inflow and outflow balanced.

She insisted that the measures did not cover stock market or direct foreign investments.

"Direct and portfolio investment are not under the measure, so it is not a point foreign investors should worry about. Moreover, we have gradually relaxed the measures," the senior director explained.

She added that the withholding measure also helped the baht move in line with regional currencies. The unit is nearly as strong as the Malaysian ringgit and Singapore dollar, but is weaker than the yen.

Besides, Thai exporters have been better able to readjust their behaviour and match the baht's changes by increasingly hedging their exposures, diversifying into different export markets and obtaining various currencies in export income.

The baht has strengthened by 9.6 per cent against the greenback since the end of 2006.

The central bank has been trying to rein in the strength of the baht by increasing the net reserve of foreign currency. As of February 1, the net international reserves amounted to US$115.2 billion (Bt3.79 trillion), rising by $1.3 billion from the previous week.The increase in the reserve has been caused by the central bank's intervention in the foreign-exchange market and the dollars received from sell-buy swap contracts.

Anoma Srisukkasem

The Nation,

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