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Published on February 11, 2008

If not, it could encounter a rapid appreciation of the baht, the Bank of Thailand warns.

Deputy Governor Atchana Waiquamdee said the government should take into account the balance of capital flows, exporter panic, government investment and interest rates.

Planning for influence on forex demand and supply will help reduce the impact on the baht from the revocation of the withholding reserve requirement, she told The Nation.

"We should consider not only the withholding reserve, but also flow balance. Demand for dollars should be high enough to serve supply," she said.

Atchana said the central bank would give the government data about the measure, and about interest-rate policy.

The bank insists it is concerned about economic growth, as well as inflation. She denied the bank was an "ivory tower" and deaf to outside suggestions.

"We need to be independent to endorse interest-rate policy. But we have joint targets of economic growth and inflation with the government, who must respond to the voters," she said.

The central bank has been criticised that it is too concerned about inflation, and neglects economic growth.

Atchana said the government should ensure a balance of demand and supply so that the baht was not affected.

Government investment plays a key role in boosting demand for dollars, and reducing pressure on the baht. Recovery of domestic demand and consumption will help bolster imports, which grew only slightly over the past few years.

"It depends on how much imported content is involved in the investment projects. This will bring about demand for dollars, compared with the huge supply of the past," Atchana said.

Hedging of foreign loans will also reduce pressure on the baht.

The government should be aware of the possible psychological effects from the revocation of the withholding measure. Exporters could panic and sell off dollar incomes fearing baht appreciation.

When outgoing finance minister Chalongphob Sussangkarn was appointed, exporters forecasted that the withholding reserve would be revoked. They sold export incomes for the entire year in advance.

Atchana said no one could project how deep and long a US recession would be. Federal Reserve interest-rate cuts could help revitalise the real sector, but the financial sector might worsen and contribute to the impact on the real sector.

She accepted that the country's economic growth risk jumped and inflation risks declined as a result of the slowdown in the global economy. But monetary policy must look forward and focus on inflation.

The Kingdom's economy will pick up eventually, she said.

Anoma Srisukkasem

The Nation