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Published on February 12, 2008

Finance Minister Surapong Suebwonglee will hold a meeting today with top policy-makers of the Bank of Thailand and other agencies to discuss the possibility of removing capital controls. He has already decided that he would like to do away with the controls, which have been in effect since December 19, 2006. Top central bank officials have come out to defend the controls, which they argue are a necessary tool to curb baht speculation. They have also asserted that if the capital controls were to be lifted, other measures must be in place in case hot money speculates against the baht again.

How can the two sides bridge the gap and reach a compromise?

In fact, the capital controls have already been watered down. Now only foreign money that goes into Thai fixed-income instruments is subject to the 30-per-cent reserve requirement. The central bank has also introduced a series of measures to relax foreign-exchange controls in order to make it easier for Thais and companies here to take their money out of the country. It is now concerned that if it were to remove the controls outright, it would not have any measures in hand to deal with baht speculation.

Surapong is not someone lacking in financial experience. He is quite bright and smart. Removing the capital controls is one of his objectives in order to send a signal to foreign investors that Thailand under the Samak administration is going to pursue more market-friendly policies.

However, Surapong is surrounded by advisers who are inclined towards allowing the baht to appreciate with market forces. For instance, Dr Supavud Saicheua, the managing director of Phatra Securities, and Nibhat Bhukkanasut, who are now Surapong's advisers, are believers in a stronger baht. Dr Olarn Chaipravat, also an adviser, appears to believe that the baht should be kept competitive to boost Thai exports and local industries, which still employ a sizeable portion of the Thai labour force.

The Finance Ministry now appears to hold the view that the baht's present strength is a result of a current account surplus, which comes largely from Thailand's trade surplus. It believes that there is less reason to be concerned over speculation. Finance Ministry spokesman Somchai Sajjapong has indicated that authorities would not levy taxes on capital inflow if the capital controls are scrapped. But he hinted that there might be other support measures to cushion the baht's rise.

What can we expect once the capital controls are totally removed?

First, the baht will shoot up dramatically because of buoyant sentiment. Exporters have been selling the dollar heavily amid political pressure to remove the controls.

Second, the onshore and offshore baht rates, which have widened by about Bt2-Bt3 per US dollar, will converge when the capital controls are no longer in place. Traders in Singapore are now taking their positions in anticipation of the removal of controls.

Third, the stronger baht will require the central bank to intervene in the foreign-exchange market even more to stem its rise for fear of hurting exports. As a result, reserves should increase even more.

Fourth, as the US Federal Reserve has cut its rates aggressively to deal with the sub-prime loan crisis, the Thai central bank will be forced to cut its rate to narrow the interest rate differential otherwise the baht would become too attractive.

Fifth, the stronger baht will hurt Thai industries, particularly labour-intensive ones. This might require the government to come up with some fiscal measures to give them a hand.

Sixth, authorities might have to introduce further measures to liberalise the foreign-exchange market in order to make it easier for capital to flow out of the country. The value of the baht depends very much on supply and demand.

Seventh, authorities also have the option of taxing foreign capital when it holds on to fixed-income instruments or bank deposits for less than one year.

We don't know what the outcome of the talks on the capital control will be, but certainly the issues raised above should require all involved to act with prudence.

The Nation