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Published on February 13, 2008

The capital-control measure is likely to be lifted in the second half of this year as Finance Minister Surapong Suebwonglee and the Bank of Thailand (BOT) are still worrying about the effects of removing the exchange curbs, Standard Chartered Bank said yesterday.

Outlining three possibilities, the bank saw a 50-per-cent possibility of the capital-control measure being removed in the second half of the year.

When exactly the controls will be lifted remains unknown after the finance minister said that no decision was made at yesterday's meeting with the BOT on the 30-per-cent withholding reserve measure.

"The timing of such liberalisation is difficult to predict precisely and there are three possibilities," the bank stated. "All scenarios should be positive for the Thai baht in the near-term, as the government's stance about the removal of capital restrictions has already been noticed by investors, making the timing of execution arguably less relevant."

The baht yesterday rose to a fresh 10-year high of 32.88 to the US dollar from an opening price of 32.90/32.93 before closing at 32.88/32.89.

Standard Chartered Bank said the central bank could cut the policy rate to keep the Thai and US rate spreads manageable, while balancing the need to facilitate growth and manage inflation.

It expects the BOT to cut the policy rate by 25 basis points at each of five Monetary Policy Committee meetings from April to October this year, lowering the policy rate from 3.25 per cent to 2 per cent.

The bank saw a 40-per-cent chance of an immediate removal of capital control as a second possibility.

If that is done, the BOT would need to cut the policy rate deeper and sooner.

The bank saw only a 10-per-cent chance of a third possibility of capital controls being lifted in the second quarter.

Economists and market watchers believe the capital-control measure will be lifted, though they are not sure of the timing.

However, Somchai Jitsu-chon of the Thailand Devel-opment Research Institute (TRDI), said the finance

minister's recent public an-nouncement about termi-

nating the 30-per-cent capi-tal reserve, would be seen as indirectly interfering with

the central bank's functioning, and is harmful to investor sentiment.

"It is a matter of when before the BOT lifts the 30-per-cent capital reserve," said Somchai, TDRI's research director for macroeconomic development and income distribution.

Although opinions among economists at the BOT differ widely, with the younger ones favouring an economy governed by pure market forces and the older group preferring the opposite, the general consensus is that capital controls will eventually be removed in the first half of this year, he said.

UOB Asset Management chief executive Vana Bulbon said that the BOT has always been adept at managing its reputation for independence. He believes, though, that the BOT's actual lifting of capital control would have less of an impact than the announcement in itself.

"What I suggest is that the bank should just lift it, but make it clear that [in the face of any more currency speculation], the capital reserve can be used again," said Somchai.

Any decision by the BOT to cut interest rates should be seen as just another measure to limit the baht from strengthening, said Prapas Tonpibulsak, chief investment officer for Ayudhya Fund Management.

Thanawat Polvichai, director of the University of the Thai Chamber of Commerce's Economic and Business Forecasting Centre, yesterday said the government should scrap the 30-per-cent currency control this year, to send a positive signal to foreign investors.

He suggested that the government cancel the measure in May after it has in play a set of measures to prevent money flooding into the Kingdom and causing serious baht appreciation.

Independent academic Somchai Pakapaswiwat supported revoking the measure. He suggested some replacement measures to prevent the baht from appreciating above Bt31 per dollar but said the authorities must weigh the pros and cons of the new measures.

He said that to handle volatility after the revocation, the central bank could lower interest rates by 0.50 basis points to discourage inflows. Still, this could spur inflation. He also suggested that the central bank buy more dollars, but cautioned that more bonds would be needed to absorb liquidity. While private companies should be encouraged to invest overseas, Thailand could switch to a basket exchange rate policy but with a wider band than in the past.

Export Import Bank of Thailand's research also supported the revocation, citing that this would pave the way for the diversion of new investment into the country at a time when most manufacturing plants are running at full capacity.

"The measure has been blocking new investment as overseas companies with subsidiaries in Thailand are subject to the 30-per-cent reserve requirement if they pour investment into their Thai units. New investment would also encourage technology upgrades," the bank said.

Business Desk

The Nation