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Published on March 1, 2008

Though Bank of Thailand (BOT) Governor Tarisa Watanagase announced the lifting of capital controls moments only after the stock market closed, the baht rose throughout the day, from Bt31.91-Bt31.94 at opening to a peak of Bt31.45-Bt31.50 at close, amid rumours of the bank's intention.

Chookiat Ophaswongse, president of the Rice Exporters Association, said he was very disappointed with the decision as the government did not have any measures to protect the baht from rising as a result.

"The baht could appreciate to Bt30 against the greenback within a short period. Foreign investors and speculators will flood the country as Thailand still has high interest rates to draw investors," he said.

Chookiat said Thai exports, which were the main economic engine, would show a significant drop in the second quarter this year due to the appreciation of the baht. Thai rice exporters rice will face tougher competition because every one-baht appreciation against the dollar will push up their prices by $25 per tonne, he said.

Poj Aramwattannont, president of the Thai Frozen Foods Association, said that exporters would find it more difficult to quote prices because of baht volatility once the central bank's 30-per-cent reserve requirement on foreign investment was lifted.

"Agricultural and agro-industry exports will be hit hardest by the move measure as they rely on local content of 40 per cent and higher," Poj said, adding that farmers would also suffer as exporters forced them to lower their prices to trim losses.

The association will call an urgent meeting early next week to consider how to shoulder the impact of cancellation of capital controls, which will definitely cause higher baht value, he said.

Thanavath Phonvichai, director of the Economic and Business Forecasting Centre, said foreign capital would rapidly flood the Stock Exchange of Thailand and the bond market for short-term speculation, which would quickly push the local currency up to Bt30 against the dollar.

"The government should take measures to alleviate the impact of the cancellation. In the first half of the year, the government must intervene in the market to ensure the baht does not appreciate to more than Bt32 to the dollar, otherwise the export sector will face big trouble," he said.

Anurat Khokasai, chief marketing and operations officer of frozen seafood company Prantalay Marketing, said that there would definitely be a big impact on the export sector.

The capital controls absorbed 30 to 40 per cent of the money flooding to Thailand and slowed the baht's rise during the 14 months they were in place, and without them the export sector will suffer from the resumption of speculation in the country's capital market, he said.

However, brokers and the stock market authorities hailed the central bank's decision yesterday.

Stock Exchange of Thailand (SET) president Patareeya Benjapholchai told reporters the move would be a blessing to property funds and bond markets as foreign investments in these were subject to the 30-per-cent reserve requirement.

Speculation about whether the rule will be lifted has contributed to the baht's volatility, she said.

"The announcement will have a psychological impact on the stock market as investors will have more confidence, and investment in the stock market was already exempted from the 30-per-cent withholding reserve requirement," she said.

"All parties need to cooperate to weaken the baht; the central bank is not the only one responsible. I don't want to see anyone being sacked as that does not solve anything. The BOT governor is doing her best," she said. Padermphob Songkroh, Bualuang Securities' deputy managing director, said the bond market would benefit more than the stock market since investment in bonds was subject to the 30-per-cent rule. Now foreign investors will be able to switch funds between the bond and stock markets freely, he said.

He said investors should keep an eye on the political situation following the transfer of several high-ranking officials.

Kongkiat Opaswongkarn, chairman of the Federation of Capital Market Organisations, said capital would be able to flow in and out of the country more easily.

The baht's significant rise yesterday is a short-term phenomenon, and it will return to normal levels soon, he said.

Thai Bond Market Association president Nattapol Chavalitcheevin said the central bank's decision sent out a positive signal that Thailand welcomed foreign investment.

However, he does not anticipate an immediate influx of funds into the bond market, as foreign investors mostly focus on short-term investment of less than a year, though huge inflows into the market would bring down bond yields and benefit the government, which was raising funds to finance its projects.

"Prior to the enforcement of the capital-reserve measure, foreign investment in the bond market accounted for 20 per cent, or about Bt130 billion. Following the enforcement, that declined to Bt50.7 billion, or 1 per cent of the total market value," he said.

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