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Published on March 1, 2008

The Bank of Thailand yesterday decided to remove controversial capital controls and introduce new ways to prevent baht speculation, ending 14 months of the "draconian" measures.

The move is effective from Monday.

After the announ-cement, the baht onshore rate rose against the greenback to close at its peak of Bt31.45-Bt31.50, from an opening of Bt31.91-Bt31.94, while the baht offshore weakened to Bt30.40-Bt30.90 from Bt29.45-Bt29.55.

Meanwhile, the central bank insisted it would not cut the policy interest rate, though the Thai rate is higher than the US and makes Thailand attractive for capital inflows, which would strengthen the baht.

The market earlier believed the revocation would come with a deep policy interest-rate cut of at least 100 basis points from the current 3.25 per cent.

The bank said the managed-float exchange rate was suitable, because it was flexible and dealt with global volatility, an important factor that is closely monitored.

Bank Governor Tarisa Watanagase yesterday said it considered it "good timing" to repeal the controls. Domestic demand and export growth have been stronger, apparently, since the fourth quarter. A government stimulus package will help restore investor confidence and strengthen domestic demand.

Tarisa said the balance of capital movement was experienced due to a decline in the trade surplus in January, increases in investment abroad at US$13 billion in December and resident foreign-currency deposits.

Finance Ministry public-debt restructuring and management will help bolster the balance of capital flows, she said. The bank has more instruments to manage liquidity and the baht under the new Bank of Thailand Act.

Moreover, manufacturers and exporters can adjust to an appreciating baht through forex hedging, along with improvements in production efficiency, management and market diversification.

"There had been widespread expectation we would lift the measure. As a result, market participants have adjusted behaviour in line with these expectations. This lessens the efficiency of the withholding reserve requirement," said Tarisa.

The bank believed it would be able to counter huge demand for the baht if existing foreign investors totally unwound their forex positions, worth a total of US$5 billion (Bt157 billion at $1=Bt31.4), which would lead to currency strengthening.

Tarisa was optimistic foreign investors would not entirely unwind their positions if they had a different view on currency trends. She was hopeful the revocation would not cause exporter panic, and would have a positive psychological effect on the stock market.

However, exporters yesterday expressed disappointment with the removal.

Earlier, the bank took a strong stance that the measures would be lifted only when it could ensure exporters would not panic, imports increased significantly and volatility in the global finance market declined.

Finance Minister Surapong Suebwonglee called a February 12 confidential meeting with the central bank on the measure. Markets expected ministerial pressure on the bank to revoke the withholding reserve requirement.

Tarisa insisted she independently removed the measure based on sound economics. There was no political pressure, she said. The revocation was pursued under a joint agreement between the central bank and the ministry, which both found supporting measures to reduce the impact on the baht.

"I will not quit, because I am a working person. I insisted it would continue to work. I have not been pressured as reported. We considered it was time to remove supporting measures," she said.

Deputy Governor Atchana Waiquamdee said the bank would not manage the currency with interest-rate movements, although appreciation would have an impact on the economy. The policy interest rate could be slashed only when inflationary pressure decreased, she said.

The bank will continue to monitor the global economy, but believes the managed-float exchange rate will serve fluctuations, said Deputy Governor Bandid Nijathaworn.

The central bank will tell commercial banks about the revocation and details of supporting measures soon.

Anoma Srisukkasem

The Nation