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Published on March 10, 2008

The reserve requirement was a mistake in the first place. It created many problems and obstacles for investors and businesses. It ruined the investment climate and undermined investors' confidence through undue confusion and cost. Getting rid of the measure was the correct decision although long overdue. Now that this clumsy measure has been removed, we can see future benefits to the Thai economy and finance.

First, there is no more confusion about the exchange rate. There will be one exchange rate for the baht inside and outside Thailand. There will be no difference between the on-shore and offshore Thai baht rate. So there is no point to try or even think about making a profit from the two

rates.

Second, getting rid of this capital control measure is definitely good for the stock market, debt market and mutual fund industry. The rise in the activities and value of these markets is inevitable. One sector to benefit immensely from this is real estate and property funds, which will receive a tremendous flow of foreign money.

Third, the interest rate will come down. Despite a relatively high inflation rate, the Bank of Thailand is expected to cut its policy rate, leading to a reduction in short-term bond yields and money-market rates. This is because of the widening gap between the Thai baht and the US dollar interest rate, as the Federal Reserve is expected to cut its interest rate by one percentage point in the next two meetings.

In general, we should see lower interest rates for both deposits and lending rates of commercial banks towards the end of the year after the central bank's interest rate cut. People with extra savings should deposit in a long (one year) rather than short tenure (3 months).

However, if the baht does not appreciate significantly against the US dollar, thus reducing the worry of the over-strengthening currency, and if the Thai economy does improve substantially, say at 6 per cent GDP growth, we could see interest rates rise marginally later this year to rein in inflation.

Fourth, the exchange rate of the baht against the US dollar should become less volatile due to the lifting of the 30-per-cent reserve requirement.

However, the trend is that our exchange rate should steadily strengthen as the dollar weakens and the Thai baht appreciates. The problems with the US economy and financial sector should continue to add downward pressure on the dollar, making baht appreciation unavoidable.

Nonetheless, I do not think that the baht will rise sharply against the dollar, because speculation from the two-tier exchange rate has died down. This makes the pattern of foreign-exchange transactions, especially from exporters and importers, more stable and the situation regarding flows of funds in and out the country normal.

Finally, lifting the reserve requirement brightens the prospects of the Thai economy. The outlook of the economy is much better without the capital-control measure. This is coupled with positive factors - such as better commodity and agricultural prices, more private consumption, increasing private and government investment, extra budget in general and more funds for government stimulus measures.

The Thai economy, therefore, is expected to improve to a growth rate of around 6 per cent this year.fsa@fpo.go.th

Dr.Chodechai Suwanaporn Director of the Fiscal Policy Office

The Nation