The Bank of Thailand's stringent measure to rein-in speculation on the baht has caused a serious side-effect in the stock and bond markets.

In spite of the criticism that the measure was too severe, the central bank nonetheless found it necessary to take action, considering the impact of the strong baht on exporters and the overall economy.

Without any additional measure, it remains uncertain as to what level the baht could rise to. But it is almost certain that it would continue to surge ahead of other Asian currencies as long as the prospects of the US economy remain gloomy with its prolonged twin deficits.

Deputy Premier and Finance Minister MR Pridiyathorn Devakula's announcement to relax Monday's measure for stock investors may help slow down the losses on the Thai bourse. On the other hand, it means there is still a loophole for baht speculation as investors will be able to make twin profits in the two markets continuously and park their money in a non-resident baht account.

Foreign investors have preferred to bring huge amounts of money into Asian countries rather than in US assets - as the dollar value has been declining. The US current account deficit in the third quarter jumped to US$225.6 billion, up from US$217.1 billion in the second quarter. As a result, Asian countries have become a prime destination for asset relocation.

The baht has become a proxy of Asian currencies among speculators who are eager to make profits from short-term portfolio investment along with currency gains from the widespread speculation on the appreciation of Asian currencies.

However, speculators can't effectively attack the Chinese renminbi, which is fixed at a certain level watched over by the powerful central bank with US$987.9 billion of foreign exchange reserves.

Since July 2005, when China revalued the yuan from 8.28 to 7.82 yuan to the dollar, the currency has gained about five per cent in two years.

Investors will also find it difficult to speculate on the Singaporean dollar as the central bank has tightly controlled the currency movement without any concern on keeping the key policy interest rate. The island nation, which is a financial hub, could make forward contracts of around US$60 billion a day to stabilise the currency.

The Korean central bank has willingly allowed its currency to climb. As a result, the Korean won is 45 per cent of the rate at pre-crisis level.

Thus, speculators lined up to attack the baht until it appreciated rapidly to Bt35.09 against the dollar, with Bt10 or 40 per cent left from the rate at the pre-crisis level.

More than 20,000 small and medium-sized exporters are going to go under due to loss of income in terms of baht.

Their sales account for 32 per cent of total exports, which contribute 60 per cent of the gross domestic product (GDP).

The strong baht is acceptable if the loss from exports is transferred to benefit importers - or the debtors in the country. However, foreign speculators seem to enjoy exploiting the appreciating baht.

The BOT has realised that it would be a sitting target if it did not introduce any intensive measures to fight back, after the three previous measures launched in past few weeks have had obvious loopholes. Although the central bank does not have clear evidence what channels the speculators have been working in, it is aware they had room to make endless profits, through mutual funds or bills of exchange.

However, the central bank has concentrated too much on the baht appreciation and underestimated the effect of the measure on the stock market, so it neglected launching preventive measures to prevent the market from haemorrhaging.

The fall in the Thai bourse has adversely affected other Asian stock markets. The BOT now has to learn another big lesson: the measure to rescue the domestic real sector from drowning in the strong baht is the high cost of foreign and domestic investors in the financial sector, whose wealth was wiped out on Black Tuesday.

At the same time, it does not mean that the problem will go away as Thailand's door is still ajar and foreign capital is waiting to flood in at any time.

Anoma Srisukkasem

The Nation