Although the central bank's draconian 30-per-cent reserve requirement to curb baht speculation will make foreign investors shun Thai stocks for at least three months, they will eventually come back next year.

The SET index has so far this year lost 5 per cent since December 30, 2005, mainly due to fears of higher interest rates, rising fuel prices, political uncertainty before the September 19 coup and, finally, the central bank's 30-per-cent reserve withholding requirement.

The BOT's tough measure dealt the hardest blow to the Thai stock market as the SET index tumbled almost 20 per cent in a single day, at one point to 589.92 before it recovered to close 14.84 per cent lower. It was the biggest one-day fall in the Thai stock market's 31-year history. In comparison, the SET had slumped 8.8 per cent in Bloody May in 1992 and on July 2, 1997, when the baht was floated.

The effect of the latest capital-control measure was seen not only in Thailand but also in other Asian countries, spurred by foreign investor anxiety that other central banks would follow in the BOT's footsteps.

On Thailand's Black Tuesday, Indonesian share prices closed 2.85 per cent lower, the Kuala Lumpur Composite Index lost 2 per cent, the Korea Composite Stock Price Index or Kospi fell 0.4 per cent, Singapore's Strait Times Index dropped 2.23 per cent, and Hong Kong's Heng Seng was off 1.19 per cent.

The capital-control measure, designed to fight baht speculation, prompted foreign investors - who have been snapping up Thai shares since August 2005 - to rush to unload Thai shares.

Even though the central bank succumbed to a strong petition by all parties related to the stock market by abruptly exempting stock investment from the 30-per-cent reserve withholding requirement, some foreign investors still prefer to keep themselves at a distance as they are worried the central bank might impose additional measures.

An unnamed analyst said that it would take time for foreign investors to return to the Thai stock market, though Thai shares are now very cheap.

The Thai bourse outlook early next year will be sluggish because the market will not be able to revitalise itself without foreign players, the analyst said.

Thailand's risks, in the opinion of foreign investors, increased significantly following the implementation of the central bank's tough measure, he added.

Standard & Poor's Rating Services commented that although the measure has succeeded in stemming further speculative inflows, it could also trigger a pullout of foreign funds already invested in Thailand.

The measure harmed the BOT reputation and made investors cautious about investing in the Thai financial market, the international credit rating agency said. But they are likely to come back next year.

Capital inflows are likely to pour constantly into the country next year as foreign investors are openly allowed to reap capital gains from Thai stocks with a current low price-earning ratio along with currency gains from the appreciating baht.

The central bank's one step backward - exempting stock investors from the draconian 30 per cent reserve requirement on capital inflows - has apparently left one way open for speculators.

Despite the expected capital inflows next year, the estimated current account deficit of between US$3.2 to US$6.2 billion (Bt119-226 billion) next year will help cool the strong baht.

As a result, the baht next year will not be much stronger than it is this year but will not be as weak as it was in the past few years. The high volatility of the currency next year will depend on how attractive the Thai stock market will be and how efficiently the BOT will defend the baht from expected speculation.

The Kingdom's economic outlook and the equity bourse alone are not outstandingly attractive enough to attract foreign investors compared with neighbouring countries with strong economic growth and well-performing listed companies. But it is the baht that is attracting foreign investors wanting to make a profit.

Foreign direct investment (FDI) may gradually flow into the Kingdom in some sectors. The country has been losing competitiveness to low-labour-cost exporting countries like China or Vietnam but cannot compete with high-technology exporting countries like Korea or Taiwan.

The BOT's stringent measure may lessen long-term funds as it makes the new FDIs feel uncomfortable in the more complicated fund transfer process. Existing investors may also feel annoyed by the measure as their foreign parent companies will be restricted to facilitate them financial assistance under the new rule.

In 2005, net FDI was only $7.4 billion. Whereas in the first nine months of this year, it posted $7.79 billion. But this year, the figure also included the Bt73-billion sale of Shin Corp to Temasek, the Singapore government's investment arm.

The Kingdom cannot rest easy next year as the baht would still be a target for speculation.

Asian-currency denominated assets have been attractive among investors who have faded away from the deflated value of US assets in keeping with the US economic outlook. The US current-account deficit was 6.8 per cent of gross domestic product in the third quarter, the second largest deficit since last year's fourth quarter figure of 7 per cent.

The global imbalance will be prolonged as long as the US government fails to fix its serious problems and China's currency remains intact. This means that the baht - which has already become the proxy for Asian currencies - continues to appreciate.

However, the country's current account deficit would help prevent the baht from being too much stronger as the demand for dollars from importers will be higher than the demand for baht from exporters. The higher the deficit is, the weaker the baht will be. But globalisation seems to influence the baht more than the impact from internal factors.

No matter at which level the baht moves, its fluctuation will be the key point that relevant financial parties must take into account.

Anoma Srisukkasem

Oranan Paweewun

The Nation