Financial markets were the first victims of the Bank of Thailand's capital controls, but the longer this Draconian measure is enforced, the more casualties will mount among companies in the real sector.

Apart from billions of baht in stocks and bonds evaporating on Black Tuesday, the mutual-fund industry took another hit when Suchart Sakkankosone, director of the central bank's Exchange Control and Credits Department, said last week that foreign investment funds and property funds would come under the reserve requirement for new inflows.

While 2006 was a golden year for several developers in raising funds via real-estate investment trusts, the central bank's order that foreign capital inflows to the trusts will be subject to withholding has taken the sheen off the trusts.

TMB Asset Management's CPN Retail Growth Property Fund, the country's largest, was forced to hold off its plan to increase its capital by Bt7.17 billion. It currently has Bt10.92 billion in capital. The CPN fund is among 12 in the market, which has a high ratio of foreign holders.

True Move was also reported as scrapping a business deal planned to be signed last week while Toyota Leasing has put its plans on the back burner.

Longlom Bunnag, chairman of Jones Lang LaSalle Thailand, an international real-estate consulting firm, said foreign investors who were on course to finalise acquisition deals before the year's end had immediately pulled their plans following the measure.

"Although investment in real estate is exempted from the measure, they have lost their confidence. We believe that they are still interested in Thai properties but they'll delay their plans until the government can restore confidence," he said.

Even investors who were not that concerned with the measure have delayed their investment plans, waiting to see how much the baht would weaken against the US dollar.

"The weaker the baht is, the cheaper their target assets get," Longlom said.

The Thai currency ended around 36 to the dollar last week after touching a nine-year high of 35.06, the level that forced the central bank to come up with the austere anti-speculation measure.

Developers are not alone in adopting this cautious approach. Kasikornbank said its corporate customers had delayed their fund-raising plans due to the 30-per-cent reserve requirement for many types of foreign capital inflows.

Piti Tantakasem, head of Kasikornbank's capital market business, said the bank's wholesale customers who were scheduled to issue baht bonds early next year had deferred their plans until the market situation becomes clearer.

The lack of new issues will act as a further drag on the bond market, due to the loss of interest of foreign investors hampered by the reserve requirement.

With the yield curve rising more than 30 basis points, the bond market gave up Bt32 billion in value on Black Tuesday alone.

According to the Thai Bond Market Association, over the past 11 months, foreign investors have been pumping some Bt2.2 billion per day into the bond market, accounting for 14 per cent of total trading volume.

However, after the central bank announced its austere measure, foreign investors' trading share declined by only 2 per cent, which shows that bond investors are not the short-term speculators the central bank would like to control, Thai BMA said.

ABN AMRO Asia Securities (Singapore) said in a report that the measure would likely further dampen foreign investor interest in Thai bonds, and will drive yields up, particularly at the short end of the curve, where foreign exposure is concentrated.

"Even for genuine investors, similar to equity investors, a commitment to stay invested for one year is a hurdle to active management of investment," the report said.

"Over the longer term, we think that a potentially negative impact of the measures on foreign real investment will dampen our positive view on the Thai economy. This will likely depress Thai yields beyond the near-term market reaction."

This could affect banks' treasury business.

Nattawut Sachabudhawong, a senior economist in the treasury group of Siam Commercial Bank, said the central bank's move could upset the bank's treasury business for a long time if players in the country's bond market, particularly foreign investors, head for the exit.

He said after the central bank prescribed its medicine, some foreign investors of some banks had closed out their positions early out of concern over monetary policy. Each bank has also seen its trading volume slump. This would impact market liquidity in the longer term and it would end up hurting the treasury business of the banking industry.

The bond portfolios that banks hold as loan-loss reserves were not impacted much, although many banks have trimmed their bond holdings as their provision needs have eased. The bond trading operations of banks were also not affected significantly as they normally hedge for risk.

Bank of Thailand Governor Tarisa Watanagase has stressed that capital controls would not be in place forever but she would not commit to a specific timeframe.

Until then, it is expected that the measure would claim more casualties, besides the credibility of the central bank.