Amid calls for the Bank of Thailand to review the December 19 measures to halt currency speculation, several ideas have emerged as options for the central bank to deal with speculative money.

Most economists agreed that intervention was necessary. Without the measures, the baht might continue to rise to a level where Thai exports were priced out of the market, but what to do exactly has become a big question.

For instance, economists vary in views of the appropriate percentage for the withholding requirement, the timeframe required for withholding refunds and whether the central bank should instead have cut interest rates to ease the level of the baht.

Yesterday, Thailand Development Research Institute (TDRI) proposed a solid option to Prime Minister Surayud Chulanont to reverse the policy. The institute agreed that the withholding-reserve requirement is necessary, but the withholding percentage should be lower than 30 per cent of capital inflows.

While some might prefer to see the measure as temporary, TDRI suggested that the required timeframe should be abolished, though the measure should be in place to deal with currency speculation.

However, Teerana Bhongmakapat, a lecturer from Chulalongkorn University, said yesterday that the proposal of TDRI would harm long-term fund flows and didn't tackle the root of the problem.

His suggestion was to focus anti-speculation measures on short-term inflows. Teerana suggests Thai authorities adopt a capital-reserve requirement of 3-5 per cent of capital inflows but to withhold the capital in three tiers, depending on the period that the investors keep their funds in Thailand.

At first, the authorities should withhold 3-5 per cent of capital inflows from foreign investors. If they keep their investment less than three months, the authorities would keep the entire reserves of 3-5 per cent. If investors keep their investment more than three months but less than one year, half the 3-5 per cent reserves would be taken. Finally, if they keep their investment in Thailand more than one year, they would get the entire reserves back.

He said this way long-term fund flows would hardly be affected.

"With TDRI's suggestion, the country's productivity would be affected as it increases the cost of long-term capital funds," Teerana said.

He added that the actual funding cost from his model would become implied tax rates of 3.04-5.07 per cent of total capital inflows that invest less than three months, 1.5-2.75 per cent of inflows that invest three months to less than one year, and 0.04-0.07 per cent of inflows that invest more than one year.

On December 19, the central bank introduced a draconian measure inspired by the "Tobin Tax" introduced in Chile in 1991. The Bank of Thailand required foreign investors to deposit 30 per cent of the money they bring into the country at the central bank for at least one year with no interest, which translates into a withholding tax on foreign equity investment. The Bank of Thailand, however, relaxed the policy 24 hours later.

Nattapol Chavalitcheevin, president of the Thai Bond Market Association, said the measure would be successful if it was adopted by a country that has strong macro-economic conditions. Also, the measure must be dynamic and flexible according to the situation. The measure should be implemented along with controls of financial institutions for transactions with foreign partners. The Finance Ministry and the Bank of Thailand should work together to make sure that the measure wouldn't create a domino effect.

Tarisa Wattanagase, the Bank of Thailand's governor, yesterday insisted that despite the suggestion from TDRI, the central bank would have to maintain its draconian 30-per-cent reserve requirement for at least three to six months. While the bank is willing to listen to ideas, it takes time to evaluate a measure.

Pairoj Vongvipanond, an economist at Dhurakij Pundit University, said he supported the central bank stance as the bank said it would not cancel its latest measures to curb the baht's rise. If the central bank reverses the policy too quickly simply because of a heavy fall in the stock market, it would damage policy credibility, he said.

The central bank imposing reserve requirements for short-term capital flows did not violate any conditions set out by the Internal Monetary Fund, he added.

A dealer from a large bank said the baht in offshore markets has appreciated significantly due to a lack of baht liquidity, rather than speculation.

The baht in offshore markets yesterday opened at Bt35.70 per dollar and closed at its peak of Bt35.40, while the onshore baht opened at Bt36.25-Bt36.30 per dollar and closed at Bt36.10 to Bt36.15.

He said the baht's appreciation in offshore markets was due to demand as banks sold dollars for baht.

The baht's implied interest rate, which is calculated from the swap price, reflects the higher demand with baht liquidity in offshore markets. The tomorrow-next rate, also known as the overnight rate, increased to 21.56 per cent yesterday morning, from 15.38 per cent on Wednesday. The one-day rate rose to 26.93 per cent yesterday morning, compared to 19.79 per cent on Wednesday.

Wichit Chaitrong

Anoma Srisukkasem

The Nation