Pridiyathorn, a strong defence.

In spite of negative reaction from the market, Pridiyathorn said the business sector would begin to realise benefits from the measure next year.

Speaking at a seminar yesterday jointly hosted by the Alumni Association of Sasin (Chulalongkorn University's Graduate Institute of Business Administration) and Thansethakij newspaper, Pridiyathorn said, "The measures will boost Thailand's exports and private investment in the longer term."

On December 19, the central bank adopted the draconian measure of imposing a 30-per-cent withholding requirement on capital, causing the stock index on that day to plunge 108 points, or 19 per cent.

"Next year, people will admire the central-bank governor for her decision to impose a 30-per-cent reserve on capital inflows," said Pridiyathorn. He said if the central bank had not taken action, the baht could have appreciated close to 30 to the US dollar, eroding the competitiveness of Thai exporters.

By imposing capital controls, the central bank stabilised the currency. Exporters had been hit hard by the appreciating baht before the central bank resorted to the measure, he said.

The baht rose 17 per cent against the greenback last year before the central-bank action, while other regional currencies rose less than 10 per cent.

Public Debt Management Office director-general Pongpanu Svetarundra said at a separate event that the ministry and the central bank would soon jointly assess the impact from the measure.

"If the draconian reserve requirement proves to be an obstacle to debt-market development, the Finance Ministry will ask the central bank to relax or scrap the measure," he said.

However, he added that liquidity in the market was ample, as there was still demand for long-term bonds.

Pridiyathorn defended the measure during the seminar. He said that while many critics and investors in the financial market might not agree with the central bank, the Thai economy was propelled by the real sector and exports. If exporters lost markets, it would eventually hurt the financial market anyway, he argued.

Pridiyathorn also said that a strong baht would drive out Japanese investors, because they could not make much profit from investments if the baht appreciated too much.

At the same seminar, Tarisa insisted the measure was necessary to prevent the baht from breaking the level of 34 to the dollar.

"The Bank of Thailand didn't want to implement unconventional measures, because we knew investors would not be happy. We know the policy is unpopular, but it's necessary," she said.

She nonetheless admitted: "I didn't expect the investors to be this panicky."

She said that on December 15, the baht stood at 35.09 to the dollar, on the brink of breaking the level of 35 to the dollar. "We didn't know where the level would end without the intervention," she said.

At that time, the central bank felt the need to do something. The measure was launched on Monday, December 18. Normally, she said, any financial measure would be introduced on a Friday, in order to let the market digest the information over the weekend. However, the central bank could not wait. So they announced the measure on Monday and started implementing the policy on Tuesday, December 19.

"We didn't have time to wait. We had to do something," she said.

She said that even though the central bank started introducing measures from December 19, the baht still continued to rise. "It showed that the investors thought the measures were too weak. So the central bank had to consider other options by studying what other countries had done to protect their currencies," she said.

On the first week of December, the inflow was US$950 million, compared with last November when the capital inflow was about $300 million a week.

Investors speculated in the baht because they expected high returns. The return of investment from buying baht was 5 per cent on average, plus 17 per cent from the appreciation. Therefore, the investors would receive a 22-per-cent return altogether.

She said the central bank decided not to cut the interest rate at that time, afraid of sending the wrong signal to the market. "The market might have thought we wanted to stimulate the economy. Besides, a rise of half a percentage point would cut the return from 22 per cent to only 21.5 per cent. The return thus would still be high," she added.

Pridiyathorn said he believed economic prospects this year should be good. Japanese investment will increase after the government signs a free-trade agreement with Japan.

He also defended the government's recent move to amend the Foreign Business Act, saying it would help foreign investors in the long term.

Deputy Finance Minister Sommai Phasee told representatives from asset-management firms and insurers that no other draconian measures would be announced to shock the market. He said he would take the fund managers' views into account and discuss with the ministry ways to facilitate the capital market.

Anoma Srisukkasem,

Wichit Chaitrong

The Nation