However Suchada Kirakul, the assistant governor of the central bank's Monetary Policy Group, will not spell out the time frame for removing the controversial reserve requirement that was introduced to dampen speculative capital inflows.

Measures to replace the 30-per-cent capital-reserve requirement would not be as strict, she said, but would reduce pressure from speculative inflows.

Suchada said in a recent interview with The Nation that the anti-speculation withholding measure, introduced in the second half of December, would be a short-term one.

The measure has had a significant impact on the capital market and has been criticised by many market watchers as being too harsh, as it not only prevents short-term speculative inflow but also productive long-term investment.

Several economists earlier suggested the central bank lower the withholding ratio from 30 per cent to 5 per cent, or even less, while market players in both the stock and bond markets are keeping an eye on when the Bank of Thailand might lift the measure.

Asked about the trend of the baht this year, Mathee Supapongse, the central bank's Monetary Policy Group director, said pressure from the current account still existed but would be less than last year.

"There must be something to replace the 30-per-cent measure in some areas. It won't be strong but must be able to reduce pressure from inflows," Suchada said when asked what would happen if the measure were eventually phased out.

"For instance, we expect to continue to require that investors hedge their currencies brought into the country according to the maturity in order to neutralise the exchange rate. That should still be in place," she said.

Suchada added that the 30-per-cent withholding measure had been relaxed recently when the central bank allowed Thai companies to borrow foreign funds without the need to comply with the measure if they fully hedge the loans.

She said the central bank would evaluate the first relaxation, for company foreign loans, before deciding whether to relax it further for debt markets and property funds.

She said the impact on the capital market had already subsided as the market capitalisation and the Stock Exchange of Thailand index have recovered, although they are not at the level before the measure was announced on December 19.

The yield curve in the bond market has fallen to a better level than before the announcement, she added.

Due to the withholding requirement, the Thai foreign-exchange market has been divided into two tiers, in which the baht in the offshore market is stronger than the baht in the onshore market by about Bt1 to Bt2.

Some dealers have recently warned that speculators would finally find loopholes to arbitrage the difference of the Thai currency value. Suchada agrees.

"It won't be good to leave the two-tier market for too long. People will eventually find a chance to arbitrage. For example, there might be over-invoicing of exports. They will finally find ways to get baht liquidity into their accounts," she said.

The withholding measure has encouraged the two-tier market, as speculators cannot get baht from the onshore one. Yesterday the baht opened onshore at 35.75-35.79, closing at 35.78-35.80. Offshore, the unit was 34.10-34.20 to the greenback late in the evening.

For example, a profit-seeker would like to speculate for a stronger baht and also take a profit in the Thai stock market. They do a swap transaction by selling dollars for baht in the offshore market with a foreign financial institution that has baht liquidity in a non-resident deposit account. Then they invest in the Thai stock market. Once the swap is due, they have to sell stocks to get baht liquidity and then sell it for dollars to settle the swap agreement. But they do not want to sell Thai stocks and wish to roll over the swap contract.

They need to find baht liquidity somewhere else to roll the contract over. They have to find baht liquidity offshore from another foreign financial institution which has baht, as the 30-per-cent withholding measure discourages them from doing it in the onshore spot market.

With so many doing the same thing, baht liquidity in offshore markets has dried up, resulting in the appreciation of the currency offshore.

Yesterday, Suchart Sakkankosone, director of the central bank's Exchange Control and Credits Department, said the money in non-resident accounts had declined by about Bt2 billion to Bt3 billion over the past couple of days. The bank is examining where the funds have gone.

Jiwamol Kanoksilp

The Nation