Prime Minister Surayud Chulanont is now busy looking for a new finance minister to succeed Pridiyathorn. Since we do not know who the new finance minister will be, we can't speculate on the new minister's views on the interest-rate policy and capital controls, which are in the domain of the central bank. However, some market watchers say that when the new finance minister steps in, he might seize the opportunity to remove the capital controls outright to restore confidence.

Dr Prasarn Trairatvorakul, the president of Kasikornbank, has already urged the central bank to remove the capital controls because the measure hasn't worked and it has hurt investor sentiment badly. Korn Chatikavanij, the deputy secretary-general of the Democrat Party, also said the capital controls have been watered down significantly since their introduction in December. Hence, removing the capital controls would be an important first step for the government, which will also undergo a Cabinet reshuffle, probably a major one, in order to salvage its sagging fortunes.

Once the capital controls are removed completely, how can the central bank look after the baht? The central bank defended its decision by saying that there was no other way for it to curb the baht rise but to introduce the controls. The central bank was certain that without the capital controls, the baht could have risen to Bt33-Bt34 to the US dollar. Thai industries and exporters would go bankrupt if the Thai currency were no longer competitive with regional currencies.

However, there are several methods to manage currency appreciation. The central bank can always intervene in the foreign-exchange market. It can also rely on moral suasion to deter financial institutions or funds from speculating against the baht. MR Chatu Mongol Sonakul, the former governor of the Bank of Thailand, succeeded in talking foreign financial institutions out of attacking the baht in 1998. The central bank can also introduce select administrative measures, even taxation on some transactions, to curb speculation. Finally, it can cut interest rates sharply to make the baht less attractive to investors.

This brings us to another major policy debate on the direction of interest rates. The central bank has cut its short-term rate for a second time to 4.5 per cent, leaving the gap with the US rate at 50 basis points. The first time it cut the rate was in January after the Thai rate peaked at 5 per cent. With hindsight, some economists have begun to question the hawkish stance of the central bank, which moved too aggressively to raise the rates during Pridiyathorn's term. Then the central bank was afraid of inflationary threats from higher oil prices and the negative return on interest rates (interest return minus inflation). The hawkish interest-rate policy had driven up the value of the baht sharply.

Economists are now watching the central bank's monetary policy closely. Some now hold the view that the rate cut is probably long overdue. In fact, the central bank should have moved more aggressively to cut the rate substantially, not only to stimulate growth but also to curb the appreciation of the baht. Several brokerage houses predict that the central bank's short-term rate could fall to 3.50 per cent this year. Korn Chatikavanij of the Democrat Party even suggests that there is room for a cut of 200 basis points in the interest rate to prop up the economy.

The issue now is the health of the Thai economy as a whole, as there are signs that the growth rate this year might slip below 4 per cent. Disbursement of the fiscal budget has faced problems due to a delay in the passing of the budget and also because of bureaucratic red tape. It is important that the Surayud government, with a new Cabinet, focuses on winning back confidence by putting the right people in the right jobs, pursuing expansionary fiscal and monetary policies, removing capital controls and providing clear explanations to the public about the direction it is taking.