Baht to rise if controls scrapped

"We anticipate a faster pace of baht appreciation if the remaining capital controls - the 30 per cent unremunerated deposits on offshore investments in local fixed income instruments - are lifted amid a weak US dollar setting," said Jun Trinidad, an analyst at CitiGroup, in his Thai market Weekly released yesterday.

Moreover, he said the removal of the exchange curbs would most likely result in a realignment of offshore exchange rates with onshore rates.

Already, the offshore and onshore baht rates have narrowed since the end of last year. On December 28, 2007, the onshore rate stood at Bt33.74/US dollar, compared to the offshore rate of Bt29.80. On February 11, the onshore rate strengthened to Bt32.90, against the Bt31.75 offshore rate quoted in Singapore.

"Traders will be poised to take substantial overnight positions as offshore demand for the baht improves. Markets have been abuzz with talk and expectations that the exchange curbs would soon be lifted," Jun added.

Finance Minister Surapong Suebwonglee will hold a meeting today with Bank of Thailand governor Tarisa Watanagase and top officials from other agencies to discuss the possibility of removing the capital controls.

Surapong would like to remove the capital controls in order to win back foreign investors' confidence, while Tarisa is likely to present data to support the central bank's view that capital controls should continue at least for the time being.

So far, the banking authorities have watered down the capital controls, introduced in December 2006, so that only foreign capital buying into Thai fixed-income instruments is subject to the 30 per cent reserve requirement.

Jun said in his report that if the baht appreciated sharply, the banking authorities would be forced to cut interest rates.

"Removal of the curbs might be complemented by fiscal action to provide subsidies to SME exporters, who would be vulnerable to sharp baht appreciation, and to hike portfolio taxes," he said.

Somchai Sujjapongse, the Finance Ministry spokesman, yesterday insisted that the authorities would not levy tax on foreign capital once they decide to remove the capital controls.

"The capital should be free flow, but we should think about how to reinvest foreign currencies earned by exporters," he said.

He agreed that the central bank might need to cut the interest rates to make the baht less attractive for currency speculation before the capital controls are removed.

"An adequate rate cut should prevent the baht from appreciating rapidly against the US dollar. If the baht does not appreciate faster than other regional currencies, it should be all right," he said.

However, lower interest rates would adversely affect retirees or state officials who depend on interest-rate income. Therefore, the authorities might have to find way to help savers.

"We have to think it through and launch a comprehensive package to deal with any consequences of scrapping the capital controls," said Somchai.

Somchai also said the government could speed up mega-projects investment this year by selecting those that could be implemented quickly. More public investment will lead to more import of foreign goods, which should lessen pressure on the baht.

The high current account surplus in recent years has contributed to the fast rise of the baht, he added.

Suchart Thada-Thamrongvech, an economist at Ramkhamhaeng University and one of the finance minister's advisers, suggested that boosting both private and public investment would lessen the pressure on the baht. Tax cuts would immediately boost private investment, he said.

However, scrapping the capital controls is not an urgent issue, because it did not increase the damage to the economy, he said.

Suchart suggested the government and central bank proceed smoothly if they want to scrap capital controls.

Earlier, Supavud Saicheua, managing director of Phatra Securities, suggested that the central bank should allow the baht to strengthen further in line with the market trend.

But Thai exporters are happy with the central bank's capital controls, as they are afraid that without the controls the baht could appreciate further and hurt their business. Some suggest the government should offer cheap loans to support exporters who might be affected by a stronger baht.

Bank of Thailand assistant governor Atchana Waiquamdee refused to comment yesterday on the ministry's measures to replace the withholding reserve requirement, saying the central bank would present its case to the Finance Ministry directly today.

But she insisted that capital controls could be removed once domestic demand recovers enough to cope with fluctuation in the global economy and currencies. Moreover, foreign-exchange flows from trade and investment should also show more balance than at present.

The ministry should be cautious about risks from the influx of capital incurred by the depreciation of the dollar, and should have other measures to manage the baht and liquidity, she said.

Wichit Chaitrong,

Anoma Srisukkasem

The Nation