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Published on March 4, 2008

While Governor Tarisa Watanagase denied the controls had been removed because of political pressure, some observers said the move came much earlier than expected.

The bank has revoked the unremunerated reserve requirement of 30 per cent though the balance of fund flows from both trade and capital movements carries risks, and some exporters are still nervous.

Some fear the contingency measure introduced to allow for a smooth transition from the lifting of the controls may not bring the desired effect.

At Friday's press conference, Tarisa said the bank had considered changing factors and deemed it was now an appropriate time to remove the unremunerated reserve requirement.

Factors she mentioned included the government's stimulus package, the recovery in domestic demand, an improved balance in foreign-exchange flows, and the ability by exporters and manufacturers to adjust to a lower dollar.

Moreover, the BOT said it could manage liquidity and allow for a more flexible currency under the new Bank of Thailand Act, as it could take deposits from commercial banks and issue BOT bonds unlimitedly and without any permission from the Finance Ministry.

In addition, the finance minister could issue government bonds at any time, even if the govrenment is not running a budget deficit.

Nevertheless, it may be a bit too soon to conclude that a decline in the trade surplus in January has led to balanced capital flows and that the measure to encourage portfolio investment abroad will reduce pressure on the baht to appreciate.

The Kingdom registered a lower trade surplus of US$170 million (Bt5.43 billion) in January. The current account stood at $1.4 billion.

Imports grew at a higher pace than exports in January, thus not firmly establishing a likely future trend.

Local demand for the dollar appears weaker than supply, which continues to pressure the baht.

While the government has announced a stimulus package and is going ahead with mega-project investments, particularly the mass-transit system, the work could take time, perhaps by the second half of the year. The recovery of domestic demand private consumption and investment appears to be fragile.

The 4.9-per-cent growth of the private consumption index and 4.6-per-cent rise in the private investment index in January mainly came from a low base.

Domestic demand in the first two quarters of last year was soft. However, the BOT measures to promote portfolio investment abroad will help boost some demand for the dollar.

As of the end of last year, outstanding outflows amounted to $13 billion, compared with $3 billion at the end of 2006.

But huge capital outflows cannot happen overnight and overseas investment via foreign investment funds cannot immediately cool the baht's rise.

At the same time, foreign inflows into the Kingdom could swell if investors seek to park some of their cash here to escape a US recession or stagflation.

Considering the short-term impact from the removal of the controls, the BOT must also deal with exporters who are urged to sell dollars for baht.

In addition, about $5 billion that was locked in by the controls will also need to be unwound.

But the positions should be minimal after this July.

The BOT may face high costs from issuing bonds or take deposits from commercial banks to absorb rising liquidity if it intervenes in the foreign-exchange market to weaken the baht. The central bank's supporting measures to allow commercial banks to borrow the baht from a group of non-residents (NRs) will help lower opportunities to speculate on the baht and curb its rise.

The banks can borrow baht from NRs without underlying transactions not exceeding Bt10 million, compared with the former cap of Bt50 million.

The BOT's relaxation for banks to lend baht to a group of NRs is aimed at increasing demand for dollars. The limit has been raised to Bt300 million, from Bt50 million previously.

If an NR views the dollar as being too weak, it can buy forward positions. The point is how many NRs will expect the baht to weaken, particularly in the short term as local exporters sell dollar positions.

Anoma Srisukkasem

The Nation