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Capital controls pushing baht higher


February 20, 2008

Capital controls pushing baht higher

Thailand's lack of clarity on the fate of its capital controls has fueled speculation in the baht, pushing the currency higher and threatening exports, Reuters quoted the Thai Chamber of Commerce as saying on Tuesday.

The Bank of Thailand's near daily market intervention was not working and it should take more concrete steps to rein in the baht, now at 10-year highs against the dollar, senior chamber official Chainant Ukosakul told reporters.

"It is said the baht's rise is due to arguments among policy makers and a lack of clarity on the 30-percent measure," he said, of the measure requiring 30 percent of foreign inflows to be held at the central bank for a year, interest free.

"That is worrying to manufacturers and fuelling speculation in the baht. Policy makers have to be clear on the issue rather than hold daily talks," Chainant said.

Prime Minister Samak Sundaravaej said last week his government would need 2 months to review the curbs imposed in December 2006 to contain a surging baht but which tarnished Thailand's investment reputation.

The Bank of Thailand, which for months resisted calls to remove the controls, has appealed to exporters to stop speculating in the currency, but to no avail.

The baht, which developed into a two-tier market after capital controls were imposed, was at 32.5 against the dollar onshore and at 31.7 offshore on Tuesday.

The onshore rate has risen 3.6 percent so far this year, the highest in Asia after a 7 percent rise last year. The baht rose nearly 14 percent in 2006 when the controls were imposed to protect Thai exports, which account for more than 60 percent of gross domestic product.

The measures have been gradually relaxed over the past year, but experts say a sudden lifting of the remaining curbs could trigger an influx of foreign capital flows and push the baht to 30 per dollar.

That has fuelled calls for alternative measures such as an exit tax, Aat Pisanwanich, a director at the University of the Thai Chamber of Commerce, said. Chainant expected the baht to average 32.50 against the dollar this year, which would trim export growth to 4.6 percent.

"But if the baht hits 30, exports will surely turn negative," he said. The Commerce Ministry expected exports to grow 10-12.5 percent this year after a 17.5 percent rise last year.

Aat said manufacturers need a stable, slightly weaker currency, lower production costs and a recovery in domestic demand, which has plumbed record lows during two years of political strife and a bloodless 2006 coup.

"This year foreign exchange rates will have a big impact -- bigger than oil -- on production, job cuts and production base relocation," he said, refering to speculation that some manufacturers may move elsewhere.

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