Thai Rak Thai

Now we now why the Thai baht had been so strong for so long despite the political turbulence. Thailand will scrap its capital controls on foreign inflows from Monday, a policy shift that could lead to a wave of new investment flows but strengthen the baht still further.

Tarisa Watanagase, the Bank of Thailand (BoT) governor, announced the change yesterday as ''appropriate'' as the economy had begun to improve from the fourth quarter of last year. The announcement came after the government transferred four state department chiefs in a week.

Ms Tarisa denied speculation that the scrapping of the 30% rule was made due to government pressure. The removal of the rule was a key promise by the People Power party and other parties in last year's election campaign. The Thai government plans to unveil a new stimulus programme next week would also help raise confidence in the economy, while a decline in the trade surplus and rising investment abroad had also led to a greater balance in capital flows.

Last Monday, the National Economic and Social Development Board surprised the financial markets by announcing that economic growth picked up to 5.7% year-on-year in the fourth quarter and to 4.7% for the whole of 2007. Finance Minister Surapong Suebwonglee echoed the sentiment, saying that public confidence in the economy had improved in recent months. He said the cabinet on Tuesday would review an economic stimulus programme that would help boost investor and consumer confidence further. The programme is expected to include tax breaks for individuals and companies, as well as incentives aimed at boosting the property market and other sectors.

The Finance Ministry yesterday also announced various measures to help ease the impact on the currency following the lifting of the capital control, including plans to float new public savings bonds and 30-year infrastructure bonds and policies to facilitate state and private sector investment in foreign securities. The 30% reserve rule, implemented on Dec 18, 2006, was one of the more controversial policies enacted under the Surayud Chulanont government. The rule, which was aimed at curbing speculative inflows and baht appreciation, was widely criticised by foreign investors and led to the largest one-day loss in the history of the local stock market the day after it was announced.

The central bank has since relaxed the 30% capital reserve requirement, although it remains for investments in the bond market and property funds. The baht, which traded at 31.5 to the dollar yesterday, its strongest since the 1997 crisis, has risen steadily in recent months in anticipation of a policy change.

The central bank had also imposed administrative measures to curb baht speculation by restricting transactions with no underlying trade or investment purpose. Just to compare with the ringgit: the ringgit has already appreciated gradually vs the USD over the last 18 months, even so, the ringgit has not been able to keep up with the strong baht. The move will only strengthen the baht further, damn, there goes my Bangkok trip. Abolition of capital controls is needed to resume mega-projects which require foreign investment. Meanwhile, the central bank insisted it would not cut the policy interest rate, though the Thai rate is higher than the US and makes Thailand attractive for capital inflows, which would strengthen the baht.

The market earlier believed the revocation would come with a deep policy interest-rate cut of at least 100 basis points from the current 3.25 per cent. The bank said the managed-float exchange rate was suitable, because it was flexible and dealt with global volatility, an important factor that is closely monitored.

Thailand's economy grew 4.8% last year. Economists say business confidence is reviving under the new, pro-business government. Thailand's imports in January, for instance, rose 40% compared with the same month last year. Its January trade surplus narrowed to US$170 million, compared with more than US$612 million in January 2007.

Thaksin, a billionaire populist who styled himself as Thailand's chief-executive prime minister before running afoul of the country's powerful military, strongly criticized Ms. Tarisa's capital controls from his self-imposed exile. Finance Minister Surapong Suebwonglee, a close associate of Thaksin, told reporters that the government will urge state agencies and businesses to convert their foreign debt into local currencies, effectively buying dollars and checking the baht's upward momentum. State enterprises and agencies currently have foreign-currency debts worth US$3 billion.

Despite the new signals coming from policy makers in Bangkok, political risk continues to hang over the Thai market. Thaksin's return has deepened concerns that a simmering conflict between the armed forces and the billionaire's supporters for long-term control of the country will continue to fester. On Tuesday, Thailand's election commission ruled that one of Mr. Thaksin's close associates was guilty of electoral fraud. If Thailand's Supreme Court upholds that decision, it could lead to the dissolution of the pro-Thaksin People Power Party, the nucleus of the new government.

Never underestimate Thaksin's hidden-hand. The feel-good removal of capital controls coincided with his return. Probably to foster the feel-good environment to link with his appearance - shrewd and clever. Dollar for dollar, the Malaysian economy is in a lot better shape than Thailand, hence the stronger baht will certainly bring forth some issues. Stocks will fly, however exporters will have to deal with tighter margins. Property prices will also fly, attracting bubble conditions again. I hope they remember 1997. Only this time around, the neighbours won't be joining the after-party.