Thailand's finance minister surprised markets yesterday by announcing that new capital controls would remain in effect, insisting that the measures have helped exporters and steadied the baht.
"Based on our analysis, the 30 percent reserve requirement has helped the export sector to survive and the baht is now at about 36 to one [US] dollar, which is good," Finance Minister Pridiyathorn Devakula told reporters.
Reserve requirements imposed in the middle of last month effectively lock up for a year 30 percent of any fund inflows coming into Thailand for financial investment.
Analysts had widely expected the government to ease the rules, and the announcement sent share prices sliding, with the Stock Exchange of Thailand composite index down 1 percent after the morning session.
The capital control rules had sparked a stock market crash last month, prompting authorities to allow an exemption for investments in shares. Other types of investments remain under the new rules.
The rules were designed to control the baht's rapid rise and Pridiyathorn insisted that they were helping Thai exporters by stabilizing the currency at around 36 to one US dollar.
The export sector accounts for some 60 percent of Thailand's economic output.
"The sector that really attracts direct investments is exports. Of the two types of investment, to invest in setting up a company in Thailand or to invest in the Thai stock market, we have to prefer the first type of investment," Pridiyathorn said.
He spoke after a study by the Japanese Chamber of Commerce found that the 1,200 Japanese businesses operating in Thailand were concerned that the rules would raise the cost of doing business here.
"I have met with Japanese investors who reassured me that they are not leaving and will maintain their investments here," he said.
But Sukhbir Khanijoh, senior market analyst at Kasikorn Securities, warned the capital control rules were damaging investor confidence in Thailand.
"While the minister insisted that the measure has given a boost to exports, the economic damage is much higher in terms of confidence and massive losses in the stock market," he said.
"Pridiyathorn said the rules would bring about benefits over the longer term to the Thai economy. Today, there are no new investments and we might have to wait for about a year for the measure to generate positive outcomes," he said.
The controls have helped steady the baht's rise, but has not weakened the Thai currency as much as the market had expected, said Wiriya Lappromrattana, head of research at Kiatnakin Securities.
"The baht has been trading within a narrow range and not strengthened further since the rule was announced," Wiriya said.
"The currency has become more stable, trading between 35 to 36 to the dollar," she said, adding that the market had expected the baht to slide to 36.50.
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