Baht Controls May End After Election, Says Bank

Source : The Business Times, November 27, 2007

Thailand's central bank may lift its capital controls after national elections on Dec 23, a move that may boost the currency by about 16 per cent next year, Royal Bank of Scotland plc said in a report.

The Bank of Thailand imposed restrictions last December on foreign investment to curb currency gains, causing the baht to trade at a higher exchange rate overseas than in Thailand. Elections will help revive consumer confidence that has dropped to a five-year low following a military coup in September 2006.

'When they imposed the controls, there was a little bit of political turbulence, and now they are going to elect the new democratic government,' said Chia Woon Khien, a local markets strategist for non-Japan Asia in Hong Kong at RBS. 'The currency will continue to improve.'

The baht was little changed at 33.82 onshore against the US dollar as of 12:02 pm in Bangkok, while the currency gained 0.5 per cent to 31.18 offshore.

The military junta that seized power in a bloodless coup imposed the rules to curb last year's 13 per cent gain in the currency and protect exporters. Instead, they have caused rifts within the government, eroded consumer confidence, and failed to halt a 5.6 per cent appreciation in the onshore baht and a 13 per cent jump in its offshore equivalent this year. A 16 per cent advance in the currency next year would be the most since 1997.

The two spot rates will probably converge after the lifting of capital controls, according to the report written by Mr Chia and Euben Paracuelles, economic researcher, non-Japan Asia, at RBS. The bank, the world's fifth-biggest currency trader, expects the baht to advance to 28.5 by the end of 2008.

The baht will trade at 31.8 against the US dollar by the end of next year, according to the median estimate of 16 strategists surveyed by Bloomberg.

'Improvements in the economic and political environment as well as changes to the outlook of the baht have fuelled speculation that the unremunerated reserve requirement may be relaxed altogether,' the bank's report said.

South-east Asia's second-biggest economy expanded 4.4 per cent in the second quarter from a year earlier, the government said in September. The growth accelerated from a revised 4.2 per cent in the previous three months as exports offset a slump in consumer spending.

'The timing would be good if they lift the controls after the election because having a people-elected government may remove political uncertainty,' said Hideki Hayashi, a foreign-exchange strategist at Shinko Securities Co in Tokyo. The baht may rise beyond 32 by the middle of 2008 should the controls be removed, Mr Hayashi said. -- Bloomberg