Scrap reserve rule, say Democrats

New economic team could revive confidence

The government should move quickly to scrap the 30% reserve rule on foreign inflows and plans to amend the Foreign Business Act to help revive investor confidence, according to leaders of the Democrat Party. ''The government needs to take a stand and relax these measures to ease the confusion regarding the country's economic policy,'' said Democrat Party leader Abhisit Vejjajiva.
Mr Abhisit said market confusion over the government's sufficiency-economy platform stemmed directly from poorly executed measures such as the central bank's Dec 18 reserve rules or the moves to tighten the FBA.
Democrat leader Abhisit Vejjajiva (left) and deputy secretary-general Korn Chatikavanij discuss their views on the economy at a briefing yesterday. APICHART JINAKUL
Foreign investors have expressed concern that both measures are part of a broader theme by the government repudiating decades of policies aimed at encouraging foreign direct investment.
While policymakers have denied any plan to adopt a more insular economic direction, market confidence remains tenuous in the face of uncertain policies and ongoing political risks.
The resignation this week of M.R. Pridiyathorn Devakula as finance minister and deputy premier overseeing economic policy has further rattled market sentiment.
''The government should take advantage of the upcoming cabinet reshuffle and bring in a new economic team to help restore market confidence,'' Mr Abhisit said.
''The new team needs to be comprised of credible, respected candidates with a broad base of experience, not people drawn solely from the civil service as we have now.''
Prime Minister Surayud Chulanont's current team is comprised largely of ex-technocrats. M.R. Pridiyathorn had joined the government from the Bank of Thailand, while Commerce Minister Krirk-Krai Jirapaet, Industry Minister Kosit Panpiemras and Energy Minister Piyasvasti Amranand all have careers based on long stints in the civil service.
Korn Chatikavanij, the deputy secretary-general of the Democrat Party, noted the central bank had made numerous adjustments to the 30% reserve rules over the past several months to help facilitate foreign investment in the local market.
Yet market confidence remains poor, and the central bank would do better to scrap the rules altogether, he said.
''The fact that they had to amend the rules within just 24 hours after they were announced shows clearly that they were wrong from the beginning,'' said Mr Korn, a former investment banker.
Authorities on Dec 19 announced that foreign inflows into listed stocks would be waived from the reserve rules after the Stock Exchange of Thailand posted its largest one-day loss in history in response to the draconian curbs.
Mr Korn said the authorities had numerous options to help guard against currency speculation and pressure on the baht to appreciate without having to resort to capital controls, including requirements that inflows by fully hedged or simply cutting market interest rates.
''Reducing interest rates would not only reduce speculative pressure but also help boost the slowing economy,'' he said.
''Real interest rates should be cut to zero or even brought into negative territory. Based on current trends, we have room to cut rates by another 200 basis points.''
One-day repurchase interest rates currently stand at 4.5%, following a quarter-point reduction by the central bank's Monetary Policy Committee on Wednesday. Inflation in February, meanwhile, was just 2.3% higher than the year before, down 0.4% from the previous month.
Mr Korn said moves by the Chinese government to slow economic growth would also help reduce demand for energy and commodities in the world market, further easing pressure on inflation and oil prices.
''I think if the central bank scrapped the 30% rules, we would see some speculation in the beginning, as traders sell baht offshore to buy onshore. But after a while, we would see rates come to an equilibrium,'' he said.
Offshore rates have been quoted as much as two baht to the dollar stronger than onshore rates due to thin liquidity under the capital controls. The baht has traded at around 35.5 to the dollar for the past several weeks, compared with 35 in mid-December.
Mr Abhisit said for the FBA, the government would do better to withdraw the proposed amendments from the National Legislative Assembly and conduct a review of the business sectors under protection.
''If we say that a foreign company can invest in a given business, then they should be able to do so without unnecessary complication,'' he said, adding that reforms to related laws, such as the Lands Act, were also necessary.
The government in January approved a framework to tighten enforcement against nominee shareholding structures and add the definition of voting rights in the determination of foreign companies. The FBA reforms follow an ongoing criminal investigation into the use of nominees by Temasek Holdings in its takeover last year of telecom giant Shin Corp.
While authorities have said the changes would not affect manufacturers, exporters or companies receiving Board of Investment privileges, the reforms have still attracted considerable resentment and concern from the foreign business community, as several thousand companies nationwide are expected to be affected by the changes.
''The government proposed the changes simply because of the nominee question surrounding Kularb Kaew, and the thought that many other companies have similar nominee structures,'' Mr Abhisit said.
''But we should consider that nominees and voting rights are different issues. The original 1999 law did not include voting rights in the law, and the Council of State has also previously ruled that only the issue of nominees is significant.''
Mr Korn added that Thailand should consider carefully whether it should maintain safeguards and limit competition in different sectors.
''We need to be able to say that protection is aimed at safeguarding the national interest, not safeguarding the interests of existing operators,'' he said. ''Take telecoms. If this sector is truly critical for national security, then it should be completely managed by the state, not the private sector at all. But the government has instead said the private sector can operate telecoms, only with limits on foreign shareholdings.''