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Thailand's central bank removes capital control

Thailand's central bank removes capital control

Thailand's central bank will remove on March 3 the controversial controls on overseas capital that it imposed more than a year ago to restrain the country's currency from getting too strong, the bank's head said Friday.
"We think it's the right timing to remove the capital controls because economic conditions are quite strong," Bank of Thailand Gov. Tarisa Watanagase told a press conference.
Removal of the controls is also justified by a greater balance of inflows and outflows in the foreign exchange market, she said.
The decision had been expected to come in April but was brought forward because widespread expectations of the removal had "eroded the effectiveness" of the measure, Tarisa said.
The decision came within weeks of the formation of Thailand's first elected government since the September 2006 coup that ousted Thaksin Shinawatra as prime minister.
Newly installed Prime Minister Samak Sundaravej has spoken out for the controls to be removed to help boost the economy and amend Thailand's reputation with foreign investors.
The central bank implemented a one-year, 30 percent withholding requirement on many types of capital inflows in December 2006, in part to help maintain the competitiveness of Thai exports by restraining the value of the baht.
But the immediate effect of the measure was to trigger a massive one-day sell-off on the Thai stock market and damage the country's reputation with foreign investors.
The controls also created a disparity in the baht's exchange rate, with the currency trading at a stronger level outside the country than inside due to the small supply of baht trading offshore.
After the removal of the measure, "the two markets, offshore and onshore, should converge to the same rate," Tarisa said.
The U.S. dollar was trading at 31.50 baht inside Thailand late Friday, its lowest in more than 10 years. Outside the country _ or "offshore" in currency lingo _ the dollar was trading at 31.10 baht.
Economists expect the baht to continue strengthening due to the weakening greenback.
"The bath is likely to continue rising if you look at the Federal Reserves' monetary policy stance. The Fed will likely continue to cut interest rates and that will weaken the dollar even further," said Sompob Manarangsan, a professor of economics at Chulalongkorn University. "It may face some resistance from exporters but it is certainly good news for investors."
Other measures will be implemented to support removal of the controls, Tarisa said, adding that a managed float of the baht remains an appropriate policy.
Capital controls, imposed under the administration of the military-installed government, were seen as a dramatic example of its ineptitude.
Samak's new government is led by Thaksin's loyalists, and his People's Power Party is widely seen as a replacement for the ousted premier's Thai Rak Thai Party, which was dissolved for election law violations.
The removal of the capital measure came one day after Thaksin returned to Thailand after 17 months in exile. His homecoming was widely seen as a return to the center of Thai politics despite the military's efforts to eradicate his legacy.