Around the region, three critical questions about Thailand are being asked, Thanong Khanthong reports.

A top executive of a US investment banking firm based in Hong Kong highlights three critical questions facing Thailand, which recently emerged from a bruising currency battle against foreign speculators.

First, what is the impact of the Bank of Thailand's decision to shut down the swap market in defence of the baht? Second, should interest rates be cut to give the economy a boost or should they continue to be kept high to defend the currency? Third, how deep are the country's economic problems?

On the first question, he said overseas reactions to the Bank of Thailand's shutdown of the swap market in defence of the baht have been largely negative, potentially blocking future capital inflows necessary to finance the country's balance of payments. Although the central bank aimed to specifically cut off the baht supply to speculators attacking the Thai currency, its dramatic move created the impression that Thailand was retreating from its open-door policy.

''The question is how long will it last? The reason people have been investing in Thailand is because it has opened its doors. However, with this shutdown, investors may think twice before returning to Thailand," added his colleague, who is a fixed-income specialist.

Since May 15, the Thai central bank has played hardball against currency speculators who attacked the baht for the second time this year, exactly three months after the St Valentine raid. The central bank shut down the swap market where the baht is traded at a premium for a specified future date, effectively blocking the speculators' access to the Thai currency, which they needed to cover their positions.

Speculators had their fingers badly burnt, losing Bt1 to Bt2 on every single dollar. Some lost in the neighbourhood of US$40-US$50 million (Bt1.04-Bt1.3 billion).

Thai officials defended their actions by arguing that they did not place any curbs on normal or trade-oriented foreign exchange transactions but were punishing speculators for their attack against the baht. Even so, the fixed-income expert said the semi-foreign exchange control has created an impression that ''the regime cannot be trusted" because all of a sudden the rules have been changed.

Regarding Thailand's interest rate policy, the foreign executives agreed that there is almost no room for Thai officials to maneuver. For if interest rates are cut, it will trigger another baht attack. If interest rates are not coming down, Thai businesses will be further squeezed. ''They are caught in a box," said the fixed-income executive.

Still, somewhere along the line, interest rates must be cut to stimulate the sagging economy. The US executive believes it is impossible for a stand-alone interest rate cut, and that any cut must be accompanied by tough and consistent measures to bring the Thai economy back on track. ''If the rate is cut in isolation, the baht will be attacked again," he said.

The measures accompanying the rate cut that he would like to see include a comprehensive package to address the financial and property sector crises; further deregulation of the Thai economy; possibly increasing financial sector liberalisation; privatisation of state enterprises; and a broad programme that emphasises investment over consumption. These measures should help restore confidence in the Thai economy.