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The market has generally been on an upswing since late January due to expectations that the government and the Bank of Thailand (BOT) will lift the capital controls that have been in place since December 2006.
However, following the first meeting between new finance minister Surapong Suebwonglee and the BOTÆs governor earlier this month, it has been reported that the two sides still could not reach any conclusion over the 30% reserve requirement.
ôThe PPP promised to the voters that one of their first priorities would be to abandon the capital controls,ö the Citi report says. ôIt appears that it is easier said than done.ö
The People Power Party (PPP), backed by ousted prime minister Thaksin Shinawatra, has formed a six-party coalition government after winning the most seats in Thailand's December elections, the first since the bloodless September 2006 coup.
Surapong, who has close links with Thaksin, was sworn in as finance minister earlier this month and as one of six deputy prime ministers in the 36-member cabinet. Surapong has said that a decision on whether to abolish Thailand's capital controls would be made in the coming two months.
Thailand's new government, under the leadership of prime minister Samak Sundaravej, the conservative ally of Thaksin, is pushing for the central bank's controls on short-term capital inflows to be abolished to improve the country's reputation with investors.
Citi notes there is typically a three to six month honeymoon period for new governments in Thailand.
ôWe believe that both external and internal environments could shorten the honeymoon period for the PPP-led government,ö City says in the report.
The gross domestic product growth target of 5%-6% set by the new government could be affected by weaker-than-expected exports amid a recession in the US, Citi says. The bank adds that reviving the domestic economy amid low consumer confidence and high energy prices could prove to be a ôdaunting taskö for the new government.
Citi recommends that investors in Thailand focus on companies with high earnings visibility, ample free cash flow, and strong balance sheets.
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