2  BIS Review 27/2007  Ladies and gentlemen. I would like to reassure you that we have always welcomed genuine foreign capital flows and investors and will continue to do so. The measure implemented in December was not meant to affect genuine investors and this was clear from the beginning. The measure announced on 18th of December clearly stated that capital inflow in the form of foreign direct investment (FDI) was exempted from the reserve requirement. And later on, as it turned out that genuine flows were still affected by the measure, we attempted to find an alternative option to alleviate pressure on the baht and adverse effects on productive sectors. To date, the exchange control measure has effectively slowed down the appreciation of the baht. On average, the nominal effective exchange rate in February strengthened by only 0.5% relative to January, compared to an appreciation of 1.7% between November 2006 and the first half of December – before the measure was implemented. After we have successfully slowed down the one-way appreciation momentum, we have allowed greater flexibility to the measure without compromising the needs to contain excessive volatility – by providing the fully-hedging option for all categories of inflows that are covered under the reserve requirement measure. We will closely monitor the hedging requirement. If its implementation is effective, we can lift the reserve requirement and keep only the hedging requirement. In safeguarding economic stability and fostering long term growth, the BoT also looks beyond the immediate horizon.

However, to overcome the challenge of global dynamism over the long run, monetary and financial stability alone are not sufficient. The challenge here is for the Thai economy to make sustainable gains in productivity through increased flexibility, efficiency, and competitiveness amidst the dynamic global economic conditions and structure. In this respect, we need to promote a sound and stable macroeconomic environment by carrying out necessary reforms in the real sector and financial sector. The real sector must work continuously in improving productivity to enhance its competitiveness. So far, reform efforts from both the private and public sectors have been made to promote transparency, strengthen governance and improve the quality of human resources. In the long term, the government plans to embark on key infrastructure investment projects, which include the expansion of the mass transit network in Bangkok, water resource management, and an integrated logistics system. These public investments will ease bottle-necks without exerting too much pressure on external stability and allow firms to focus on improving their efficiency and productivity. On the financial sector, the Bank of Thailand has played an important role in strengthening the financial infrastructure. The Financial Sector Master Plan (FSMP), in place since 2002, will move into its second phase. FSMP aims to broaden access to financial services to all potential users, promote competition in financial services in order to enhance financial efficiency and resiliency and ensure that our financial sector can perform well in the global competitive environment.