The terrorist bombings in Bangkok that rang in the New Year dealt a fresh blow to investor confidence in the Thai economy, already shaken by a year of political turmoil and inept efforts to control the value of the baht.
A long holiday weekend provided a short cooling-off period after the Sunday night bombings killed three and injured 38, but weakness in currency and capital markets is expected when trading resumes.
Foreign exchange trading will commence in offshore markets on Tuesday, while local currency trading and the Stock Exchange of Thailand will reopen Wednesday.
The perpetrators of the nine blasts are unknown, though speculation has focused on Islamic separatists, who since January 2004 have been waging a deadly insurgency in the country's southernmost, Muslim-dominated provinces, or embittered supporters of former Prime Minister Thaksin Shinawatra, ousted in a September coup d'etat.
A mass movement to oust Thaksin for alleged corruption and abuse of power had destabilized the country's politics and nearly paralyzed its administration for much of last year.
"Whether it's about the south or internal politics, the aim (of the bombings) is clear and has been successfully achieved, which is to discredit the current government and the National Security Council," said Chalee Keuyen, an analyst at Trinity Securities.
Analysts were already expecting foreign outflows following the Bank of Thailand's shock move in mid-December to impose a 30% withholding deposit on selected capital inflows as a means to ease speculative pressure on the baht, which had been steadily strengthening to the detriment of Thai exporters.
Foreigners were heavy sellers on the Thai stock market during December, but many investors were waiting until the New Year to decide whether to cash out of the country, because there was still hope for foreign exchange and market gains in 2007, and the withholding measure means that the cost of money leaving and re-entering the country is high.
The bombings will almost certainly affect the short-term confidence of both foreign and local retail investors, however, so outflows will likely be higher than previously expected.
"The explosions will inevitably raise country risk and political risk ... It won't be a surprise to see panic selling when the stock market reopens Wednesday, and we could probably see the Stock Exchange of Thailand Index fall by around 20-30 points," said BFIT's Aekpittaya.
Analysts said the panic selling probably won't be as severe as Dec. 19, Black Tuesday, when the central bank initially imposed the withholding measure, which caused a 15% drop in the local bourse's SET Index, its biggest ever one-day fall. The measure was amended the next day so as not to restrict equity investment.
"The market probably won't fall as much as Black Tuesday, as this time around investors have two full days to digest information and deliberate their next moves. But it's no doubt the market will surely fall as an initial reaction to the incident," said Pongrat Ratanatawanananda, an analyst at Bualuang Securities.
"We'll see the baht weaken by at least 0.50-1 baht (per U.S. dollar) in response to the bombs," said a foreign exchange dealer from a local bank, who asked not to be named because he is not authorized to speak for his company.
The foreign exchange trader said the dollar could rise to 37 or 38 baht in the coming weeks, depending on the extent of the panic among foreign investors. The baht traded Friday at 36.11 to the dollar in Thai markets, and 35.30 offshore.
Ironically, that is around the level that analysts generally estimate the central bank would like to see, as it would bring the baht back in line with the movements of regional currencies against the dollar after a year of strong outperforming them.