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Cablegate: Thai Stocks Suffer Subprime Fallout, but Direct

VZCZCXRO4147
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #4465/01 2320030
ZNR UUUUU ZZH
P 200030Z AUG 07
FM AMEMBASSY BANGKOK
TO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 8994
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 4688
RUEHUL/AMEMBASSY SEOUL PRIORITY 3489
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 3995
RUEHKO/AMEMBASSY TOKYO PRIORITY 9654
RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 3983

UNCLAS SECTION 01 OF 03 BANGKOK 004465

SIPDIS

SIPDIS

STATE FOR EAP/MLS AND EB
TREASURY FOR OAISA
COMMERCE FOR EAP/MAC/OKSA
STATE PASS USTR FOR BARBARA WEISEL, DAVID BISBEE
FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN
SINGAPORE FOR FINATT BAKER

E.O. 12958: N/A
TAGS: EFIN ETRD EINV ECON TH
SUBJECT: THAI STOCKS SUFFER SUBPRIME FALLOUT, BUT DIRECT
BANK EXPOSURE MINIMAL


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1. Summary. Thai banks do not have significant direct
exposure to the collapse of the U.S. subprime mortgage market
and associated debt instruments. So far, only one bank,
BankThai, has reported significant holdings of collateralized
debt obligations (CDOs) derived from subprime mortgages, with
an exposure of about USD 50 million. However, the indirect
impact of tight credit worldwide has caused a sharp selloff
of Thai stocks in line with other regional equity markets,
with the Thai Stock Exchange falling over 3 percent on August
16 alone and 15 percent since July 26. The stock market
impact has temporarily relieved upward pressure on the Thai
baht, which had risen over 18 percent against the dollar this
year through July. RTG finance officials have issued mild
statements saying they are monitoring capital flows, but
observed that the stock drop resulted from a worldwide credit
squeeze and is not a reflection of direct Thai exposure to
subprime lending. The Thai central bank has faced criticism
throughout the year from exporting companies negatively
impacted by the baht's appreciation. With most observers now
expecting the baht to stabilize or slightly weaken over the
next two months, pressure for exchange rate intervention will
likely tail off. End Summary.

Minimal Direct Exposure to Subprime
-----------------------------------

2. Thai finance officials and private sector analysts report
that Thai banks have minimal direct exposure to the subprime
mortgage market in the U.S., including mortgage-backed
securities or derivative collateralized debt obligations
(CDOs). The worst-affected bank is BankThai with
approximately USD 50 million invested in mortgage-backed CDOs
(out of a total CDO portfolio of USD 420 million). BankThai
had already set aside USD 8 million in the first half of this
year to cover possible losses on this portfolio. Three other
Thai banks have significant exposure to offshore CDOs (Krung
Thai at USD 160 million, Bank of Ayudhya at USD 80 million,
and Bangkok Bank at USD 50 million), but stress that these
investments are not based on subprime mortgage assets. The
Thai bank with the highest foreign bond investment portfolio,
Kasikorn Bank, reports that about a third of its overall
investment portfolio is in foreign government bonds and
top-grade corporate bonds, with no exposure to subprime CDOs.
All told, Thai bank holdings of foreign assets represent
about 9 percent of total bank investments of USD 29 billion.

Fallout Hits Thai Stocks, Relieves Upward Baht Pressure
--------------------------------------------- ----------

3. The Stock Exchange of Thailand (SET), however, has been
roiled by the global stock selloff, falling over 15 percent
since July 26, and over 3 percent on August 16 alone. The
SET's drop in share prices has been the third-largest fall in
Southeast Asian stock markets, behind only the Indonesian and
Philippines exchanges. Bank of Thailand (BOT) Governor
Tarisa Watanagase issued mild comments on August 16 saying
she was closely monitoring capital flows, with foreign
investors having sold nearly USD 1 billion in Thai shares
since the last week of July. She said that the BOT did not
need to inject liquidity into the banking system due to the
minimal exposure of Thai banks to subprime securities, and
stressed that she would not introduce any measures to
ameliorate the stock sales or their impact on the Thai baht.

A Temporary Respite in Baht Debate
----------------------------------

4. The recent weakening of the baht (now quoted at
Bt.34.5/USD) has temporarily shifted attention away from its
year-long appreciation. The baht reached a 10-year high in
July at Bt.33.3/USD after rising 18 percent in 2007.
Although Thailand's export revenue has continued to grow
strongly, analysts have forecast a sales slowdown in the
second half of the year as the price of Thai goods becomes
relatively more expensive overseas. A number of low-cost,
labor-intensive textiles factories have already announced
their closure in the past two months due to slowing orders.

BANGKOK 00004465 002.2 OF 003


One plant's plans to lay off 6,000 workers were met with
massive protests in a Bangkok suburb in July, with rival
politicians accusing the government of neglecting its export
industry workers by allowing the baht's rise. Another two
footwear factories, with combined employment of 4,300,
announced their closures in August.

5. The debate on the future of the baht has divided local
economists and business leaders into two camps. One side,
which includes former Finance Minister Pridiyathorn Devakula,
has urged the RTG to target an "appropriate" exchange rate of
around Bt.34.5/USD to maintain export competitiveness and
prevent foreign investors from speculating in the currency.
Pridiyathorn resigned in February after heavy criticism of
his aborted effort to halt the baht's rise through capital
controls last December. He urged the BOT yesterday to
continue the one remaining provision of those controls, a 30
percent reserve requirement on capital inflows, to guard
against a possible resurgence of portfolio investment from
investors fleeing shaky markets in the U.S. and Europe.
(Most pundits, however, believe a quick rebound in stock
prices in unlikely until the global subprime fallout
settles.) "We should allow investors to profit only from the
stock exchange and not in changes of the baht, or else the
currency will continue to swing sharply," he said.

6. Other analysts are skeptical (correctly, in our view) of
the BOT's ability to control long-term trends in the baht in
light of continuing large current and capital account
surpluses. Prime Minister Surayud Chulanont himself said on
August 11, "We can't really say that the baht won't hit
Bt.30/USD, because we're not aiming for any target -
stability simply means that the rate mustn't change abruptly
and rapidly in a short period." A prominent economist told
Econoff this week, "We can't stop fundamental changes in
global trade and investment trends - we're facing the
opposite problem of 1997, when our foreign reserves ran dry."
"Back then," he added, "we needed exports to generate
foreign exchange and pay off our debts to the IMF. Today, we
have a maturing economy, with the strong baht a reflection of
our recovery from 1997. We should embrace our new purchasing
power and prod our export-focused industries to adjust their
production to the domestic market."

7. Asked where current Finance Minister Chalongphob
Sussangkarn stood on this, the economist replied, "He just
wants to get to December (for the projected elections) and
hand this off to the next government - a temporary weakening
of the baht due to the subprime-induced stock selloff will
only help him." Another private sector economist, who
advises the Ministry of Finance on monetary policy, said,
"We've got three choices: 1) leave the exchange rate alone
and force uncompetitive companies to adjust from the export
market to the domestic market; 2) strongly intervene in
currency markets to keep the baht level and satisfy
exporters; and 3) drive the baht down by drastically reducing
interest rates to boost liquidity." The likely outcome?
"For an economist, the first choice is preferred and the
second is not feasible - the third is the most likely, but it
won't happen during Chalongphob's time because he's worried
about inflation - wait for the next government and see what
happens."

8. Comment: Most advocates of a more targeted exchange
rate, including Pridiyathorn, have placed a "preferred value"
on the baht of somewhere between Bt.34 to 35/USD, which is
where it stands now (although some exporting industry
representatives have called for a Bt.36/USD rate.) Analysts
have also noted that the gap between the onshore and offshore
baht rates has narrowed to 2.5 baht (31.55 to the dollar
offshore buy rate compared to 34.06 onshore) from a nearly 4
baht difference last week. This reflects the BOT's approval
of 25 billion baht in local borrowing by foreign investors to
bring offshore hedging contracts to the onshore market (the
BOT now allows foreigners to hedge baht-denominated
transactions with local institutions without being subject to
the 30 percent reserve requirement.)

BANGKOK 00004465 003.2 OF 003


BOYCE

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