Cablegate: Thai Equities Bounce but Problems Remain

VZCZCXRO9640
OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #7504/01 3540813
ZNR UUUUU ZZH
O 200813Z DEC 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3533
INFO RUCNASE/ASEAN MEMBER COLLECTIVE IMMEDIATE
RUEHBJ/AMEMBASSY BEIJING IMMEDIATE 3394
RUEHBY/AMEMBASSY CANBERRA IMMEDIATE 6468
RUEHKO/AMEMBASSY TOKYO IMMEDIATE 8660
RUEHWL/AMEMBASSY WELLINGTON IMMEDIATE 1590
RUEHCHI/AMCONSUL CHIANG MAI IMMEDIATE 2856
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 02 BANGKOK 007504

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
TREASURY FOR OASIA
COMMERCE FOR EAP/MAC/OKSA
STATE PASS TO FEDERAL RESERVE SAN FRANCSICO FOR DAN FINEMAN
STATE PASS TO FEDERAL RESERVE NEW YORK FOR MATT HILDEBRANDT
STATE PASS TO USTR FOR WEISEL

E.O. 12958: N/A
TAGS: EFIN ECON TH
SUBJECT: THAI EQUITIES BOUNCE BUT PROBLEMS REMAIN

REF: A. BANGKOK 7484

B. BANGKOK 7435
C. BANGKOK 6531
D. BANGKOK 6156

BANGKOK 00007504 001.2 OF 002

1. (SBU) On the evening of December 19, Deputy PM
Pridiyathorn announced that his government would immediately
lift the obligation for a non-interest bearing reserve
requirement on foreign investors seeking to invest in Thai
equities. The requirement would be maintained, however, on
foreigners wishing to invest in Thai debt markets and real
estate. Comment: By law, only the autonomous Bank of Thailand
(BoT) is authorized to issue foreign exchange and capital
control regulations. It took the BoT until midday December 20
to issue new regulations corresponding to Pridiyathorn's
pronouncement. BoT Governor Tarisa is reportedly out of town
on vacation. End Comment.

2. (U) In response to the news, the Thai Stock Exchange (SET)
rose 10 percent at the open on December 20. Market observers
tell us that the volume was moderate with retail investors
especially looking to snap up bargains. Large foreign
investors who failed to sell their positions yesterday were
considering their next steps and apparently not heavy sellers
today. There is considerable skepticism among market analysts
here that the SET will be able to achieve the levels reached
prior to the introduction of the new capital controls given
the increased risk premium now associated with Thai markets.
The baht was trading between 35.6 and 35.8 with an unusually
wide spread between the bid and offer rates. Traders said
that the reason for the volatility and wide spreads is
because liquidity in the domestic market has been reduced in
the wake of the new BoT regulations and far more trade is
being conducted offshore. The head of the Public Debt
Management Office called us to say that today's auction of
15-year treasury
bonds resulted in a yield 50-60 basis points above last
week's auction. He expects the result of the BoT regulations
to be "a substantial increase in funding costs" for the RTG.

3. (SBU) Commerce Permanent Secretary Karun told us that he
had consulted with the BoT before they made their initial
decision on imposing capital controls. Their analysis was
that the RTG had to take some drastic action because Thai
exporter's margins were being so severely squeezed by the
appreciating baht and capital inflows were increasing from an
average of US$300 million/week to US$950 million last week.
After "informal" consultations with the IMF, the RTG
determined that lowering interest rates as a remedy would be
"ineffective" in the face of the large funds inflow and they
were afraid that a real crisis would occur in the export
sector--the only sector in the Thai economy that has been
performing well this year. Karun said that the reaction of
the SET was "beyond expectations" but also argued that
everyone needed to look at the situation over the longer
term; that if the baht had continued to strengthen to 34/US$
"the situation would be even worse."

4. (SBU) We spoke to BoT Assistant Governor for Financial
Market Operations, Nitaya Pibulrantanagit, and asked about
how the latest set of regulations would work i.e. how the
commercial banks that receive f/x inflows could be sure that
the funds actually went to the SET (and not debt markets or
property) and therefore were exempt from the 30 percent
requirement. She replied that all funds received and
identified for SET investments would be placed in a
non-resident account at the BoT which could then be drawn on
only for settlement of SET transactions. Bankers with whom we
spoke are very concerned about the manual nature of tracking
these flows and the associated high costs.

5. (SBU) We also asked Nitaya about the reported unusually
high capital inflows and whether they had been analyzed as to
whether they were the result of speculators, exporters
converting their US$ earnings or other factors. We had
earlier learned that a major telecom company here at earlier
this month repatriated $450 million from an (fully hedged)

BANGKOK 00007504 002.2 OF 002

offshore bond issuance Nitaya advised that the BoT had not
done an analysis of the inflows and that the referred-to
US$950 million was a "gross number using raw data." One
banker argued that if the inflows into money market
instruments were as heavy as the BoT implies then "effective
short-term interest rates would be about zero" because of the
relative lack of available debt instruments.

6. (SBU) Comment: The 1997 crisis was the defining moment for
most Thais involved in the financial sector, including
Pridiyathorn. He took several lessons away from that event;
a) foreigners are short-term oriented and do not have Thai
interests at heart, b) the mistake the Thais made in 1997 was
not enacting and enforcing tough regulations and causing
financial pain to the foreign speculators who were behind all
the trouble. Given this general view, it is perhaps
unsurprising that the solution to the current problem would
be a dramatic move intended to flush out the speculators from
their positions. Unfortunately, this reveals a basic distrust
of the efficiency of markets and a failure to properly
analyze and address the reasons behind the appreciating baht
(see reftels). Many observers believe that it also displays a
high degree of both arrogance (for not consulting with actual
market experts as to the likely fallout) and ignorance (for
not understanding the likely result himself).

7. (SBU) Comment continued: These observers also believe that
the usually cautious Pridiyathorn moved precipitously to
impose capital controls because he was threatened with being
replaced as a sop to exporters. (This might explain his
flip-flop from last week when he said that exporters would
simply have to get used to a strong baht for the next year.)
That would seriously threaten Pridiyathorn's (widely
presumed) ambition to become the next prime minister. The
events of the past 48 hours have not advanced his political
ambitions, although the extent of the damage remains to be
seen. BoT Governor Tarisa is also under severe scrutiny and,
if she is in fact at play while the markets burn, she may not
remain in her position for long.
ARVIZU

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