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Cablegate: Thailand Capital Controls: Equities, Currency

VZCZCXRO2150
OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #7577/01 3560734
ZNR UUUUU ZZH
O 220734Z DEC 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3611
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 3410
RUEHKO/AMEMBASSY TOKYO PRIORITY 8672
RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 2875

UNCLAS SECTION 01 OF 02 BANGKOK 007577

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
TREASURY FOR OASIA
COMMERCE FOR EAP/MAC/OKSA
STATE PASS USTR FOR BWEISEL
STATE PASS TO FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN
STATE PASS TO FEDERAL RESERVE NEW YORK FOR MATT HILDENBRANDT

E.O. 12958: N/A
TAGS: EFIN ECON CH TH
SUBJECT: THAILAND CAPITAL CONTROLS: EQUITIES, CURRENCY
VOLATILITY SUBSIDES

REF: BANGKOK 7550 AND PREVIOUS

BANGKOK 00007577 001.2 OF 002


1. (SBU) The Stock Exchange of Thailand composite index
rose close to 0.5 percent during the December 22 trading
session. For the week, the SET is down about 6 percent. The
Thai baht closed very slightly weaker against the dollar.
Many traders think the worst of the market volatility
(prompted by the Bank of Thailand's December 18 decision to
impose capital controls) is over.

Deputy PM/Finance Minister Defends Action

2. (SBU) Deputy Prime Minister and Finance Minister
Pridiyathorn Devakula defended his actions before the
National Legislative Assembly. Basically, the DPM argued
that the action was necessary to save Thailand from a
collapse in exports as the baht continued to strengthen. The
capital controls, he noted, have in fact stopped the one-way
trajectory of the baht and even weakened the currency
somewhat. While unfortunate, the stock market crash was a
necessary price to save the country. "Don't say this (the
stock market crash) is the price we pay for being stupid.
Once we saw a problem, we moved to address it. The measure
was meant to end the export crisis. I have told them (the
critics of the DPM's action) to look both ways -- also to
alleviate the problems. Nothing was underhanded. It's
alright if I am disgraced in this matter as long as the
country survives."

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Was BoT's Independence Respected?

3. (SBU) Questions continue to be raised over the way the
capital controls decision was made. In response to charges
that he usurped the proper role of the Bank of Thailand and
undermined its independence, Pridiyathorn replied that the
decision to impose capital controls was made two seeks ago by
the BoT in full consultation with him and Thai stock exchange
officials. He conceded that the December 19 decision to
partially lift the controls by exempting the stock market was
made without the head of the BoT being physically present,
but this was because Governor Tarisa was in the northern Thai
city of Chiang Mai (Embassy Comment: We are told that Tarisa
was on vacation) and couldn't return until Wednesday morning
(December 20). That, Pridiyathorn said, "Would have been too
late." He added that Tarisa was in touch by telephone and
that she fully concurred in the decision to exempt stocks.
Stock exchange officials, he said, had not been fully
informed of the BoT's plans due to fears of leaks.

Comment

4. (SBU) The BoT Governor rightly points out that the
underlying problem with Thailand's export competitiveness is
the rapidly developing Chinese economy and its undervalued
currency. But there is an even deeper problem at work.
Pridiyathorn is not engaging in hyperbole when he claims that
the country's exports were threatened with collapse. At
baht35/US$1 (the approximate rate which triggered the
imposition of capital controls), we believe a large
percentage of Thai exports were unprofitable (i.e., many Thai
exports are commodities, and generally are price takers in
their end markets). That a fairly modest strengthening of
the baht relative to Thailand's competitors could threaten
the viability of Thailand's exports and its entire economy
attests to the fragility of that economy. The reality --
recognized by many Thai economists -- is that in a head-on
competition with China, Thailand is sure to lose. In order
for Thailand's economy to continue to grow, the economy must
reduce the proportion of imported components, phase out
assembly-only operations of cheap consumer goods, and move up
the value-added chain. That way, Thailand will not compete
directly with China's exports and will avoid downward
pressure on the Thai currency and wages. The Thaksin
government, for all its flaws, explicitly recognized the need
to address this issue through education and infrastructure
development (although its record in terms of concrete
accomplishments toward addressing this issue is meager). We
see no evidence that the current government is doing anything

BANGKOK 00007577 002.2 OF 002


to address this issue. Indeed, we see no evidence that it
sees head-on export competition with China as anything more
than a problem related to Chinese currency manipulation.


ARVIZU

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