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Cablegate: Thai Banks Remain Strong Despite Crisis

VZCZCXRO3754
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #3530/01 3371047
ZNR UUUUU ZZH
P 021047Z DEC 08
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC PRIORITY 5275
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
INFO RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 5933
RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 BANGKOK 003530

STATE FOR EAP/MLS AND EB
STATE PASS TO USTR
TREASURY FOR OASIA
SINGAPORE FOR FINATT BAKER

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV ETRD TH
SUBJECT: Thai Banks Remain Strong Despite Crisis

BANGKOK 00003530 001.2 OF 002


Sensitive But Unclassified. For Official Use Only.

REFS: A) Bangkok 3519 B) Bangkok 2885

1. (SBU) Summary: Despite the economic impact of Thailand's
prolonged political stalemate, including the ongoing airport closure
crisis (ref a), financial sector leaders in Thailand believe the
local banking sector remains sound. Even though credit rating
agencies have downgraded Thailand's credit outlook and that of many
major Thai banks (although not/not Thailand's sovereign rating),
financial leaders believe lessons learned from the 1997 financial
crisis have prepared Thailand well for the current downturn. High
levels of foreign reserves, low levels of debt, and strong oversight
are some of the factors pointed to as evidence of a strong banking
sector. Pressured by the Bank of Thailand, however, commercial
banks are reducing loans to bolster their balance sheets, while the
government would prefer to push credit availability to spur GDP
growth. End Summary.

2. (SBU) The closing of Bangkok's two main airports by protesters
is causing the nation's growth rate projections to be revised
downward. Thai government and private estimates of GDP growth for
2009 are at or below two percent (ref a). When describing
Thailand's moribund stock market, managers of two investment houses
told Econoff December 1 that many foreign investors have sold off
equities in the Stock Exchange of Thailand (SET) to reduce their
exposure. Meanwhile, financial analysts report that Thai investors
are fleeing the market for the relative safety of government bonds,
contributing to the stock market's 50 percent plunge this year. As
one put it, while there has not been any wholesale capital flight,
there is increased risk aversion.

3. (SBU) Along the same lines, financial analysts opined that the
baht's slow depreciation against the US dollar of late, and expected
depreciation over the coming months, would be welcome since
inflationary fears are down and exporters could use the help. The
Commerce Ministry reported December 1 that inflation slowed to 2.2
percent in November from 3.9 percent in October, the largest decline
since July 2002. The Bank of Thailand (BOT) is widely expected to
cut the policy interest rate by at least 25 basis points on December
3. One investment bank forecasts the baht will depreciate to 37 per
dollar within three months. Experts argue that with approximately
USD 110 billion in foreign reserves, the Bank of Thailand (BOT) has
more than enough capital available to defend the baht, even though
it generally intervenes to do so less than any other nation in ASEAN
(according to a UBS report, the BOT has spent an average of USD 2.5
billion per month to support the baht against the dollar since
March).

4. (SBU) When asked specifically about the state of Thailand's
financial sector, analysts are quick to point out it remains strong.
One investment firm head, who has deep concerns about Thailand's
political situation, insists that Thai banks are "stronger than
ever," with plenty of liquidity, high capital to debt ratios, a
blanket guarantee on deposits, low exposure to foreign debt, and in
business with Thai corporations that also have low debt on their
balance sheets (ref b).

5. (SBU) The head of a foreign bank in Bangkok expanded on this
point with Econoff on November 25. He described the situation in
Thailand today as not as severe as during the 1997 financial crisis.
Leading to that crisis, Thai banks achieved growth through cheap
foreign exchange debt whereas now they do so through local savings
and debt. Banks that survived the 1997 crisis learned from the
experience and manage their risk exposure accordingly, as does the
Bank of Thailand, which is strict on its oversight of private banks
and "sees everything through a 1997 lens." Also, the ongoing
political crisis has prevented the bubble in asset values that has
happened elsewhere. As one wryly put it, "the shorter the time at
the party, the less the hangover." The question for banks is not
how to stay alive, but how to grow in the current environment.
6. (SBU) Despite these bullish comments, challenges for the
financial industry remain. Fitch Ratings and Standard and Poor's
both revised Thailand's credit outlook downward from stable to
negative, indicating an increased level of risk to Thailand's
sovereign creditworthiness. Fitch also revised the outlook of nine
of Thailand's major banks from stable to negative. (Note: According
to S and P, a rating outlook assesses the potential direction of a
long-term credit rating over the intermediate term, typically six
months to two years. An outlook is not necessarily a precursor of a
rating change. End Note).
7. (SBU) The general economic climate is also having an impact.
Corporate clients of banks are and will continue to be affected by

BANGKOK 00003530 002.2 OF 002


the general economic slowdown, first small and medium enterprises
(SMEs) and then larger firms. Meanwhile, under pressure from the
Bank of Thailand, financial institutions and banks are holding more
cash and cutting back on lending to make sure their balance sheets
remain solid. This trend is unfortunate from the Government's
perspective, as bolstering credit in the market would help GDP
growth.

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