VZCZCXRO2977
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #3828/01 1791055
ZNR UUUUU ZZH
R 281055Z JUN 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 9755
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHCHI/AMCONSUL CHIANG MAI 2036
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 BANGKOK 003828 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPT FOR EAP/MLS AND EB 
TREASURY FOR OASIA 
COMMERCE FOR 4430/EAP/MAC/OKSA 
STATE PASS TO USTR FOR WEISEL 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN TH
SUBJECT: CREDIT TIGHTENTING IN THAILAND 
 
REF: A) BANGKOK 1665 (POLITICAL PROBLEMS EFFCT THAI ECONOMY); 
 
B) BANGKOK 2360 (THAI ECONOMY REACTS TO POLITICAL UNCERTAINTY); 
C) BANGKOK 2978 (THAILAND: INVESTMENT SLOWDOWN) 
 
BANGKOK 00003828  001.2 OF 002 
 
 
¶1. (U) Summary. Deputy Prime Minister and Commerce Minister Somkid 
will be visiting the US July 9-14 to fly the Thai flag for 
investment. The slowing of the Thai economy is being exacerbated in 
the short term by a reduction in credit availability and lack of 
liquidity in the stock exchange. Because of the government's 
caretaker status, programs to ameliorate these problems are of 
limited effectiveness. End Summary. 
 
¶2. (SBU) On-going political uncertainty combined with rising 
interest rates and high energy prices continue to depress the Thai 
economy. Government and private consumption and capital expenditure 
are both in general decline. Record high imports (US$11.5 billion) 
in May reportedly were largely the result of importers taking 
advantage of a strong baht which they expected to decline following 
aggressive business lobbying of the Bank of Thailand (to date, there 
is no indication that the business community was successful in 
seeking exchange rate relief from the central bankers with the baht 
holding steady at 38-39/1US$). Although Q1 GDP grew 6 percent from 
last year, this was off a low base affected by the December 2004 
tsunami and unusually high oil imports. 
 
SIPDIS 
 
¶3. (U) While the banking system is quite liquid, access to capital 
is becoming more difficult for many. Banks have tightened their 
lending standards, rejecting mortgage applications they would have 
approved a year ago, lending a maximum of 70 percent of value (vs. 
100 percent a year ago) and generally applying much more stringent 
lending practices in advance of what they perceive as a general 
decline in consumer and corporate cash flow. A major property 
developer told us that banks will simply not lend except against 100 
percent collateral. With credit card late payments increasing to 
about 3.5 percent of outstanding credits, card issuers are also 
becoming more selective in granting increases in credit lines. 
 
¶4. (U) Credit tightening is also reflected in a declining bank 
loan/deposit ratio which stood at 91 percent at the end of December 
2005 and fell to 86.4 percent in April, the lowest level since 
November 2003. New loan growth is estimated at 8 percent so far this 
year, however several analysts have said that the majority of these 
"new loans" are to other financial institutions in the form of US$ 
deposits, seeking to earn the spread between bank cost of funds (1.7 
percent) and 3 month US$ deposits (5.55 percent). Three month baht 
deposits earn a maximum 5.39 percent. This spread between US$ and 
baht interest rates is one reason that many expect the Bank of 
Thailand to continue raising rates so long as the US Federal Reserve 
does so. 
 
¶5. (U) In an effort to stimulate the economy in the face of rising 
rates, expenses, and declining consumer and investor confidence - or 
at least support small businesspersons and farmers - the RTG has 
instructed the specialized financial institutions (SFIs) that it 
controls (Bank of Agriculture and Agricultural Cooperatives-BAAC, 
Government Savings Bank-GSB, Government Housing Bank, GHB, Small and 
Medium Enterprise Bank-SME Bank) to lend at below market rates and 
help their existing customers cope with rising expenses. Examples of 
these programs include GHB cutting its margin on new mortgages by 50 
basis points and BAAC reducing interest charges to borrowers of less 
than 100,000 baht (US$2600) by 1 percent. GHB is offering 6 month to 
one year of interest-only payments to some customers and the SME 
Bank is also helping to restructure the loans of many of its 
customers (although with an NPL rate of around 19 percent, they 
don't have much choice). 
 
¶6. (U) To pay for these programs, the SFIs have asked for additional 
deposits from the Ministry of Finance to reduce their cost of funds. 
They are also seeking permission to pay no interest on these 
deposits. While many existing borrowers are taking advantage of 
these SFI programs, few new loans are being extended as the general 
reluctance to spend and invest seen in the overall economy is 
reflected in the micro and SME sectors. These SFI programs are seen 
largely as a public relations effort with little effect on SFI 
operations or the economy. 
 
¶7. (SBU) Thailand's alternative to bank finance, the Stock Exchange 
of Thailand, has had only five IPOs since February and trading 
volume over the last few weeks has been so low that there is danger 
of some of the smaller brokers going out of business despite a fixed 
commission system. Foreigners were net buyers of US$7.3 billion of 
Thai equities from November 2004 through May 9, 2006. Since then, 
foreign investors have sold US$1.4 billion of their position 
 
BANGKOK 00003828  002.2 OF 002 
 
 
although little of this has left the country as evidenced by the 
continuing strength of the baht. The President of the Stock Exchange 
told us that increased volume and an upturn in equity offerings is 
unlikely until the political scene stabilizes. 
 
¶8. (SBU) Comment: With FDI remaining low (see reftel C) and domestic 
confidence down, Deputy Prime Minister Somkid intends to use his 
mid-July visit to the US to try and reassure current and potential 
investors that Thailand remains open for business despite the 
continuing political uncertainty. He is scheduled to meet with USTR 
and Department of Commerce in addition to Ford (which is considering 
additional investment in Thailand) and AIG. With the economy in the 
doldrums, no ability to proceed with bilateral trade negotiations, 
American business concerned about tenuousness of continued RTG 
support for the Treaty of Amity and Economic Relations (which 
governs our bilateral investment relationship), and the general 
inability of this caretaker government to undertake any policy 
initiatives, Somkid's task is a difficult one. 
ARVIZU