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