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." 
 
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