VZCZCXRO4147
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #4465/01 2320030
ZNR UUUUU ZZH
P 200030Z AUG 07
FM AMEMBASSY BANGKOK
TO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 8994
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 4688
RUEHUL/AMEMBASSY SEOUL PRIORITY 3489
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 3995
RUEHKO/AMEMBASSY TOKYO PRIORITY 9654
RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 3983

UNCLAS SECTION 01 OF 03 BANGKOK 004465 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/MLS AND EB 
TREASURY FOR OAISA 
COMMERCE FOR EAP/MAC/OKSA 
STATE PASS USTR FOR BARBARA WEISEL, DAVID BISBEE 
FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN 
SINGAPORE FOR FINATT BAKER 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD EINV ECON TH
SUBJECT: THAI STOCKS SUFFER SUBPRIME FALLOUT, BUT DIRECT 
BANK EXPOSURE MINIMAL 
 
 
BANGKOK 00004465  001.2 OF 003 
 
 
¶1.  Summary.  Thai banks do not have significant direct 
exposure to the collapse of the U.S. subprime mortgage market 
and associated debt instruments.  So far, only one bank, 
BankThai, has reported significant holdings of collateralized 
debt obligations (CDOs) derived from subprime mortgages, with 
an exposure of about USD 50 million.  However, the indirect 
impact of tight credit worldwide has caused a sharp selloff 
of Thai stocks in line with other regional equity markets, 
with the Thai Stock Exchange falling over 3 percent on August 
16 alone and 15 percent since July 26.  The stock market 
impact has temporarily relieved upward pressure on the Thai 
baht, which had risen over 18 percent against the dollar this 
year through July.  RTG finance officials have issued mild 
statements saying they are monitoring capital flows, but 
observed that the stock drop resulted from a worldwide credit 
squeeze and is not a reflection of direct Thai exposure to 
subprime lending.  The Thai central bank has faced criticism 
throughout the year from exporting companies negatively 
impacted by the baht's appreciation.  With most observers now 
expecting the baht to stabilize or slightly weaken over the 
next two months, pressure for exchange rate intervention will 
likely tail off.  End Summary. 
 
Minimal Direct Exposure to Subprime 
----------------------------------- 
 
¶2.  Thai finance officials and private sector analysts report 
that Thai banks have minimal direct exposure to the subprime 
mortgage market in the U.S., including mortgage-backed 
securities or derivative collateralized debt obligations 
(CDOs).  The worst-affected bank is BankThai with 
approximately USD 50 million invested in mortgage-backed CDOs 
(out of a total CDO portfolio of USD 420 million).  BankThai 
had already set aside USD 8 million in the first half of this 
year to cover possible losses on this portfolio.  Three other 
Thai banks have significant exposure to offshore CDOs (Krung 
Thai at USD 160 million, Bank of Ayudhya at USD 80 million, 
and Bangkok Bank at USD 50 million), but stress that these 
investments are not based on subprime mortgage assets.  The 
Thai bank with the highest foreign bond investment portfolio, 
Kasikorn Bank, reports that about a third of its overall 
investment portfolio is in foreign government bonds and 
top-grade corporate bonds, with no exposure to subprime CDOs. 
 All told, Thai bank holdings of foreign assets represent 
about 9 percent of total bank investments of USD 29 billion. 
 
Fallout Hits Thai Stocks, Relieves Upward Baht Pressure 
--------------------------------------------- ---------- 
 
¶3.  The Stock Exchange of Thailand (SET), however, has been 
roiled by the global stock selloff, falling over 15 percent 
since July 26, and over 3 percent on August 16 alone.  The 
SET's drop in share prices has been the third-largest fall in 
Southeast Asian stock markets, behind only the Indonesian and 
Philippines exchanges.  Bank of Thailand (BOT) Governor 
Tarisa Watanagase issued mild comments on August 16 saying 
she was closely monitoring capital flows, with foreign 
investors having sold nearly USD 1 billion in Thai shares 
since the last week of July.  She said that the BOT did not 
need to inject liquidity into the banking system due to the 
minimal exposure of Thai banks to subprime securities, and 
stressed that she would not introduce any measures to 
ameliorate the stock sales or their impact on the Thai baht. 
 
A Temporary Respite in Baht Debate 
---------------------------------- 
 
¶4.  The recent weakening of the baht (now quoted at 
Bt.34.5/USD) has temporarily shifted attention away from its 
year-long appreciation.  The baht reached a 10-year high in 
July at Bt.33.3/USD after rising 18 percent in 2007. 
Although Thailand's export revenue has continued to grow 
strongly, analysts have forecast a sales slowdown in the 
second half of the year as the price of Thai goods becomes 
relatively more expensive overseas.  A number of low-cost, 
labor-intensive textiles factories have already announced 
their closure in the past two months due to slowing orders. 
 
BANGKOK 00004465  002.2 OF 003 
 
 
One plant's plans to lay off 6,000 workers were met with 
massive protests in a Bangkok suburb in July, with rival 
politicians accusing the government of neglecting its export 
industry workers by allowing the baht's rise.  Another two 
footwear factories, with combined employment of 4,300, 
announced their closures in August. 
 
¶5.  The debate on the future of the baht has divided local 
economists and business leaders into two camps.  One side, 
which includes former Finance Minister Pridiyathorn Devakula, 
has urged the RTG to target an "appropriate" exchange rate of 
around Bt.34.5/USD to maintain export competitiveness and 
prevent foreign investors from speculating in the currency. 
Pridiyathorn resigned in February after heavy criticism of 
his aborted effort to halt the baht's rise through capital 
controls last December.  He urged the BOT yesterday to 
continue the one remaining provision of those controls, a 30 
percent reserve requirement on capital inflows, to guard 
against a possible resurgence of portfolio investment from 
investors fleeing shaky markets in the U.S. and Europe. 
(Most pundits, however, believe a quick rebound in stock 
prices in unlikely until the global subprime fallout 
settles.)  "We should allow investors to profit only from the 
stock exchange and not in changes of the baht, or else the 
currency will continue to swing sharply," he said. 
 
¶6.  Other analysts are skeptical (correctly, in our view) of 
the BOT's ability to control long-term trends in the baht in 
light of continuing large current and capital account 
surpluses.  Prime Minister Surayud Chulanont himself said on 
August 11, "We can't really say that the baht won't hit 
Bt.30/USD, because we're not aiming for any target - 
stability simply means that the rate mustn't change abruptly 
and rapidly in a short period."  A prominent economist told 
Econoff this week, "We can't stop fundamental changes in 
global trade and investment trends - we're facing the 
opposite problem of 1997, when our foreign reserves ran dry." 
 "Back then," he added, "we needed exports to generate 
foreign exchange and pay off our debts to the IMF.  Today, we 
have a maturing economy, with the strong baht a reflection of 
our recovery from 1997.  We should embrace our new purchasing 
power and prod our export-focused industries to adjust their 
production to the domestic market." 
 
¶7.  Asked where current Finance Minister Chalongphob 
Sussangkarn stood on this, the economist replied, "He just 
wants to get to December (for the projected elections) and 
hand this off to the next government - a temporary weakening 
of the baht due to the subprime-induced stock selloff will 
only help him."  Another private sector economist, who 
advises the Ministry of Finance on monetary policy, said, 
"We've got three choices: 1) leave the exchange rate alone 
and force uncompetitive companies to adjust from the export 
market to the domestic market; 2) strongly intervene in 
currency markets to keep the baht level and satisfy 
exporters; and 3) drive the baht down by drastically reducing 
interest rates to boost liquidity."  The likely outcome? 
"For an economist, the first choice is preferred and the 
second is not feasible - the third is the most likely, but it 
won't happen during Chalongphob's time because he's worried 
about inflation - wait for the next government and see what 
happens." 
 
¶8.  Comment:  Most advocates of a more targeted exchange 
rate, including Pridiyathorn, have placed a "preferred value" 
on the baht of somewhere between Bt.34 to 35/USD, which is 
where it stands now (although some exporting industry 
representatives have called for a Bt.36/USD rate.)  Analysts 
have also noted that the gap between the onshore and offshore 
baht rates has narrowed to 2.5 baht (31.55 to the dollar 
offshore buy rate compared to 34.06 onshore) from a nearly 4 
baht difference last week.  This reflects the BOT's approval 
of 25 billion baht in local borrowing by foreign investors to 
bring offshore hedging contracts to the onshore market (the 
BOT now allows foreigners to hedge baht-denominated 
transactions with local institutions without being subject to 
the 30 percent reserve requirement.) 
 
BANGKOK 00004465  003.2 OF 003 
 
 
BOYCE