LIMITED ECONOMIC FALLOUT FROM COUP

UNCLAS SECTION 01 OF 02 BANGKOK 005797

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SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
COMMERCE FOR EAP/MAC/OKSA
TREASURY FOR OASIA
STATE PASS TO USTR FOR WEISEL
STATE PASS TO FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN
STATE PASS TO FEDERAL RESERVE NEW YORK FOR MATT HILDEBRANDT

E.O. 12958: N/A
TAGS: ECON EFIN TH
SUBJECT: LIMITED ECONOMIC FALLOUT FROM COUP

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1. (SBU) There is near universal agreement among Thai and US
businesspersons and RTG civil servants with whom we have
spoken that any economic fallout from Thailand's military
coup will be shallow and short-lived. Banks tell us that they
have very few clients asking to exit baht-denominated
portfolio investment while a number are actually seeking to
buy on any further baht or Stock Exchange of Thailand
weakness. As one bank executive told us "if the baht goes
down more, many foreign hedge fund will see this as a
short-term opportunity to buy cheap Thai stocks at a further
discount." Most expect tomorrow to bring a decline in the
value of the baht and Thai equities to be quickly followed by
a rally back up, perhaps above previous levels. One analyst
noted that following the February 1991 coup, the Stock
Exchange index fell 8 percent on day one following the event,
but gained 19.5 percent in the following three weeks. The
Exchange reports that they plan on operating normally
tomorrow.


2. (SBU) We spoke to the Governor of the Bank of Thailand by
cell phone as he was returning to Bangkok from the Bank/Fund
meetings in Singapore. He said that the baht had depreciated
from 37.30/$ to 37.95/$ as news of the coup spread, but
quickly strengthened to 37.60-37.70 as Thai exporters took
advantage of the situation to convert dollars. He said the
BoT had not intervened in the currency markets and, while
prepared to do so, had no expectation that it would be
necessary. He also advised that the Bank stood ready to add
liquidity to the banking system if such action were
necessary. In a subsequent conversation, the Assistant BoT
Governor for Financial Institutions said that in his survey
of banks there was no indication of any expected increase in
cash withdrawals or demand for foreign currency and expects
banks to reopen tomorrow. At foreign exchange kiosks open
today business has been slow, presumably because of a decline
in arriving tourists and an expectation among consumers that
the baht will be low
er tomorrow. The price on Credit Default Swaps which
increased from US$35,000/contract to US$55,000 yesterday is
reportedly back below US$40,000 this afternoon.


3. (SBU) An official from the Federation of Thai Industries
explained that the coup was "good news for business" because
"everyone is tired of all the political fighting." He added
that he expects a caretaker government to be named soon that
will be comprised of highly qualified technocrats "who could
make decisions." Dr. Pichit Likitkijsomboon, an economics
professor at Thammasat University, said the military was not
well informed on economic issues and did not expect them to
make any radical changes that would affect the long-term
investment environment. The Deputy Director General of the
Fiscal Policy Office of the Finance Ministry echoed this
view, recalling that after the 1991 coup, the interim
government pushed through regulations that had long been
bottled up in the parliament of the bureaucracy. The
Executive Director of the American Chamber of Commerce in
Bangkok advised us that some foreign companies had not opened
today due to uncertainty as to how martial law would be
implemented but that they
had no particular concerns about business conditions going
forward. Thai exporters with whom we spoke were positive on
the political developments, saw no real downside to their
export business and looked forward to greater economic
stability. They were concerned about the short-term impact
on the domestic market, but believed the impact would be
minimized if the military executed a quick transition to
civilian leadership.


4. (SBU) The biggest caveat in this rosy scenario is if
violence breaks out between Thaksin supporters and
coup-backers - a possibility that seems unlikely but cannot
be dismissed. Such an event would likely depress confidence
for a far longer period and negate the relief felt by many
that the political battles of the past year are now over and
everyone can focus on their jobs, including government
bureaucrats. Violence would also seriously impact the
important Thai tourism industry, a sector that contributes 6
percent of total Thai GDP. Barring the outbreak in violence,

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however, the feeling among most Thais is that overall
uncertainty is reduced because of the coup, and less
uncertainty is better for business. While all the key credit
rating agencies now have their rating on Thailand under
review, it appears that they will be little changed.


5. (SBU) Comment: The optimism of the business community,
even in the face of martial law, is striking. One foreign
brokerage has actually recommended a double-weighting for
Thai assets in the wake of the coup. Most expect a knee-jerk
decline in markets tomorrow morning followed by a rapid
recovery. The real question is how the economy reacts over
the next year. Will the apparent approval of the coup among
consumers and business result in increases in domestic
consumption and private investment? Will an interim
government be able to make some of the infrastructure
investments that have been on hold for the past year? The
answers to these questions will determine whether Thai
economic growth remains sluggish over the short-medium term.
BOYCE