THAI CAPITAL MARKETS FALL HEAVILY IN WAKE OF BOT

UNCLAS BANGKOK 007484

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
TREASURY FOR OASIA
COMMECE FOR EAP/MAC/OKSA

E.O. 12958: N/A
TAGS: EFIN ECON TH
SUBJECT: THAI CAPITAL MARKETS FALL HEAVILY IN WAKE OF BOT
CAPITAL CONTROLS

REF: BANGKOK 7435


1. (U) On the afternoon of December 18, the Bank of Thailand
announced new capital control regulations in an effort to
arrest the appreciation of the baht against the US$. Tear to
date, the baht has appreciated about 15 percent.


2. (U) The new measures announce by the BoT require all
foreign capital inflows above US$20,000 to deposit 30 percent
of the amount principle amount with the BoT in a non-interest
bearing account. Investors who hold their positions for at
least one year would have their deposit refunded to them
after submitting evidence of the tenor of the investment to
their commercial banks. If investors want to repatriate their
funds before one year, they would be refunded only two-thirds
of the deposit. Transactions completed prior to December 19
are exempted.


3. (U) The reaction of Thai capital markets was swift and
painful. The SET Index had declined 15.67 percent as of 3:30
p.m. representing a capital loss of about .5 trillion baht
(US$7 billion). The large cap SET 50 Index (in which most
foreign investment is located) was down 16.14 percent. For
the first time in Thai stock market history, the stock
exchange utilized its circuit breaker mechanism and the
closed the market for trading at about 11:00 a.m. when the
SET was down 10 percent. it re-opened 30 minutes later and,
after attempting to recover, continued its decline.
Meanwhile, the baht hit an intraday high of 35.99/US$ from
yesterday's close of around 35.05/US$. In afternoon trading
the level was around 35.6/US$, a change of around 1.6 percent
from the previous day.


4. (SBU) Bankers with whom we spoke were highly critical of
the move. They cite the lack of coordination and consultation
and the clear lack of understanding of how capital markets
would react. "They panicked and went nuclear" said one local
banker. Given the foreign inventors are estimated to control
about 33 percent of all shares on the stock exchange and
supply around 50 percent of daily turnover, the forced
absence of new foreign investors and likely departure of
existing ones will continue to severely depress capital
markets. At 1330 today, BoT officials held a conference call
with investment bank officials to explain their action,
reportedly saying that the currency markets were not
"responding quickly enough" and that they the BoT had to act
"for the sake of the real sector."


5. (SBU) Another explanation for the decision to apply
capital controls was the sever pressure the new BoT governor
was under by exporters whose margins were suffering from the
appreciating baht (see reftel). Similarly Deputy Prime
Minister and economic czar Pridiyathorn, who only last week
told the press that exporters would simply have to adjust to
the new strength in the baht, was rumored to be under
pressure to name an additional economic sector minister due
to his apparent inability to help exporters. He and Industry
Minister Kosit this afternoon both said that they support the
move by the BoT.


6. (SBU) A senior official with the Thai Chamber of Commerce
lamented that the damage to Thai capital markets was hardly
worth the small reversal in the baht's appreciation. "They
are incompetent" he said. Some are speculating that the BoT
will be forced to reverse their decision within the next few
weeks. There is some concern about how banks will make a
market in the baht when all the foreigners who have sold
shares today attempt to convert their baht to US$ three days
from now when the trades settle.
ARVIZU