BANK OF THAILAND'S LATEST EFFORT TO STOP THE BAHT

UNCLAS BANGKOK 001809

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB
TREASURY FOR OASIA
COMMERCE FOR EAP/MAC/OKSA
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: EFIN ECON TH
SUBJECT: BANK OF THAILAND'S LATEST EFFORT TO STOP THE BAHT

REF: 06BANGKOK7435


1. (U) Rumors of a return to a fixed foreign exchange rate
regime were widespread the afternoon of March 26 as word
spread that all commercial banks in the country were being
summoned to the Bank of Thailand: Thai banks to appear at
5:00, foreign banks at 5:45. There were several factors
propelling the rumors. First, the continued appreciation of
the baht over the last few weeks (to around 34.5/US$ from
about 35.7/US$ at the beginning of the year) reminded
observers of the concern last year which resulted in the BoT
initiating strict exchange control measures (reftel). Second,
the Director General of the Fiscal Policy Office of the
Ministry of Finance wondered aloud to the press whether fixed
rates would be a way to solve both the problem of too rapid
baht appreciation and the need for fiscal stimulus. Finally,
on March 23, the BoT had send a letter to banks in Thailand
ordering them to adjust their currency trading positions to
the same levels as they held at the end of last year
(presumably when the positio
ns were squared for the year-end).


2. (SBU) As it happened, the BoT called the meeting to deny
the rumor of pegging the baht to the dollar (supposedly at
36/US$) or of having any intention of doing so. BoT officials
also clarified their March 23 letter, effectively ordering
banks not to speculate on baht strength. Contacts advise us
that there were two Thai banks that had established large
short-dollar positions based on the knowledge that their
export customers would be seeking to exchange their US$
earnings. The BoT used the meeting to remind all banks that
in the current environment, such front-running of trades or
taking any short-dollar speculative position was
unacceptable. The baht is trading at around 35.02/US$ in
volatile trading as of the morning of March 27.


3. (SBU) Comment: It is widely accepted that the BoT has not
been very good at sending signals to the market. Yesterday's
effort at moral suasion was at least an effort to change this
problem and to let the banks know that the BoT will force
them to share the cost of baht appreciation. The underlying
problem of a large current account surplus remains. To
resolve the problem of the strong baht, the RTG is faced with
the need for fiscal stimulus while distancing itself from the
simulative policies that the Thaksin regime pursued. They are
finding it tough to square this circle, especially in the
face of low consumer and business confidence. We question
whether the expected series of small cuts in the policy
lending rate will be a sufficient response. This is one
reason that rumors of resorting to a pegged exchange rate
will probably continue to regularly crop up. Septel will
examine in more detail the problems of the appreciating baht
and the BoT response.
ARVIZU