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