This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 BANGKOK 005699 
 
SIPDIS 
 
DEPT FOR EAP/MLS AND EB 
TREASURY FOR OASIA 
COMMERCE FOR 4430/EAP/MAC/OKSA 
STATE PASS TO USTR FOR WEISEL, COEN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID TH
SUBJECT: THAILAND: CAPITAL ALLOCATION TO TSUNAMI VICTIMS 
 
REF: A. BANGKOK 0155 
 
     ¶B. BANGKOK 0950 
 
Introduction and Summary 
--------------------------------- 
 
¶1. The streets of Patong Beach are busy, not as busy as 
normal and with a distinct scarcity of the Asian tourists 
typical during the summer months that comprise the low 
tourist season in Phuket, but still enough to give the place 
a certain buzz. Hotels report a 40-50 percent occupancy rate, 
about 10-15 percent below normal for this time of year and a 
marked recovery from the 10-20 percent rates that prevailed 
during the first half of the year. Some of the large hotels 
are not yet fully operational, using the tsunami recovery 
period and damage they incurred as reasons to remodel. Street 
vendors still crowd the sidewalk along Beach Road and the 
bars and nightclubs are all open, albeit at some the bar 
girls outnumber the clientele. (After the tsunami, many bar 
girls simply went to work in other Thai tourist centers. 
Their return is a positive sign; an indication that they 
again see sufficient business potential to return from 
Bangkok or Pattaya). We observed very few empty storefronts 
although business was slow. 
People involved in real estate advised that property prices 
have continued to appreciate, not declining even immediately 
after the disaster. The Phuket branch of a Thai bank reported 
that the volume of transactions at its currency exchange 
facilities was down only 14 percent from the same period last 
year.  As several businessmen told us, over the past 4 years 
they have survived the effects of the Bali bombing, SARS, 
avian flu and now the tsunami. They are hopeful that their 
run of bad luck will end and they can soon end the 
discounting being used to lure back bargain-hunting tourists. 
 
¶2. In contrast, tsunami economic recovery in the province of 
Phang Nga has barely begun. Only about 20 percent of the 
province's pre-disaster hotel rooms (1200 of 6000) are now 
habitable, and yet there is only 10 percent occupancy. In the 
Khao Lak area, which was the center of the province's tourist 
industry, unemployment is reportedly around 70 percent. While 
the selling price for fish is good, the number of fisherman 
and large commercial shipping vessels is about half of what 
it was. The shrimp hatchery and shrimp farm businesses in the 
province were largely wiped out and have made little progress 
towards reconstruction. If not for the rubber, cashew and 
papaya plantations -which are currently enjoying high prices- 
combined with the inflow of funds from the international NGOs 
that have blanketed the affected areas, the Phang Nga economy 
would be a complete ruin. 
 
¶3. The RTG has used commercial banks and government-owned 
specialized banking institutions to channel credit to 
tsunami-affected businesses. While this has been effective in 
 
SIPDIS 
restructuring existing loans, relatively little in the way of 
new money needed for reconstruction has been extended. In 
addition, those without previous bank relationships or who 
have insufficient collateral have a very difficult time 
acquiring credit beyond the maximum US$12,500 offered by the 
government's Small and Medium Enterprise Bank to those who 
can find a credit-worthy co-signer. The often informal nature 
of many SMEs in Thailand, a reluctance of many entrepreneurs 
to engage with the government, and a failure of businesses or 
their communities to organize to have themselves heard and 
demand assistance has hindered their ability to take full 
advantage of those assistance programs that are available. 
NGOs have stepped into the breach to satisfy humanitarian 
needs but have also created some degree of dependency and, by 
offering some 
goods and services for free, have hindered the re-start of 
some sustainable businesses. End Summary and Introduction. 
Government Assistance 
---------------------------- 
 
¶4. The Thai government says it has spent about US$650 million 
on tsunami support and reconstruction. How much of this has 
been spent vs. how much has been allocated is not clear. In 
Phuket, US$1.78 million has been distributed to 1200 
individuals as compensation for the destruction or damage to 
their homes. Each family that has lost a family member is 
entitled to a Bt20, 000 (US$486) lump-sum payment which would 
total Bt62.9 million (US$15.3 million) for the 3147 Thai 
citizens who have been confirmed dead (2817 people remain 
missing and 1650 bodies have yet to be formally identified). 
The RTG through the Royal Thai Army has reportedly built 1456 
homes at a cost of Bt100, 000 (US$2400) each for a total 
housing spend of about US$3.5 million. Other funds have 
reportedly been spent by the Fishery Department (US$15 
million on fishing boats in Phuket only, no figures for Phang 
Nga). The new houses are not always of the quality or style 
appropriate to the situation: southern Thai families 
typically live three generations to a house, five to ten 
persons, but the RTG provides only a single house of 36 
square meters (387 sq feet). Also, many fishermen own land on 
tidal flats and, appropriately, built their homes on stilts. 
The RTG-supplied homes are built on cement slabs on the 
ground. Land title disputes have slowed the provision of new 
houses to hundreds of families and there are accusations of 
land-grabbing by powerful figures including the sister of the 
Speaker of Parliament. Schools and hospitals have been 
rebuilt but much of the money and labor for these (as for 
other houses not included above) have been provided by NGOs. 
Critics of the government claim that the amount the RTG says 
it has spent and the observed results don't match and assume 
that there must be fraud.  Others argue that the number of 
RTG agencies, NGOs, foreign governments and individuals that 
have flowed into the region have resulted in significant 
problems in coordination and resulting waste. Some school 
rebuilding projects, for example, have more resources than 
needed, others not enough. 
 
Capital Allocation and Commercial Banks 
--------------------------------------------- ------ 
 
¶5. As a means to funnel capital to businesses affected by the 
tsunami, the Bank of Thailand (BoT, the central bank) 
 
SIPDIS 
instituted a "soft loan" program. The BoT made available Bt60 
billion (US$1.45 billion) for loans to commercial banks and 
specialized government lending institutions (Government 
Savings Bank-GSB, Bank for Agriculture and Agricultural 
Cooperatives-BAAC, and the Small and Medium Enterprise Bank). 
The program provides loans to banks at a rate of 0.01 percent 
for three years with the following provisions: 
-The banks use the funds only for lending to those affected 
by the tsunami. 
-The banks charge these customers no more than 2 percent per 
year. 
-If a borrower had insurance coverage for their loss, they 
were ineligible. 
-The borrower must be at least 50 percent Thai-owned. 
- Banks had only until February 1, 2005 to apply, seeking 
approval from the BoT for each loan they wished to include 
under the program. 
-The soft loans would apply only to 80 percent of the total 
loan amount. The banks must apply 20 percent of the loan 
amount from its own capital. Normal underwriting standards 
would apply. 
 
¶6. BoT reported that it had approved loan requests for Bt48 
billion, of which Bt37.5 billion was for hotels and 
restaurants, Bt1.3 billion for construction (mainly private 
roads and other infrastructure), Bt900 million for 
transportation (cruise boats, taxis), Bt400 million for 
fisheries and Bt180 million for agriculture. As of August 21, 
Bt25 billion (US$607.8 million) had been drawndown, mostly 
for large hotels. 
 
¶7. In fact, the vast majority of money from the BoT program 
has to date been used for refinancing existing loans to 
tsunami-affected companies. Old loans were turned into new 
 
SIPDIS 
three year loans, often with interest and/or principle grace 
periods of 6 months to 3 years. While this has provided some 
breathing room for borrowers, the banks have been extremely 
reluctant to extend new loans either to existing borrowers or 
new clients unless the borrower has collateral (cash, land 
and buildings only) sufficient to cover the entire amount of 
both the existing loan and the new loan. There are a variety 
of explanations for the reluctance of the banks to extend new 
money in addition to the lack of available collateral. These 
include: 
-Time required to renegotiate old loans and a new loan (two 
separate negotiations) 
- Borrowers waiting to decide on whether/when to rebuild 
based on recovery outlook. 
-Lack of clear title to land. 
-Banks waiting to see strength of recovery before extending 
new loans in the region. 
-Banks waiting for insurance companies to complete their 
settlements with borrowers before extending new loans. 
- Bank's reluctance to extend loans based on 2 percent 
margins (typical bank margins on commercial loans are at 
least 4 percent.) 
-Concern over reports of high levels of fraud, people 
claiming the loss of their fishing boat several times over, 
for example. As a result, there is some hesitancy among the 
banks to respond to some types of loan requests. 
The BoT is satisfied with these results given that the 
stability of the banking system is the central bank's primary 
concern. The conservative approach the commercial banks have 
taken utilizing the soft-loan is seen as contributing to 
tsunami recovery while apparently not increasing banking 
 
SIPDIS 
system exposure to high-risk borrowers. 
 
The Special Purpose Banks 
--------------------------------- 
 
¶8. Small and micro businesses (e.g. sidewalk vendors, taxis, 
small restaurants, fisherman with a 12 foot boat, small-scale 
merchants) typically don't have formal bank relationships. 
Commercial banks view this business as high-risk and low 
profit. The RTG has directed the GSB, BAAC and SME Bank to 
service this sector and develop special programs to aid 
tsunami victims. 
 
SIPDIS 
 
¶9. The GSB has three types of loan programs for tsunami 
victims: 
- Support loans for small businesses of a maximum Bt100, 000 
(US$2400) with no collateral required but one 
guarantor/co-signer. 
-Using the BoT soft-loan program. No maximum amount for the 
loan but the borrower must have sufficient collateral. This 
has been used for existing GSB clients. 
-SME support loans. Loans up to Bt300, 000 (US$7200) may be 
extended without collateral but require two 
guarantors/co-signers. Loans of more than Bt300, 000, up to a 
maximum of Bt5 million (US$121,000) must be fully 
collateralized. 
The GSB reports that they have extended Bt100 million (US$2.4 
million) to 900 existing customers and 100 new customers. We 
note that since GSB says they have refinanced all existing 
tsunami-affected customers, there was probably very little in 
 
SIPDIS 
the way of fresh credit extended under any of the bank's 
programs. We are told a key problem is the need for 
guarantors. A village leader told us that he could not act as 
a guarantor since that person must be a civil servant. Others 
told us that anyone could co-sign. 
 
¶10. The SME Bank branches in Phuket and Phang Nga approved 
433 loans post-tsunami, the vast majority for amounts ranging 
from Bt50,000 (US$1250) to Bt500,000 (US$12,500) to those 
affected by the waves directly (destruction or damage) or 
indirectly (loss of business). For loans of this size, no 
collateral is required but at least one guarantor. Most of 
the borrowers are new customers of the bank, typically retail 
or wholesale firms but also includes tour operators, 
restaurants and small manufacturers. Total amount of the 
loans extended to small clients (other than agriculture 
-related which is the purview of the BAAC) has been US$4.5 
million. Some larger new clients, mostly hotels, have also 
been taken on by the bank, in cases where the client's 
existing bank declined to make additional loans for 
reconstruction. The SME Bank requires full collateral to 
extend loans to these larger customers and for existing loans 
to be restructured under the BoT program.  Every commercial 
bank and the other specialized banks p 
ointed to the SME Bank as the only opportunity for those 
without sufficient collateral to get a small loan. The small 
number of loan applicants compared to the thousands of small 
businesses affected was noted by the branch managers. 
 
¶11. The Department of SME Promotion has also created a 
"venture capital fund" to provide an alternative source of 
capital for companies with capitalization of between 
US$25,000 and US$5 million... Rather than take an equity 
position, the fund takes a promissory note back from the 
company carrying an interest rate of 1 percent yearly with a 
five-year maturity. The fund has a total capital of US$125 
million supplied by the SME Bank, the Stock Exchange of 
Thailand and its listed companies and the Thai Bankers 
Association. A private equity firm acts as the fund manager. 
It has invested US$50 million in 14 medium-sized hotels in 
Phang Nga. In order for the fund to invest, existing loans 
must have been restructured under the BoT program and 
sufficient collateral to back the note must be available. 
 
¶12. The BAAC lends only to farmers, fisherman and the food 
processing industry. BAAC officials told us that 6343 of 
their customers had damage to physical property and/or loss 
of income resulting from the tsunami with total outstanding 
debt of Bt622 million (US$15.2 million).   Of this, 112 
customers died in the wave and their debt of Bt19.3 million 
(US$472 thousand) was written-off. 5716 customers had their 
loans restructured to require no principle or interest 
payments for three years and no interest accruing during that 
period. The Ministry of Finance is defraying the cost of 
interest foregone by BAAC. The remaining 515 customers are 
reportedly "in process." The BoT soft-loan program is used 
for providing new loans to existing customers. To date, 2307 
new loans totaling Bt194.5 million (US$4.7 million) has been 
drawndown even though the BoT has provided Bt1 billion to 
BAAC in pre-approvals. The maximum size of this loan is 
Bt150, 000 (US$2037) with no collateral required but two 
existing BAAAC customers to 
 act as guarantors.   No new customers have yet been provided 
loans, although the BAAC is considering making the BoT funds 
available to this group of customers as well. 
 
Where are the Customers? 
------------------------------- 
 
¶13. The apparent underutilization of the programs to provide 
credit to the tsunami victims and their businesses is 
ascribed to a variety of factors: 
-The victims are too traumatized to understand what is 
available or lack the energy to travel to the district 
capitals (where these programs are typically administered) to 
request the loan. 
-The programs are poorly publicized. Even when people are 
aware of their existence, there tend to be widespread rumors 
about who is or is not eligible and what is required to 
secure a loan. 
-There is a high degree of effort required to comply with 
Thai company law. This includes filing monthly tax 
statements. Many small businesses prefer to simply operate on 
an unregistered basis. This, of course, means that they have 
no paper proof of their operations as having existed prior to 
the tsunami. While the specialized institutions say they will 
accept, in lieu of registration documents, the written 
assurance of a village leader affirming that prospective 
borrower had an operation before the disaster, we have heard 
of very few examples where this process worked. 
- Some sectors are simply written-off by the banks. Shrimp 
hatcheries in particular are seen as un-creditworthy. 
Commercial fishing boats (costing US$200,000 and up) are not 
considered a fixed asset (they move) and so are not eligible 
for loans without other, fixed, collateral. 
-There is a culture of dependency forming in some villages. 
With foreign NGOs rebuilding homes and supplying food, 
medicine and often cash, "many people would prefer spending 
their day waiting in line for a handout rather than out 
fishing" as one Thai NGO official told us. This also reduces 
efforts to get loans. 
-Many businesses in Phuket, while registered as majority 
Thai-owned, are in fact majority owned and operated by 
foreigners. Thai banks are apparently unwilling to extend 
their tsunami relief programs to foreigners regardless of the 
official ownership registration. 
- The number of NGOs providing free food and free fishing 
boats has impaired the ability of commercial vendors of these 
products to compete. These small businesses see no reason to 
take on additional debt until the market reverts to normal. 
 
¶14. The end result has been that in Phuket, one of the 
nation's richest provinces with a long-standing tourist 
industry and businesses that have had the opportunity to 
build cash reserves over many years of operation, the need 
for access to bank capital is less critical than in Phang Nga 
where the tourist industry only really began in the late 
1990s, many businesses were relatively smaller and the damage 
was considerably more extensive. Commercial banks have 
largely declined to make loans to entities that were not 
customers before the tsunami; some banks will not consider 
any new customers at all, preferring to await the results of 
the tourist high-season before even considering the 
possibility. The specialized banks have focused on small 
loans. We believe that one reason there are so many more BoT 
loan approvals than drawdowns is that the banks are not 
making decisions on pending requests for new loans from 
customers until after this tourism season. Even then, 
sufficient collateral will be a requirement, not 
an easy prerequisite since many businesses, especially in 
Phang Nga, had borrowed close to the full value of the 
collateral and land prices in that province are said by some 
observers to have declined considerably in the wake of the 
slow post-tsunami recovery. 
 
Comment 
------------ 
 
¶15. The provision of assistance and credit to 
tsunami-affected individuals and businesses has been uneven. 
 
SIPDIS 
This is attributable to such universal factors as 
bureaucratic error, coordination difficulties and oversight 
in difficult circumstances and to cultural issues related to 
hesitancy among some poor Thais to deal with the government 
or other large organization that they find overwhelming. The 
RTG effort to use existing credit institutions, both public 
and private, to allocate capital and credit in the tsunami 
region can be seen as a noble free market experiment under 
which the government provided incentives for these 
institutions to provide debt relief and new capital while 
maintaining disciplined lending standards. Unfortunately, 
Thai banks have never lent against cash-flow. Collateral and 
"personal relationships" have always been the credit criteria 
when evaluating credit risk. The downside of this approach is 
clear in the aftermath of the tsunami. The strict reliance on 
land and buildings as collateral 
for the full value of any loan of more than a few thousand 
dollars has prevented businesses, especially in Phang Nga, 
from acquiring the means of restarting their business. 
Further, with the decline in business, the value of real 
estate collateral tends to decline and the situation further 
deteriorates. 
 
¶16. At some point, private equity will step in and purchase 
the distressed assets. Meanwhile, the banks have used the BoT 
soft-loan program to delay the day of reckoning for their 
customers for three years. (When the BoT program ends). It is 
clear that both the BoT and the banks have used this program 
primarily as a way to avoid booking any loans as 
non-performing rather than a real restructuring that examines 
the viability of the loan going forward. If the borrowers are 
able to find a way to get back on their feet during the 
three-year loan term, all will be well; if not, then the 
banks will deal with the issue at that time. In the interim 
there is considerable frustration and a sense among small 
businesses and individuals that, once again, the big and 
powerful get what they need and the small get little. With 
the RTG's pronouncements that it needed no foreign 
assistance, that it has spent large amounts on reconstruction 
already and questions about where the funds raised for 
tsunami relief (by the "Prime Min 
 
SIPDIS 
ister's Fund" for example) have gone, one might think the 
frustration level could reach a point of ignition. But Phuket 
is coming back in any case, and Phang Nga is simply too poor 
and its society too poorly organized to result in any sort of 
real backlash, especially with the international NGOs on hand 
to provide for people's needs.  On September 6, the RTG 
cabinet will hold a meeting in Phang Nga in response to the 
slow recovery of that province. 
ARVIZU