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

UNCLAS SECTION 01 OF 03 BANGKOK 001665 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/MLS AND EB 
TREASURY FOR OASIA 
COMMERCE FOR 4430/EAP/MAC/OKSA 
STATE PASS TO USTR FOR WEISEL 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL TH
SUBJECT: POLITICAL PROBLEMS EFFECT ON THAI ECONOMY 
 
REF: A. BANGKOK 788 (THE FREAT THAKSIN ASSET SALE) 
     ¶B. BANGKOK 551 (MEGAPROJECTS CONFERENCE) 
     ¶C. 05 BANGKOK 7000 (EXPORTS REVIVE THAI ECONOMY) 
 
¶1. (SBU) Summary and Introduction. It has been less than two 
months since the news that the Prime Minister's 
publicly-listed holding company, Shin Corp, was to be bought 
by Temasek of Singapore. This event catalyzed opposition to 
Thaksin and has led to almost two months of political 
uncertainty. With this limited timeframe, there is little 
hard data to judge the effect of the political situation on 
the economy nor to separate out economic declines 
attributable to the end of a business cycle from reaction to 
political concerns. Nevertheless, following a series of 
discussions with foreign and Thai businesspeople, economists, 
market analysts and government economic officials we believe 
that in the short term the economy will whether this storm 
achieving positive GDP growth albeit at a rate up to 2 
percent slower than if the political situation were stable. 
If the current political instability persists for more than 
another three months, however, the effects could be more 
severe and long-lasting. End Summary and 
Introduction. 
 
FDI Down but Not Out 
----------------------------- 
 
¶2. (SBU) Anecdotal evidence indicates that companies with 
existing operations in Thailand have proceeded with planned 
additional investment thus far in 2006. This is especially 
true of Japanese companies which had been preparing to expand 
their Thai operations in conjunction with a Thai-Japan FTA 
(awaiting final signature) and of some foreign-owned 
manufacturers whose Thai output is primarily for export. We 
understand that investors that had been considering an 
initial investment into Thailand are taking a 'wait-and-see' 
approach. We believe the overall effect on FDI so far is 
minimal but, as prognosticators here continually point out, 
if the political uncertainty lasts more than a few more 
months FDI could dry up. In 2005, the Bank of Thailand 
reported FDI of US$ 2.7 billion, 1.5 percent of 2005 GDP and 
a 223 percent increase over 2004 (a year which some 
substantial disinvestment).  Foreign portfolio investment was 
very strong the first two months of 2006. Foreign portfolio 
managers reportedly had an excess 
of cash, were fully invested in other Asian markets and 
underweighted in Thailand, and with the Thai market selling 
at a price/earnings ration of about 9 vs. 12-13 for the rest 
of Asia found the Thai market too attractive to ignore. These 
managers and most economists point out that the issue in 
Thailand is political, not economic, and therefore expect 
economic conditions to improve as soon as the political 
situation is resolved. Over the past week or so, foreigners 
have stopped adding to their portfolios here as they bought 
to their targeted levels. There are no signs indicating that 
they are exiting the market. 
 
Thai Investors on Hold 
---------------------------- 
 
¶3. (SBU) The available evidence so far points to a marked 
slowdown in domestic investment. Banks have told us that 
their corporate loan growth is very slow and preliminary 
customs figures reportedly show imports of capital goods 
declining. Meanwhile capacity utilization, especially in 
export sectors, is reportedly up to 90 percent. Exacerbating 
Thai business reluctance to invest is that the 
much-anticipated "megaprojects" (a multi-billion dollar, 
5-year infrastructure development program) that had been 
expected to begin by now is indefinitely on hold pending 
resolution of the political impasse. One reason Thaksin had 
promulgated the megaproject program was to stimulate private 
investment and counteract the negative effect of slowing 
consumer demand. 
 
¶4. (SBU) One analyst attributed the slowdown in investment 
directly to political uncertainty: "the businessmen don't 
know who to pay for contracts anymore." A reflection of how 
important this aspect of doing business here is; none of the 
major business organizations have taken a public position on 
the political situation - a reflection of divided membership 
but also a desire not to be seen as backing the wrong horse. 
There are voices in the business community arguing that their 
businesses are suffering and pleading for a quick political 
settlement, including one of the vice-chairs of the 
Federation of Thai Industries - one of the countries major 
business associations. But we were told by the secretary 
general of another business group that there is no way they 
will take a public stand favoring one side or the other in 
the political battle. 
 
¶5. (SBU) Demand for new housing units reportedly remains 
strong at the luxury-end of the market although slower in the 
rest of the market. Applications for new construction are 
down 31 percent from the same period last year. This is 
probably as much a function of the real estate cycle as any 
other factor.  Thais have been liquidating holdings in the 
Thai stock market and buying bank CDs (as reflected in 
decreasing loan/deposit ratios) and government debt. The SET 
Index is down about 3.5 percent from its 2006 high, but still 
trading significantly above the levels of the second half of 
¶2005. 
 
Consumers Wary 
--------------------- 
 
¶6. (SBU) As previously reported (reftels),  domestic 
consumption was expected to slow this year in the wake of 
high consumer debt levels, rising interest rates (up 125 
basis points over the last 12 months) and inflation which ran 
at 6.1 percent in 2005 (5.6 percent February 2006). While new 
car sales were reported strong in January and February, some 
analysts argue that this is a reflection of new model 
introductions and accounting practices which pushed sales 
into the new year from December rather than particularly 
strong underlying demand. Travel agents report a slowdown in 
their Thai outbound business.   Preliminary customs reports 
are said to show a slowing of imports of consumer goods. 
 
The Bottom Line 
-------------------- 
 
¶7. (SBU) There is no panic and no evident slowdown of 
economic activity in Bangkok. That said, everyone with whom 
we have spoken believes a slowdown in investment and consumer 
activity is occurring and will worsen if the current 
political instability lasts more than a few months longer 
(the consensus is June, for no apparent economic reason but 
because of concern that if things aren't resolved in time for 
the King's 60th anniversary of his coronation, then things 
must be really bad.) The expectation is that events to date 
will reduce 2006 GDP by 0.5 - 1 percent (resulting in 4-5 
percent growth for the year). However, if the situation 
persists, GDP could grow by as little as 3 percent. 
 
¶8. (SBU) There is clearly no flight from the baht. The Thai 
currency has continued to perform well this year (down 0.6 
percent against the US$) and official foreign exchange 
reserves have increased to US$54.5 billion from US$52.1 
billion in December. While some of this strength is 
attributable to US$1.8 billion inflow from Temasek to fund 
their purchase of Shin Corp and foreign portfolio investment 
inflows, there is no evidence of significant outward currency 
flows. Analysts attribute this vote of confidence to several 
factors: 
- Thais are naturally optimistic and are confident that, 
somehow, all the political issues will be resolved; "don't 
forget, we always have the King to settle matters if things 
get too out of hand" one analyst told us. 
- The export sector is "unaffected" by all these problems. 
Thai analysts are generally confident that so long as the 
world economy stays healthy, the Thai economy can continue to 
grow in its wake. 
- "We are non-violent people, so tourists will continue to 
visit." "Tourists came back after the tsunami, so they will 
not be put off by demonstrations no different than they have 
in their home countries." 
- "Our economy has survived many problems; we can survive 
this one too." 
 
A Comment about Taxes, Demographics and Street Protests 
--------------------------------------------- ----------- 
 
¶9. (SBU) Septel will examine the structure of the Thai tax 
system and its effect on the economy. But we note here that 
the failure of the PM to pay any tax on his US$1.8 billion 
capital gains has been a major source of anger among the 
Bangkok middle class and business people. Thailand's salaried 
employees are the only Thais who pay personal income tax and 
while this group has increased rapidly with Thailand's 
industrial development, such tax payers still number only 4 
million of Thailand's 64 million population, and the vast 
majority of these 4 million live in Bangkok. Rural people 
typically earn below the minimum taxable income of Bt80,000 
(US$2048) per year and usually operate outside the formal 
economy in any case. Since Thaksin took office, he has 
modernized the Revenue Department and made them far more 
efficient tax collectors. Although most of their efforts have 
gone to better collection of corporate taxes, they have also 
improved collection of personal income taxes mostly through 
payroll withholding. T 
he very wealthy, especially the owners of businesses, pay 
minimal income tax because most of their personal expenses 
are borne by their companies which write off the costs as 
business expenses. This sense that the rich "Thaksin cronies" 
and Thaksin's  rural support base (who receive the benefit of 
 better tax collection through debt write-offs, almost-free 
hospital visits and other redistributive policies) are free 
riders tax-wise has been an additional impetus for Bangkok 
middle class people to take to the streets to oust the PM. 
BOYCE