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 002360 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/MLS AND EB 
COMMERCE FOR 4430/EAP/MAC/OKSA 
TREASURY FOR OASIA 
STATE PASS TO USTR FOR WEISEL 
STATE PESS TO FEDERAL RESERVE FOR MATT HILDEBRANDT 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL TH
SUBJECT: THAI ECONOMY REACTS TO POLITICAL UNCERTAINTY 
 
REF: A. BANGKOK 1665 (POLITICAL PROBLEMS AFFECT THAI 
        ECONOMY) 
     ¶B. BANGKOK 788 (THE GREAT THAKSIN ASSET SALE) 
 
¶1. (SBU) Summary: Over the past few years, the Thai economy 
has weathered SARS, bird-flu, tsunami, increased competition 
from China and unrest in the country's south, all with only 
limited impact to growth. The ongoing political crisis that 
has gripped the country throughout this year, combined with 
record-high energy prices and a surprisingly strong currency, 
bring new challenges to continued economic strength. As we 
have reported (reftels), the economy has grown increasingly 
dependent on exports for its growth and will become even more 
so if the current political instability persists. End 
Summary. 
 
¶2. (SBU) In a meeting with Assistant Governor for Domestic 
Economy of the Bank of Thailand (and key member of the 
monetary policy committee), Dr. Atchana Waiquamdee told us 
that domestic demand would grow slowly, if at all in the face 
of high energy prices, high consumer debt levels and 
increasing interest rates. Because of increased salaries 
(5-10 percent varying by sector) and continued low (1.7 
percent) unemployment, there has been no increase in consumer 
debt defaults and spending on non-durables remains strong 
even as consumer confidence continues to slide. This decline 
in consumer confidence is reflected in slowdowns in first 
quarter 2006 new home sales (exacerbated by a 50 percent 
decline in bank mortgage approvals as banks have tightened 
lending standards in anticipation of weaker economic growth), 
new car sales and sales of other consumer durables all lead 
to a general consensus among Thai economists that consumers 
will not be a factor in the growth of the Thai economy in 
¶2006. Most observers expect consumer demand to grow only at 
the rate of the overall economy (3.5-5.5 percent), at best as 
consumers continue to use -and borrow on- their credit cards 
to keep non-durables spending near current levels. Dr. 
Atchana also pointedly said that the government should never 
have expected economic growth to come from domestic 
consumption given GDP/capita is only about US$2000. Comment: 
This is a dig at the Thaksin administration's "dual-track" 
economic policy which emphasized increased domestic 
consumption alongside export growth. One of several 
anti-Thaksin comments she made to us. End comment. 
 
Government Spending Slow 
------------------------ 
 
¶3. (SBU) Dr. Atchana believes that, because of the caretaker 
status of the current government and the likelihood that 
political instability will persist for some months, 
government disbursements for capital investment will be a bit 
slow (80 percent of target in the first quarter) even though 
spending should remain on track through the remainder of the 
fiscal year (ending September 30). If political instability 
persists, however, there may be no new budget in place for 
the new fiscal year.  In any case, in April the government 
announced that the much-anticipated tenders for 
infrastructure "megaprojects" would be delayed until a new 
government is in office. These projects were expected to add 
0.5-1 percent to GDP and help stimulate private investment. 
Anecdotally, several businesses have said that government 
decision making has been slowed considerably because of the 
administration's caretaker status. As a result, there are 
many procurement decisions that remain on hold. 
 
Companies Keep the Money in Their Pockets 
------------------------------------------ 
 
¶4. (SBU) Private investment continues at a slow pace despite 
continued high capacity utilization rates (in excess of 73 
percent). Foreign companies that use Thailand as an export 
base, especially in the auto and electronics sectors, have 
added capacity over the past year (a major factor in 
increased Thai exports--see para 5).  Thai companies, 
however, continue their hesitancy to take on debt or spend 
much of their cash flow on new capacity. This is reflected in 
very slow bank corporate loan growth (1-2 percent).  Dr. 
Atchana guessed that Thai exporters are able to increase 
output by running multiple shifts (a factor not captured in 
capacity utilization figures). First quarter private 
investment grew at a 5.4 percent annual rate, and much of 
this was investment by foreign companies and foreigners 
buying Thai property.  Further evidence of slow investment 
rates are seen from March imports which increased by only 1.3 
percent from last year, mostly because of higher oil prices. 
Imports of steel and machinery declined sharply, suggesting a 
slowdown in capital investment. 
 
Export Sector Saves the Day, Again 
------------------------------------ 
 
¶5. (SBU)  With public and private spending and investment all 
in stasis, it has been the export sector that has driven 
Thailand's growth. Exports increased 17.3 percent in the 
first quarter, including a 20 percent increase in exports to 
the US market in March and a double-digit increase in exports 
to Japan. Further helping the export figures, Thai 
commodities including sugar, rice, tapioca and rubber, have 
all benefited from increases in global prices and a recovery 
in output after the drought of 2005. With exports comprising 
more than 60 percent of GDP, the continued health of this 
sector can maintain Thailand's general economic health. 
 
¶6. (SBU) The improved trade balance and continued positive 
portfolio investment flows combined with a generally weak US$ 
has caused the baht to appreciate 7.3 percent against the 
dollar so far this year. While the Indonesian rupiah has 
appreciated at a similar rate, other regional currencies 
whose products compete with Thai exports such as the Korean 
won, Phillipine peso, Singapore dollar and Malaysian ringgit 
have increased by 4.7, 3.3, 3.0 and 2.8 percent respectively. 
This has created considerable apprehension among Thai 
business and government officials who fear that Thailand will 
lose competitiveness in export markets. 80 percent of Thai 
foreign trade is conducted in US$ and our contacts tell us 
that Thai exporters do not hedge their US$ income streams. 
Combined with increased labor, energy and interest rate 
costs, Thai company margins will be considerably squeezed if 
the baht remains so strong. 
 
Bank of Thailand Allows Strong Baht 
------------------------------------ 
 
¶7. (SBU) The Thai Ministers of Finance and Commence have both 
told the press that the baht is too strong and should be 
targeted at a rate of about 39/US$ (current rate is just 
below 38/US$). Dr. Atchana advised us that the Bank of 
Thailand has not made much effort to prevent the baht run-up 
and implied that it would be unlikely to do so in the future 
as "the Bank does not have a policy to promote the export 
sector", especially since "intervention is effective for only 
a limited period." She also noted that the cost of 
intervention is increasing because, in order to keep 
inflation down as the money supply has increased from the 
inflow of fx, the Bank has had to sterilize the baht created 
when it buys US$ and therefore issued bonds which, in a 
rising interest rate environment, is an expensive operation. 
There is also the problem of adding liquidity when the BoT 
has been trying to reign in inflation. One analyst posits 
that "the BoT is less (not more) likely to intervene and will 
allow the baht to appreciate in accordance with market 
forces." As an aside, Dr. Atchana noted that when Temasek was 
remitting funds to pay for its purchase of Shin Corp, the BoT 
was completely out of the market, allowing the baht to rise, 
at least in part because the Bank "saw no reason to allow the 
PM's family to earn more baht because of any action from the 
Bank." 
 
¶8. (SBU) Comment. In the wake of inconclusive elections in 
April, the political situation remains uncertain. Reftel A 
notes the many analysts and businesspeople who expressed 
concern for the economy if the political situation did not 
stabilize by June. Dr. Atchana told us she thought that 
domestic consumption and investment could actually begin to 
decline if Thai politics did not stabilize within three 
months. If this consensus proves correct, Thailand would 
become even more reliant on its one remaining economic 
engine, and that sector is under pressure from the strong 
baht and rising operating expenses. The Thai economic 
forecast for the rest of the year depends largely on the 
global economy maintaining its current momentum and the Thai 
political scene achieving some sort of clarity. The good news 
is that business and government debt levels are low and bank 
liquidity is ample, so there is some general flexibility in 
the system. The question is how long an economy can function 
without any economic policy-making from government. 
ARVIZU