VZCZCXRO2079
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #1702/01 0810746
ZNR UUUUU ZZH
R 220746Z MAR 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 5756
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASH DC
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 BANGKOK 001702 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/MLS AND EB 
COMMERCE FOR EAP/MAC/OKSA 
TREASURY FOR OASIA 
STATE PASS TO USTR FOR WEISEL 
STATE PASS TO FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN 
STATE PASS FEDERAL RESERVE NEW YORK FOR MATT HILDEBRANDT 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PHUM PREL TH
SUBJECT: PROSPECTS FOR THAILAND'S 2007 ECONOMIC GROWTH 
 
REF: BANGKOK 1399 
 
SENSITIVE BUT UNCLASSIFIED HANDLE ACCORDINGLY 
 
¶1. (SBU) Summary: Government officials (including newly appointed 
Finance Minister Chalungphob) and private sector analysts expressed 
deep concerns about the economy in meetings with visiting US 
Treasury officials.  Growth forecasts for 2007 have recently been 
revised downward - from 4.5 to 5 percent to 4 to 4.5 percent by 
government agencies, and to as low as 3 percent by some private 
sector analysts.  Political uncertainty and the poor policy 
environment have driven consumption and investment to multi-year 
lows, leaving exports, once again, the main engine of growth for 
Thailand. 
 
2.(SBU) Many meeting participants shared a view that increased 
public expenditure to "pump prime" the economy, particularly through 
expedited implementation of mega-infrastructure projects, would 
boost growth.  However, financing is off-track and bureaucrats are 
unlikely to expedite their decisions, making mega-infrastructure 
disbursements unlikely to happen in time to influence 2007's growth 
results. 
 
¶3. (SBU) Meeting participants shared a common assessment on the need 
for the Bank of Thailand (BOT) to aggressively cut interest rates. 
Markets have already priced in a 50-75 bps cut, with some private 
analysts suggesting a full percentage point cut to 3.75 percent at 
the BOT's next meeting on April 11.  However, it is unclear whether 
lower interest rates, without a significant improvement in 
regulatory and policy certainty, will do much to spur investment and 
growth in a politically chaotic environment. 
 
4.(SBU) On the issue of proposed revisions to the Foreign Business 
Act (FBA) and of capital controls, meeting participants lacked 
consensus and were not able to give a clear picture on the direction 
of these issues.  Minimizing the apparent anti-foreign investor 
aspects of the proposed FBA revisions and lifting of capital 
controls would be key signals of an improving policy environment and 
of a receding of anti-foreign sentiments.. End summary. 
 
2007 Growth - Not Looking Good 
------------------------------- 
 
5.(U) The National Economic and Social Development Board (NESDB), 
the Thai government's main economic statistics and forecasting body, 
recently published forecasts for 2007 growth of 4 to 5 percent, 
warning 4 to 4.5 percent as a more likely scenario.  The forecast 
presumes a recovery in consumption and investments (4 and 4.8 
percent growth respectively, from 3.1 and 4.0 percent in 2006) and 
export growth of 7.9 percent. 
 
¶6. (SBU) NESDB's presumption of consumption and investment recovery 
in 2007 may be overly optimistic, however, given prospects for 
continued political disarray in 2007, lack of timely 
mega-infrastructure disbursements and continued perceptions of 
anti-foreign investment policies (details in Para. 7).  Further, as 
appreciation pressures on the baht may continue in 2007, export 
growth may be lower than forecast further denting 2007's growth. 
The economy's high dependence on exports (gross exports is 65 to 70 
percent of economy, two times the regional average) makes it 
susceptible to any slowdown in export growth. 
 
¶7. (SBU) Political uncertainty has been the main factor driving 
private investment and consumption to multiyear lows.  Thailand's 
private investment activity index fell 0.6% y/y in January, the 
first negative reading of the indicator since February 2002. 
Private consumption's fourth quarter growth of 2.5 percent was the 
lowest since 1999.  Total domestic sales of pickup trucks, a key 
leading indicator, in January to Februrary fell 28 percent from the 
same period a year ago and total vehicle output is down 3.3 percent. 
 Citigroup forecasts Thai listed firms to average 3 percent earnings 
growth for this and next year, compared to Asia ex-Japan of 13 
percent. 
 
¶8. (SBU) While growth was a respectable 5 percent in 2006, this 
number hides the significant decline in growth over the course of 
the year.  The fourth quarter saw the weakest results for the Thai 
economy in two years, notably in private investment and consumption 
which fell from 4 percent growth each in the first quarter to 2.3 to 
2.5 percent, respectively, in the final quarter.  In its survey of 
listed companies, Citigroup found net profits of non-financial 
companies down by 56 percent y/y in the final quarter of 2006.  The 
 
BANGKOK 00001702  002 OF 003 
 
 
combined profit of 46 of the 50 biggest publicly traded companies by 
value dropped 70 percent in the fourth quarter of 2006, compared to 
a year earlier. 
9.(SBU) On export growth, NESDB's target appears achievable; exports 
rose 18 percent y/y in January, despite a 13 percent y/y 
appreciation of the baht.  And the government is fiscally strong, 
with low debt and predominantly fiscal surpluses over the past few 
years.  Finally corporate balance sheets are strong and high 
leverage not a concern for the economy.  However, downside risks 
remain.  Tourism, which contributes to approximately 7 to 8 percent 
of GDP, has remained surprisingly resilient in the face of 
September's coup and January's Bangkok bombing.  Thus far, political 
unrest has mainly affected domestic consumption and investment. 
Should violence spread beyond the three southern provinces, the 
impact on tourism and the general economic climate will see GDP 
growth fall lower than the bottom-range of current forecasts. 
 
10.(SBU) Government officials and market participants are calling on 
the BOT to aggressively cut interest rates, with some suggesting a 
full percentage point cut to 3.75% at the next monetary policy 
committee meeting on April 11.  Inflation is clearly on a downward 
trend (BOT forecasts 2007 inflation of 1.5 - 2.5 percent, down from 
2006's inflation of 4.7 percent) leaving room for aggressive cuts. 
However, interest rate cuts may not be enough to boost growth. 
BOT's benchmark rate mainly affects bond markets which account for 
only 15 percent of corporate funding.  The remainder of funding for 
Thai companies comes from commercial banks loans, and these are 
priced off the Thai equivalent of prime rate (currently 7.25 
percent) and lags policy rates.  Further, it is unclear whether 
lower interest rates, without a significant improvement in policy 
certainty, will do much for growth in a politically chaotic 
environment.  Anecdotally, companies and analysts with whom we speak 
all say that they want to wait "until after the elections" before 
making any significant new investments. The Japanese economic 
counselor related that Japanese companies are inclined to wait "at 
least one more year, to see how things go" before adding new 
capacity in Thailand. 
 
Attempts to Pump Prime the Economy - the Mega-Projects 
--------------------------------------------- ----- 
 
¶11. (SBU) The Ministry of Finance (MOF) has forecast that in order 
to reach 4.5 percent growth, government and state-owned enterprises 
(SOEs) will have to spend 93 and 83 percent, respectively, of their 
FY07 budget (ending in September).  With the approval of the FY07 
budget delayed by three months due to the September coup, full 
disbursements for the fiscal year began only in February 2007.  With 
the government now having only 9 months to disburse an amount that 
normally takes 12 months, senior staff in the MOF's fiscal policy 
office expressed some concern that they will not meet their targets. 
 MOF staff noted that Thailand historically disburses an average 92 
percent of its annual budget over a full fiscal year. 
 
¶12. (SBU) To reach these targets, officials have hinged their hopes 
on rapid implementation of two of Thailand's mega-infrastructure 
projects.  The MOF is waiting for the Japan Bank for International 
Cooperation (JBIC, a hybrid governmental financing agency mixing 
Ex-Im and USAID-like functions) to approve a loan for initial 
financing for both.  However, as related in reftel, former Deputy 
Prime Minister Somkid who has close relations with Japanese 
investors, indicated that JBIC will not be funding these projects. 
The Japanese economic counselor effectively confirmed this 
information. JBIC, as embassy has repeatedly heard from other 
foreign investors, is not increasing its exposure in Thailand due to 
the uncertain political situation and anti-foreign sentiments. 
 
FBA Revisions and Capital Controls - What Next? 
--------------------------------------------- --- 
 
¶13. (SBU) Government officials' sentiments on capital controls 
appear to be slightly contradictory.  Officials and market 
participants were painfully aware of the negative toll capital 
controls (and proposed FBA revisions) have taken on the markets and 
investor sentiment.  Given the weak domestic economy, both officials 
and market participants were sensitive to the need to support export 
growth, in part by keeping the baht weak.  The Federation of Thai 
industries (FTI) is forcefully advocating for continued controls, 
but there appears to be no well-organized advocacy group(s) willing 
to publicly argue against controls or highlighting the negative 
implications of controls for Thailand.  (Currently the 30 percent 
reserve requirement applies only to non-hedged investments in bonds, 
mutual funds, real estate funds, and foreign currency loans.) 
 
BANGKOK 00001702  003 OF 003 
 
 
Further there is no open debate to exporter's assertion that 
continued appreciation will hurt their growth (as noted earlier, 
exports grew 17 percent y/y in January despite appreciating baht) or 
that exporters should hedge and manage their own exchange rate risk. 
 This is attributed to the recognition of exports as the key sector 
of the Thai economy and the unwillingness of the financial sector to 
criticize policies believed to benefit the real sector. 
 
¶14. (SBU) Yet, as of three months after imposition of capital 
controls, Thailand continues to face strong appreciation pressures. 
Whereas the BOT had targeted capital controls to "get foreign 
speculators" appreciation pressures since the  beginning of the year 
have been due predominantly to high net export earnings.  In the 
past, exporters' demand to purchase baht (Thai regulations limit the 
number of days before exporters must convert foreign exchange 
earnings into baht) had been relatively balanced by importer's 
demand to sell baht.  However, with depressed domestic demand, 
imports have greatly reduced.  Thus Thailand finds itself in an 
unintended situation of depressed economic prospects with 
appreciation pressures on the baht from its own exporters.  Septel 
will examine the issue of baht appreciation and capital controls in 
detail. 
 
15, (SBU) As noted in reftel, Finance Minister Chalungphob has 
stated he will keep some form of capital controls in place, but 
stressed that they will be "appropriate," not "shock markets" and 
will be used as a tool to manage "market psychology."  Analysts 
believe that Chalungphob is trying to find middle ground, to cast 
his capital controls in a more market friendly light. 
 
16.(SBU) On FBA revisions, while aware of its negative market 
impact, officials were not able to offer a good sense of where this 
issue may be heading, but were able only to point to the strong 
political motivations behind the revisions - the need to 
"nab-Thaksin" by targeting his sale of Shin Corp to Singapore's 
Temasek.  Finance Minister Chalungphob stated boosting investor 
confidence, particularly foreign investor confidence, would be a 
priority for his tenure.  He told us that the current FBA draft is 
"too broad" and the telecom sector should be the only one under 
consideration currently since it is an area deemed to be of national 
security and was the original case of the entire FBA amendment 
effort due to the Shin Corp-Temasek transaction (reftel). However, 
FBA revisions fall outside his portfolio and so he will have to 
influence others rather than directly administer his vision. 
 
 
¶17. (SBU) Comment: While concern about economic growth is deep and 
wide, prospects for a strong policy response to boost growth are 
dim.  The political leadership is still uncoordinated and civil 
servants are reluctant to make firm decisions under the interim (and 
increasingly unpopular) government.  Deputy Prime Minister for 
Economy (excepting Finance) Kosit this month set up an economic 
committee to guide economic policy, but its effectiveness and 
direction remains to be seen; it's first meeting was held last week. 
 
 
¶18. (SBU) Further, the contradictory responses to capital controls 
and FBA revisions by meeting participants reveal the lack of policy 
debate in the current politically incoherent environment. 
Minimizing the anti-foreign investor aspects of FBA revisions and 
lifting of capital controls would be key signals that the regulatory 
bias against foreign investment is lessening and could give a boost 
to lackluster investment and consumption activity. 
 
¶19. (SBU) However, political uncertainty remains a dark cloud that 
hangs over all activities.  Two key private sector meeting 
participants noted that the release of the first draft of the new 
constitution (scheduled for April 19) will be a major event that 
will determine the political (and thus economic) stability for 
Thailand for the near term.  Pro and anti-government groups are 
currently fiercely debating provisions for the constitution.  The 
first draft of the constitution will either alleviate or only 
further exacerbate political tension. 
Boyce