VZCZCXRO6136
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #2916/01 1450115
ZNR UUUUU ZZH
P 250115Z MAY 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC PRIORITY 7184
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 4230
RUEHBY/AMEMBASSY CANBERRA PRIORITY 7141
RUEHUL/AMEMBASSY SEOUL PRIORITY 3117
RUEHKO/AMEMBASSY TOKYO PRIORITY 9268
RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 3563
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 05 BANGKOK 002916 
 
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 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PREL PGOV TH
SUBJECT: WHAT'S GOING ON WITH THE THAI ECONOMY 
 
REF: A. 06 BANGKOK 6156 
 
     ¶B. 06 BANGKOK 7373 
     ¶C. BANGKOK 2037 
     ¶D. BANGKOK 2473 
 
BANGKOK 00002916  001.2 OF 005 
 
 
¶1. (SBU) Summary: Thailand's GDP growth rate is decelerating 
rapidly and RTG officials are concerned about the short-term 
impact. However, this concern does not extend to changing 
policies that are having a clear impact on the primary reason 
for the economy's poor performance-loss of both consumer and 
business confidence. The political outlook remains confused 
and economic policies are discouraging foreign investment. 
The economy has enough inherent strength to prevent recession 
in the near term. However, the confidence of RTG leaders that 
Thailand can become more restrictive towards foreign business 
interests while neighboring countries become ever more 
competitive and the result will be improved post-election 
economic performance strikes many economists here as overly 
complacent if not altogether misguided. End Summary. 
 
¶2. (U) The Thai economy continues to slow substantially.  Net 
exports of goods and services contributed all but 0.2 percent 
of last year's 5 percent GDP increase. Bank of Thailand is 
now projecting 2007 GDP to be 3.8-4.8 percent, revised 
downwards in April from the previous 4-5 percent Bank 
projection. Many economists believe that the new projection 
remains substantially above what they expect and argue that 
the country will be lucky to achieve 3 percent growth this 
year. 
 
Certainly, many indicators are not positive: 
-Auto sales (a key measure of consumer confidence) down 16 
percent year-to-date compared to the same period in 2006; 
-Property transactions down 20 percent; 
-Sales at fast-food chains flat for the first time since 2001; 
-Print ad sales down 20 percent although television ad 
spending is up slightly; 
-Pawnshop loans up 16 percent while corporate loans are flat; 
-Non-performing loans up slightly (from 4.12 percent of total 
loans at December 31 to 4.19 percent March 31-a reversal of 
the previous downward trend); 
-More late payments on credit cards; 
-Brokerage income down 76 percent and stock exchange trading 
volume down 43 percent over the same period last year; 
-Reports of reduced availability of overtime for factory 
workers; 
-No growth in overall imports and declines in imports of 
capital goods; 
-Private Consumption index down 0.5 percent Q1; 
-Private Investment Index down 1.7 percent Q1 (led by 
declines in sales of cement and commercial vehicles); 
-Consumer Confidence Index at its lowest point in five years; 
-Corporate income tax payments down 12.1 percent Q1; 
-Earnings of companies on SET50 index down 12 percent Q1; 
-Manufacturing Production index indicates a slowdown in 
production, especially sectors that depend more on domestic 
markets. 
Given the strong growth and positive leading indicators of 
Thailand's regional competitors, we assume much of the above 
is the result of Thailand's ongoing political uncertainty 
combined with some remarkably poor economic policy decisions. 
 
¶3. (U) On the positive side of the ledger, the economy keeps 
growing because of the continued strength of (1) the tourism 
sector and (2) the export sector.  Tourist arrivals increased 
2.6 percent through April 2007 compared to the same period in 
¶2006. Exports grew 18.5 percent Q1 in US$ terms (although 
only 4.7 percent in terms of unit value).  Imports only grew 
by 0.1 percent in volume terms.  This resulted in a Q1 US$5.4 
billion current account surplus, continuing the accumulation 
of foreign currency reserves to more than US$70 billion ---a 
key factor contributing to the ongoing strength of the baht. 
Baht strength and low consumer demand have kept inflation low 
with CPI rising at a 1.8 percent rate this year. Gross 
external debt is down to 29.6 percent of GDP, with the 
government portion of this debt falling to 28.7 percent of 
GDP. Fitch Ratings accordingly maintained Thai sovereign debt 
at a BBB  rating in its May annual report. 
 
BANGKOK 00002916  002.2 OF 005 
 
 
 
BEHIND THE NUMBERS 
------------------ 
 
¶4. (SBU) Most analysts we speak with believe the core problem 
with the Thai economy is lack of confidence. While this may 
sound simplistic and obvious, it reflects the contentious and 
confused nature of the current debate about Thai politics, 
society, and Thailand's place in the global economy that are 
currently roiling the country. Until these basic questions 
are resolved, Thais are hunkering down. Examples: 
 
- Over the past 12 months, the Thai stock market was the only 
one in the world reviewed by Bloomberg that experienced a 
negative return (down 2.6 percent.) The next worst performer 
was Tokyo which had an 8.2 percent gain. Thailand's regional 
competitors, Manila, Singapore, Kuala Lumpur and Jakarta 
enjoyed market appreciation of 45, 40, 43, and 41 percent 
respectively. The Thai market would have performed even more 
poorly were it not for foreign investors who have continued 
to be net buyers of Thai equities over the period. Thai 
investors, meanwhile, have continued their three-year trend 
of net selling Thai shares. This is despite Thai shares' much 
lower valuations and much higher dividend yield than other 
markets in the region. High bank liquidity also indicates 
that individuals are socking money away in bank deposits 
(which enjoy unlimited guarantee of principal by the RTG) and 
low bank lending for mortgages, automotive and corporate 
loans. 
 
-  Thai businessmen in sectors as varied as chemicals, 
cement, footwear, banking, insurance and property development 
have all told us that while they are confident Thailand will 
be a good place to invest in the future, they are holding off 
making new investments here "until things are more clear." 
They have been telling us this for almost two years. Instead, 
they are running down their inventories (another contributor 
to the high current account surplus), squeezing as much as 
possible out of their existing production capacity, and 
investing in new operations in places like Vietnam and 
Cambodia. Because of the downturn in domestic consumption, 
output that was previously produced for the domestic market 
is being diverted to export markets despite slimmer margins - 
another contributor to the current account surplus and 
reduced corporate profitability. 
 
- Senior executives of the Government Savings Bank (GSB) and 
the Agricultural Bank (the two biggest lenders to rural 
Thais) confirmed press reports that rural businesses are 
suffering a severe downturn in business despite continued 
high prices for Thai agricultural goods. The bankers said 
that farmers are simply not spending money unless essential. 
They ascribed this frugality to their concerns about the loss 
of the Thaksin-era rural economic safety nets and the 
"sufficiency-economy" model the current government is 
espousing that promotes savings over consumption. An RTG 
promoted campaign to offer Bt5000, 18 month term loans to 
good existing customers of the GSB as a means to encourage 
consumption is instead reportedly being used by borrowers to 
pay back loans from loan sharks. 
 
WHAT THE RTG IS DOING ABOUT IT 
------------------------------ 
 
¶5. (SBU) The RTG is well aware that the economy is not doing 
well and is looking for policies to quickly improve matters. 
Thus far, the search for economic stimulus has brought about 
a 1.5 percent reduction this year in the Bank of Thailand 
policy interest rate to 3.5 percent. In its May 23 statement 
accompanying a 50bp rate cut, The BoT signaled that further 
rate cuts were now less likely. One economist tells us that 
this sudden change in approach - despite continued weak 
economic numbers after the most rapid cut in rates since the 
1997 financial crisis - was to compel consumers to start 
purchasing now rather than wait for the end of the BoT 
loosening cycle. However, as the local UBS economist wrote in 
a recent report, "While we believe that the BoT's decision to 
cut rates is the correct one, we do not believe that it will 
 
BANGKOK 00002916  003.2 OF 005 
 
 
have a meaningful impact on domestic demand in the near term. 
What is more relevant to turning around the economy is 
turning around confidence." 
 
¶6. (SBU) As evidenced in recent BoT-Ministry of Finance 
public fights on internet blogs, the BoT agrees that the 
impact of monetary policy will be limited and has encouraged 
MoF to use fiscal policy to stimulate domestic demand. The 
MoF acknowledges the need for stimulative fiscal policy, but 
argues that if the BoT had cut interest rates earlier and 
faster, then the MoF would not be required to apply fiscal 
stimulus so urgently. The stimulus package remains a vague 
work-in-progress but is expected to include two extensions to 
the Sky Train mass transit system (contracts to be awarded by 
August, delayed from April), increased spending by 
state-owned enterprises (especially petroleum giant PTT, 
although there is no clear time frame for the various 
projects) and small tax adjustments to make property 
purchases a better deal.  The impact of the tax changes may 
be muted for some time as homebuyers are waiting for the BoT 
rate reduction cycle to play itself out before signing on for 
a new mortgage. 
 
THROW MONEY AT IT 
----------------- 
 
¶7. (SBU) Other fiscal measures are meant to disburse the 
state budget more quickly. A special Bt44 billion (US$1.3 
billion) in new funds for the state Specialized Financial 
Institutions (Agricultural Bank, Government Savings Bank, SME 
Bank, Government Housing Bank) are being promoted as a boon 
to economic activity in the rural areas.  One obstacle to 
success for both these programs is that government 
bureaucrats are in "neutral gear" and apparently unwilling to 
approve expenditures.  In Thailand's extremely hierarchical 
society, decisions are often pushed up the chain of command 
for clearance (and thus political cover for decisions). In 
the present environment in which civil servants expect that 
their current political masters will soon be gone, the 
already limited desire to put one's signature to an 
implementing decision is almost completely absent. This 
reluctance is especially pronounced in the areas that have 
attracted the attention of the corruption-busting Asset 
Examination Committee (AEC).  A prime example of this is seen 
in the RTG Department of Revenue. Local accounting firms 
complain that since the Director General of the Department 
was sacked for providing a tax advice letter to the former 
PM's family (that the AEC subsequently determined was 
incorrect), tax rulings are simply no longer available from 
the Department. 
 
¶8. (SBU) As for the Bt44 billion package, senior executives 
from two of the SFIs told us that 1) they have plenty of 
liquidity and so don't need the money and 2) the only way 
they could lend more would be to relax their credit 
standards, an issue for which they were severely criticized 
when the military staged the coup. They believe that the 
government announcement was simply for publicity purposes and 
little new lending was really expected by the policy-makers. 
The Finance Minister recently told the Ambassador that his 
ministry had "solved" the "neutral gear" problem regarding 
disbursements, but he did not say how and, according to one 
Thai participant in the meeting, "didn't really believe his 
own words." 
 
"FOREIGNERS LIKE TO COMPLAIN" 
----------------------------- 
 
¶9. (SBU) Exacerbating all these problems have been a series 
of policy decisions that have contributed to significantly 
reduced new foreign direct investment and caused many to 
question the openness of Thailand to foreign investment in 
general. Changes in capital control regulations and proposed 
amendments to laws governing investment in the services 
sector have generated a deep concern among all major foreign 
investors in Thailand-concerns which have been dismissed by 
the RTG. One of our contacts related that Commerce Minister 
Krirk-Krai, responding to concerns expressed by his staff of 
 
BANGKOK 00002916  004.2 OF 005 
 
 
foreign criticism of Thai policies, said "foreigners always 
like to complain. But we don't have to worry about it because 
we know we our actions are right." 
 
¶10. (SBU) Senior officials at the Bank of Thailand and 
Ministry of Commerce acknowledge that the economy is running 
on one engine and missing out on new investment. But they 
note that government and corporate balance sheets are in good 
shape and there is plenty of liquidity in the economy. 
Economic policy makers are convinced that once elections are 
held and a new government is installed, pent-up consumer and 
business demand will be unleashed and the economy will 
quickly resume its historical growth rate.  "We are simply 
building a good base from which to grow," an Assistant 
Governor of the BoT told us. 
 
¶11. (SBU) The apparent confidence the current government 
places in foreign desire to invest in Thailand is combined 
with bureaucratic "neutral gear" at the Board of Investment 
(BOI), the agency responsible for promoting inward 
investment. We have been told by foreign and Thai companies 
that BOI has adopted a "take it or leave it" attitude to 
potential foreign investors asking about investment 
incentives. As one Thai industrial estates developer told us, 
"in Singapore they ask what they can do for the foreign 
investor; at BOI they just want to know what the foreign 
investor will do for Thailand. And then if the investor asks 
for some special help or some alteration of the published 
incentives, the BOI is completely inflexible." 
 
RISING RISK AND REDUCED RETURNS 
------------------------------- 
 
¶12. (SBU) Portfolio managers tell us that the risk premium 
for Thailand has increased considerably and many fund 
managers with longer-term time horizons intend to remain 
uninvested in the Thai market until the political and policy 
risks are more easily quantified. Hedge funds and short-term 
traders, attracted by "the huge discounts available in 
Thailand" have demonstrated a willingness to continue making 
small bets here. 
 
¶13. (SBU) A more quantitative indication of Thailand's 
increased risk rating is the increasing spread in 5 year 
Credit Default Swaps for Thai risk vs. narrowing spreads for 
Thailand's competitors. A Thai bank analyst report states 
that the risk premium for Thai securities is now second only 
to Indonesia among Thailand's regional competitors. Some 
economists argue that exacerbating the increased risk has 
been an expectation for reduced growth in Thailand going 
forward (due to RTG policy statements which state a 
preference for "happiness" and "sufficiency" over growth) and 
question why investors will come to Thailand if risks are 
rising while potential returns are falling. 
 
¶14. (SBU) This perception of increased Thai risk also applies 
to fixed inward investment. U.S. companies with whom we have 
spoken say that in weighing their global options for new 
capacity, they now must include a greater weighting for Thai 
policy and political risk in their analysis than they had in 
previous years. This has been exacerbated by the ubiquitous 
demonstrations of affection for the King over the last two 
years and the concern (almost never voiced aloud but 
universally acknowledged) of how the country will respond 
when the frail 79 year-old monarch eventually passes from the 
scene. 
 
¶15. (SBU) Comment: Starting with the communist revolution in 
China, Thailand enjoyed the serial elimination of many of its 
regional competitors for foreign investment and export 
markets. China, Vietnam, Laos, Cambodia, Burma and, to some 
extent India, all took themselves out of the game. Indonesia, 
the Philippines and at times Malaysia suffered political 
instability or bouts of xenophobia which similarly reduced 
their attractiveness to foreign investment. Thailand was one 
of the very few regional beacons of relative stability, 
predictability and economic openness. 
 
 
BANGKOK 00002916  005.2 OF 005 
 
 
¶16. (SBU) Comment continued: Thai policymakers seem not to 
recognize that the game has now changed. Thailand must 
compete with the new Asian tigers as well as the old ones. 
The country no longer offers particularly attractive labor or 
land costs and recent policies have caused many to question 
the transparency and predictability of future policies that 
could affect investment in Thailand. And then there is the 
opaque and confusing political scene to consider. Companies 
already invested in Thailand don't seem likely to leave 
(although lawyers in town tell us that they are getting a lot 
of work preparing exit plans for clients, just in case), but 
attracting new investment, even from Thais, is proving to be 
a problem. While momentum from past investments and fairly 
reliable infrastructure will keep the economy going for 
awhile, it is the "next investment dollar" that Thailand has 
lost out on over the past two years and will continue to 
forego should current policy trends continue. 
BOYCE