VZCZCXRO1842
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #4639/01 2400941
ZNR UUUUU ZZH
P 280941Z AUG 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC PRIORITY 9226
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
INFO RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 4037
RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING 4753
RUEHKO/AMEMBASSY TOKYO 9711
RUEHUL/AMEMBASSY SEOUL 3542

UNCLAS SECTION 01 OF 03 BANGKOK 004639 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/MLS AND EB 
STATE PASS TO USTR 
TREASURY FOR OASIA 
COMMERCE FOR EAP/MAC/OKSA 
FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN 
SINGAPORE FOR FINATT BAKER 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ETRD ECON PGOV TH
SUBJECT: THAILAND: TEN YEARS AFTER 1997 FINANCIAL CRISIS 
 
REF: (A) BANGKOK 4588 (B) BANGKOK 4465 
 
BANGKOK 00004639  001.2 OF 003 
 
 
¶1. (SBU) SUMMARY:  At the ten-year anniversary of the 1997 financial 
crisis, Thailand faces economic challenges of a much different 
nature.  Gone are the days of easy loans fueling massive real estate 
speculation and luxury imports.  Rather than fighting a currency 
devaluation, and exhausting its foreign exchange reserves in the 
process (as it did in 1997), Thailand today enjoys both current 
account and capital account surpluses, an appreciating exchange 
rate, and more than healthy foreign currency reserves.  So where is 
the problem?  A military coup in September 2006, subsequent 
political instability and a rash of nationalistic business decisions 
have harmed the investment climate.  Thailand's economic growth 
trails that of its neighbors and is overly dependent on exports, 
which could now be harmed by a sub-prime induced slowdown in the 
U.S., Thailand's chief market.  The Thai economy sorely needs a 
boost in domestic demand, productivity and infrastructure investment 
to keep pace with competition from Vietnam and China.  Planned 
elections in December bring hopes of renewed political stability, 
but likely will result in a weak coalition government that will be 
hard pressed to provide the decisive economic leadership that 
Thailand needs.  END SUMMARY. 
 
 
¶2. (U) Ten years after the 1997 financial crisis, Thailand's economy 
has seen a steady, if unspectacular, recovery to sustainable growth 
levels.  From a low point in 1998, when GDP contracted by 10.5 
percent, Thailand has averaged 5.9 percent annual real growth since 
¶2002.  Inflation is now below 2 percent, and external debt is a 
manageable 32 percent of GDP (compared to over 75 percent in 1998). 
Thailand recorded a current account surplus of USD 6.2 billion for 
the first half of 2007.  The capital account is also in surplus, 
with net inflows on track to exceed the USD 8.9 billion recorded in 
2006, before the recent interruption of the sub-prime mortgage 
fallout.  This balance of payments situation has caused the Thai 
baht to appreciate 18 percent in the past 12 months, well outpacing 
similar rises in other Asian currencies against the dollar (although 
more in line with those currencies if measured since 2004).  Foreign 
reserves, once depleted during the 1997 crisis, now stand at over 
$73 billion and can cover 7-8 months' worth of imports.  The 
government has run a balanced budget for the past two years. 
 
A LOST YEAR 
----------- 
 
¶3. (U) While such macroeconomic fundamentals would normally portend 
a period of healthy growth, Thai economists and investors, both 
foreign and domestic, are concerned about immediate prospects. 
Investor and consumer confidence indices are at ten-year lows. 
Domestic demand (consumption and investment) remains virtually flat 
after growing just 1 percent last year, and Thailand's growth rate 
is trailing that of its neighbors.  Real GDP growth is expected to 
slow down to 4 percent, and possibly as low as 3.7 percent, this 
year.  Vietnam and China, by comparison, are expected to meet or 
exceed their 8 to 10 percent annual growth from 2005 to 2007, 
according to World Bank figures.  Those same figures show Indonesia, 
Philippines and Malaysia growing at an average of 5.5 percent 
annually over 2005-07. 
 
¶4. (U) Moreover, Thailand's modest growth is due almost entirely to 
exports, which have risen sharply over the past 18 months.  Exports, 
however, appear to be finally slowing with the appreciation of the 
baht making Thai goods more expensive abroad.  Exports in July grew 
at an annualized rate of 5.9 percent, compared to 18.6 percent for 
the first six months of 2007 (although the Bank of Thailand on 
August 28 tried to attribute the fall to a temporary closure of 
refinery facilities for repair).  Figures are likely to fall further 
in coming months as demand in the U.S. - Thailand's largest export 
market - continues to contract. 
 
¶5. (U) Thailand's future growth in the short-to-medium term requires 
a combination of political stability, enhanced productivity, 
stimulated public investment (especially in infrastructure), and 
increased domestic demand to take the burden off of the export 
sector.  So far, there are few indications of such on the horizon. 
On the contrary, in the ten months since last September's coup 
d'etat, the Thai government has: 
 
BANGKOK 00004639  002.2 OF 003 
 
 
 
-- Imposed martial law on the entire country following the September 
coup, and subsequently lifting it in only 41 of the 76 provinces in 
late January. 
 
-- Put a hold on government investment expenditures, including 
long-delayed "megaprojects" such as expanded mass transit lines and 
provincial highway construction. 
 
-- Imposed a 30 percent reserve requirement on most capital inflows 
in December, only to remove those controls for portfolio investment 
the next day following a 15 percent drop in the stock market. 
 
-- Introduced amendments to the Foreign Business Act (FBA) that 
would restrict foreign ownership in selected sectors and possibly 
force foreign investors to retroactively give up majority voting 
rights or divest within a given period. (This bill has been 
retracted and it's future status is uncertain - see ref A.) 
 
-- Forwarded to the National Legislative Assembly (NLA) additional 
bills, including a draft Insurance Act and Retail Act, provisions of 
which include measures to limit the expansion of foreign investment 
in these industries. 
 
SWIMMING IN DOLLARS - CRISIS OR OPPORTUNITY? 
-------------------------------------------- 
 
¶6. (U) Rather than focus on government missteps, a number of media 
pundits, exporters and economists have termed the baht's 
appreciation a new "crisis" and are urging the BOT to maintain or 
weaken the exchange rate by:  1) aggressively buying U.S. dollars in 
currency markets and 2) sharply cutting interest rates by 1.0 to 1.5 
percent.  Supporters of this view claim that over 2 million 
export-related jobs will be threatened if the baht breaks the Bt 
32/USD barrier.  Most of those jobs will be lost in labor-intensive 
industries such as textiles, or producers of agricultural and 
seafood products - the latter being more price sensitive than 
electronics or machinery products that are vertically integrated in 
foreign production chains. 
 
¶7. (U) These critics dismiss the onerous task faced by the Bank of 
Thailand (BOT) of soaking up dollars produced by the dual 
current/capital surpluses.  "Defending the currency by buying the 
dollar should be easier than by selling the dollar as in 1997," said 
one.  "If the central bank had cut interest rates more aggressively 
and earlier," he added, "it would have succeeded in maintaining baht 
stability."  According to this line, lower interest rates will keep 
the BOT's sterilization costs low when issuing bonds to control baht 
liquidity.  The BOT also has positive carry on its baht debt 
(earning more on its U.S. Treasury bonds than it pays out on baht 
debt).  As for concerns about an excessive foreign exchange buildup, 
another economist said, "If anyone worried about foreign exchange 
losses (through a weakened dollar), China's central bank officials 
would have been executed by now." 
 
¶8. (U) Other economists, who, fortunately, include those in charge 
at the BOT, maintain that Thailand cannot purchase dollars 
indefinitely.  Besides the potentially huge foreign exchange 
valuation losses accruing from a weaker dollar, Thailand's balance 
sheet already includes 1 trillion baht worth of baht-denominated 
debt through sterilization measures, compared to 800 billion baht of 
base money.  Further, Thailand does not have a government investment 
corporation with which to invest the reserves (a situation that many 
economists would prefer to keep, due to the temptation to take on 
higher risk). 
¶9. (U) In a July speech, BOT Deputy Governor Bandid Nijathaworn 
noted these risks in addition to the difficulty of targeting the 
exchange rate and inflation simultaneously.  "There is a risk that 
the central bank may cut interest rates too much," he said, "sowing 
the seeds for inflation and an asset price boom down the road as 
well."  Most observers believe Finance Minister Chalongphob is in 
full agreement with the BOT economists, who prefer only occasional 
currency interventions to reduce volatility while encouraging more 
capital outflows to relieve the surplus. 
¶10. (U) Economist Supavud Saicheua, however, goes further, saying 
that the exchange rate should be left alone:  "The appreciation of 
the baht must be seen for what it is: an increase in Thailand's 
 
BANGKOK 00004639  003.2 OF 003 
 
 
purchasing power, which presents us with the opportunity to buy the 
many things we need from the world market."  The current account 
surplus, he added, "may have been essential during 1997-2004, when 
Thailand had to generate excess dollars to repay foreign debt, repay 
the IMF and build up international reserves lost during the 1997 
crisis."  Supavud bemoans Thailand's reliance on exports, noting 
that the pre-1997 baht was even stronger, at Bt 25/USD, and exports 
only 35 percent of GDP (compared to Bt 34/USD and 60 percent today). 
 
¶11. (U) Ideally, the higher purchasing power of the baht should 
allow Thailand to re-tool its production facilities, physical 
infrastructure, and research and development base to prepare to 
compete in coming years.  It is also an opportunity for Thai 
consumers to use their buying power on imported goods.  However, 
voices such as Supavud's are being eclipsed by the clamor for 
exchange rate protection emanating from large exporters, such as 
shrimp and tuna processing firms with low margins.  Thirapong 
Chansiri, president of the world's largest tuna cannery, Thai Union 
Frozen Foods, said on August 26, "Would it really help the country 
if we moved to Vietnam?"  Better to maintain a favorable exchange 
rate, he said.  He added that "while we in the past complained about 
politicians with conflicts of interest, this new government, run by 
bureaucrats, isn't accomplishing anything, and I'm really desperate 
about the future." 
 
¶12. (SBU) While a seemingly paralyzed government and low consumer 
and investor confidence continue to hold sway, optimists hope that 
national elections, now scheduled for December 23 will remove enough 
political uncertainty to unleash a broad growth rebound in 2008. 
But those elections are likely to result in a weak coalition 
government, as the August 19 constitutional referendum vote revealed 
that sharp schisms remain between the Bangkok elite and the 
provincial voter base of ex-PM Thaksin's disbanded Thai Rak Thai 
(TRT) party (ref C). 
 
¶13. (SBU) Comment:  A weak democratic government will certainly be 
an improvement over the current coup-installed one, but will be hard 
pressed to provide decisive economic leadership in the months ahead. 
 An interesting aspect of the current political maneuvering is the 
reappearance of ex-PM Gen. Chavalit Yongchaiyudh, angling to lead an 
alliance of several new TRT-based parties.  He ended his last term 
as Prime Minister almost ten years ago, four months after he touched 
off the 1997 crisis with his fateful but unavoidable decision to 
float the baht. 
 
BOYCE