VZCZCXRO7614
PP RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHBK #6241/01 3551022
ZNR UUUUU ZZH
P 211022Z DEC 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC PRIORITY 1190
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
INFO RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 4590
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS

UNCLAS SECTION 01 OF 03 BANGKOK 006241 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS AND EB 
TREASURY FOR OASIA 
COMMERCE FOR EAP/MAC/OKSA 
STATE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ETRD PGOV TH
SUBJECT: THAILAND READIES POST-ELECTION THAKSIN-LIKE SPENDING BINGE 
TO BOOST GROWTH 
 
REF: a) Bangkok 5584  b) Chiang Mai 187 
 
BANGKOK 00006241  001.2 OF 003 
 
 
¶1. (SBU) Summary:  Thailand's major political parties have all made 
campaign promises of large spending increases both on traditional 
programs for infrastructure development and on "populist" programs. 
  Economic advisers in all parties believe that a substantial fiscal 
boost is necessary for economic growth.  Government economists and 
private sector analysts agree that there is sufficient "fiscal 
space" to embark on such an expansion, which could raise the 
government budget deficit from its current 1.8 percent of GDP to 3 
percent by 2009.  Deposed Prime Minister Thaksin's populist policies 
generated broad support for him and his party, and many officials 
admit that these popular programs have generally been effective and 
have not bankrupted the country.  While various factors will 
influence the way people vote, the common voter's perception that 
Thaksin "gave back" to the people some of the spoils of power has 
had a substantial impact on all parties' economic and social 
platforms.  End Summary. 
 
POLITICAL PARTIES PLAN SPENDING INCREASES 
----------------------------------------- 
 
¶2. (U) With the approach of the December 23 elections, both 
government and private sector economists expect public spending to 
increase no matter who forms the next government, as all major 
parties have pledged to increase spending both on major 
infrastructure projects and continue populist programs.  The World 
Bank estimates that public investment spending for FY2008, already 
set under the current government's budget, will rise 11 percent from 
FY2007.  However, FY2009 is expected to see an even more significant 
fiscal boost if the ruling political parties enact the spending 
programs they have promised in their campaigns this year. 
 
¶3. (SBU) The Democrat Party, thought by many to be the most likely 
to form the core of a new coalition government, has outlined 
spending plans to include USD 2.9 billion in agricultural irrigation 
projects, USD 7.4 billion in subway and skytrain infrastructure 
projects, and a USD 5.9 billion extension and renovation of 
Thailand's railway system.  Democrat proposals include a "populist" 
Village Sufficiency Fund, similar to Thaksin's Million Baht Village 
Fund. 
 
¶4. (U) The rival People Power's Party (PPP) has not hidden its roots 
in Thaksin's former Thai Rak Thai party and has resolved to continue 
the same policies pursued under his leadership because "they worked 
before, and will do so again," in the words of Secretary General 
Surapong Suebwonglee.  Former Bank of Thailand Governor Vijit 
Supinit, now an adviser to the smaller Puea Pandin party, says that 
the next government should expand spending markedly if it wants to 
see GDP growth in excess of 5 percent, which he said would still be 
too slow for an economy of Thailand's size.  "The government should 
not fear implementing populism - in fact, it is necessary and 
effective to spread wealth to the grass roots level," he says. 
Vijit believes the budget deficit could increase from 1.8 percent to 
3 percent of GDP without adverse consequences. 
 
¶5. (SBU) Former Finance Minister and current advisor to the Chart 
Thai party Pridiyathorn Devakula similarly predicted to Econoffs 
that the post-election government would focus on fiscal expansion, 
no matter which party led the ruling coalition.  "Investment 
projects were held up after the coup," he said, "due to indecision, 
political uncertainty, and a range of regulatory obstacles on 
environmental and land use issues."  Pridiyathorn said the existence 
of a new elected government, even if it only survives 12-18 months 
as some observers predict, would clear the air and allow bureaucrats 
to push through much-needed infrastructure projects at the behest of 
the Cabinet. 
 
¶6. (SBU) Pridiyathorn added that he believes there is room in the 
government budget to expand spending, largely due to the past year's 
efforts to clean up the off-budget obligations incurred from the 
programs of Prime Minister Thaksin.  Pridiyathorn, who was installed 
as Finance Minister shortly after the 2006 coup and resigned in 
February 2007 due to policy differences with the CNS and Prime 
Minister Surayud, said a focus on fiscal expansion is needed to 
offset a predicted slowdown in exports caused by the sub-prime 
mortgage crisis in the United States. 
 
"FISCAL SPACE" FOR AN EXPANSION 
------------------------------- 
 
¶7. (SBU) In a meeting with Econoff at the Ministry of Finance's 
Fiscal Policy Office (FPO), government economists agreed that the 
 
BANGKOK 00006241  002.2 OF 003 
 
 
new government would have significant "fiscal space" to embark on a 
spending expansion, thanks to the current government's "cleaning up" 
of most fiscal obligations incurred during the Thaksin era.  The 
FPO's calculations showed that the current public debt-to-GDP ratio 
stood at 37.7 percent at the end of FY2007, down from a peak of 58 
percent in 2000.  (Public debt is comprised of three components: 
government debt, non-financial public enterprise debt, and debt 
incurred by the Financial Institutions Development Fund - FIDF - 
which was set up to recapitalize failed banks in the wake of the 
1997 financial crisis.)  Debt service as a percentage of the 
government budget was down to 11.3 percent in 2007 compared to 13.2 
percent in 2003. 
 
¶8. (SBU) The FPO economists said that the government ran a 
"balanced" budget in 2005 and 2006 due to increased revenues and the 
fact that many of Thaksin's "populist" programs were operated 
outside the regular budget.  The post-coup government has run 
deficits in the FY2007 budget (of USD 4.2 billion) and FY2008 budget 
(of USD 4.8 billion) partly due to reduced government revenues that 
accompanied an economic slowdown, but also because Thaksin's 
populist program obligations were brought back on the government's 
open books. 
 
POPULIST PROGRAMS CHANGE THE FACE OF THAI POLITICS 
--------------------------------------------- ----- 
 
¶9. (SBU) Much of the staying power of Thaksin's popularity comes 
from the populist programs he expanded and implemented.  In the view 
of many villagers we have talked to in Central and Northeast 
Thailand over the past two months, Thaksin was the first Bangkok 
politician willing go "give back" to the common people some of the 
spoils that come from holding political power.  While academics and 
Bangkok elites are often disparaging of populism as encouraging 
inefficiency and undermining public morals, the programs, while 
imperfect, have proven affordable.  The programs remain very popular 
at the grassroots level and all the parties are clamoring they will 
continue them.  The key programs are as follows: 
 
(1) Commodity Price Subsidies - Price supports for agricultural 
commodities were greatly expanded by Thaksin as a means to stimulate 
domestic demand.  Last year, the price floor set by the government 
(before the coup) was so far above world rice prices that nearly all 
domestic production was sold to the government, which accumulated 
some 5 million tons in warehouses.  The FPO calculated that USD 500 
million was needed to pay back the Bank for Agriculture and 
Agricultural Cooperatives (BAAC) for the rice price support alone. 
Over USD 200 million was also used to cover a similar program for 
rubber.  This year, the market price for long-grain fragrant rice 
has risen dramatically (spurred by poor weather in other producing 
countries).  Virtually no Thai farmer is selling rice to the 
government, and the government has been able to sell off some three 
million tons from stockpiles.  Farmers, unsurprisingly, like the 
high price supports, and believe they are necessary to compensate 
for the rising costs of inputs, such as fertilizer.  The willingness 
to continue to maintain high commodity price supports will be the 
key test of the commitment of the next government to populism. 
 
(2)  The Million Baht Village Fund - Thaksin allocated every Thai 
village or urban community a million baht (approximately 30,000 USD 
at current exchange rates) to begin a rotating fund for villagers to 
administer among themselves for local investment projects.  In some 
villages, a committee scrutinizes loan proposals and tries to 
allocate funds where they will do the most good, usually to begin 
animal husbandry side businesses or help underwrite crop 
expenditures.  In other villages, the politics of giving money to 
some families and not others has proven too difficult so the fund is 
allocated equally among all village households.  All loans from the 
fund are to be repaid within a year, so money is available for the 
next round of loans.  Some villages report that funds are largely 
repaid on time.  Others admit that loans are sometimes "squandered" 
on consumer goods and have to be repaid with higher-interest loans 
from local moneymen, increasing rural household debt. In 
particularly successful villages, the local branch of the BAAC has 
added another million to the pot, so two million baht is loaned out 
each year.  The FPO told us that the government's initial USD 2 
billion expenditure has now been cleared from the books. 
 
(3)  Universal 30-Baht Health Care Coverage - Thaksin dismantled the 
national public health budget which had been organized by functional 
need and divided it up on a per capita basis, so that local 
hospitals were given an allocation based solely on the number of 
residents in their districts.  Patients were required to pay a flat 
fee of 30 baht (under 1 USD) per visit (which was reduced to zero by 
 
BANGKOK 00006241  003.2 OF 003 
 
 
the interim government).  We visited local hospitals across six 
provinces and found that they had largely recovered from the 
budgetary chaos of the transition and now are generally able to 
maintain operations adequately.  Some hospital directors say that 
service has deteriorated and bemoan the stress that free care has 
brought - average patient visits per year, at least in one province, 
have doubled to 2.5 - but others believe the increased exposure to 
medical professionals provides opportunity for more preventative 
care education and is a net plus for public health.  The 
government's per capita allocation has been increased significantly 
in the last three years, rescuing many hospitals from debt, and 
generating some sense of optimism among hospital administrators. 
All hospital directors, however, agreed that there is little money 
for capital improvements or new equipment purchases, which if not 
rectified will degrade services as the years go by.  Some directors 
have begun serious fund-raising efforts and/or side businesses, such 
as spas, to supplement hospital income.  Villagers complained about 
the longer waits they now must endure to see a doctor, but the 
guarantee against financially-crippling medical expenses that 
previously came with serious illness or accident is greatly 
appreciated. 
 
(4)  Teacher Salary Subsidies - Thailand's policy elites have long 
been concerned about the paucity of resources going into education 
and the resulting poor quality of many of the nation's schools. 
Thus, Thaksin's championing of more money for education was 
initially widely supported.  The mechanism by which he sought to 
implement that initiative, raising teacher salaries, however, has 
been seen by some as a cynical effort to buy teachers' votes.  While 
the program was supposed to provide financial incentives for 
improved teaching in the classroom, our visits to provincial teacher 
credit cooperatives revealed that, in practice, the cynicism may be 
justified.  We did find one province which requires additional 
training courses and teachers now have to submit a research paper to 
demonstrate their credentials which, perversely, often proves a 
distraction from classroom teaching.  In practice, however, the 
supplements are generally allocated on the basis of years in 
service, and allocated to all school administrators and teachers 
with the necessary time-in-grade.  From the teachers' perspective, 
the salary supplements are long overdue.  A beginning teacher with a 
college degree earns only about USD 200 per month.  The supplements 
cost the government nearly USD 300 million per year, and are now 
part of the budget for the Ministry of Education. 
 
¶10. (SBU) Comment: The interim government has been given little 
credit for the fiscal responsibility it has demonstrated by getting 
Thaksin's off-the-book populism programs back in the budget where 
they can be properly accounted for and seem to be affordable, at 
least for now.  But there is no doubt that Thaksin's introduction of 
nationwide popular policies, as opposed to narrow pork-barrel 
payoffs to win personal loyalty, as a means of winning votes has 
created a sea change in Thai politics.  The election on December 23 
will in part be a measure of the extent that common voters believe 
that anyone but those who carry Thaksin's legacy can be trusted to 
"give back" to the people as he is perceived to have done through 
his populist policies. 
 
Boyce