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“93736”,”1/24/2007 9:18″,”07BANGKOK499″,”Embassy Bangkok”,”UNCLASSIFIED//FOR OFFICIAL USE ONLY”,”07BANGKOK261″,”VZCZCXRO6559


DE RUEHBK #0499/01 0240918


P 240918Z JAN 07




















E.O. 12958: N/A





C. 06 BANGKOK 7650

D. 06 BANGKOK 7504

E. 06 BANGKOK 7484

F. 06 BANGKOK 7435

BANGKOK 00000499 001.2 OF 005

1. (SBU) Summary. Investor confidence in Thailand has

suffered a series of shocks over the past 40 days. The

introduction of more stringent capital controls effectively

limiting new investment, a series of bombs in Bangkok on New

Year\’s Eve, and proposed amendments to the Foreign Business

Act (FBA), all have combined to shake both foreign and

domestic confidence in the economic management capability of

the current government. This has been exacerbated by the

regime\’s failure to consult with stakeholders, rapid

policy-shifts and apparent lack of concern about the

short-term impact of their decisions. Despite this, most

economists continue to forecast Thailand\’s GDP for 2007 to

come in at about the same rate of growth as was achieved in

2006; 4-5 percent. Despite the benefits of a decline in oil

prices and continued strength in Thailand\’s export markets,

the perception that the current government is economically

and politically inept will likley cause Thailand\’s economy to

underperform, especially in comparison to its regional

competitors. End Summary.

2. (U) On January 17 the Monetary Policy Committee (MPC) of

the Bank of Thailand (BoT) announced a 19 basis point

reduction in the central bank\’s interest policy rate to 4.75

percent (the 1-day repurchase agreement rate which replaced

the previous policy benchmark based on the 14 day repo). The

reason given by the MPC for their action was \”Latest economic

indicators point towards a slowdown in domestic demand. In

particular, consumption and investment…showed a continued

moderation. On the other hand inflationary pressures are

expected to moderate…\”

3. (SBU) As we have reported (reftels), economists have been

predicting for over a year that domestic demand and private

investment would grow only modestly in 2006, and they were

proven correct with these indicators growing at about 3

percent and 2.9 percent respectively. The only driver to the

economy was the export sector which grew about 16 percent in

US$ terms. With the 14 percent appreciation in the baht last

year, however, the effective contribution of exports to

economic growth was much less but still was sufficient to

achieve a 4.6 percent increase in GDP for the year.

Confidence Lagging


4. (SBU) The reasons for the poor consumer and investor

confidence in 2006 were a combination of the political

turmoil in the run-up to the September coup, concerns about

an economic slowdown in Thailand\’s major export markets, and

the high price of oil in an economy that imports all its

crude oil and is highly energy inefficient. The coup

initially provided a lift to sentiment since it was seen as

resolving the political unrest and providing a clear path to

new elections along with a technocratic government that would

formulate economic policy untainted by political and

corruption-related factors.

5. (SBU) In fact, the economic mood in Thailand is now quite

negative. Offsetting the good news of the recent moderation

of oil prices has been a series of policy decisions, along

with the New Year\’s Eve bombings, that are widely seen to

have been either badly managed, politically motivated, or

both. The military-installed government is under growing

criticism for not yet bringing any corruption charges against

former PM Thaksin, for heavy-handed efforts to intimidate the

media, and a general air of ineptitude.

Capital Controls – Why so \”Draconian\”?


BANGKOK 00000499 002.2 OF 005

6. (SBU) There is little doubt that Thai exporters\’ margins

were under severe pressure from the appreciating baht before

new capital controls were implemented on December 19. Even

those who supported the measures at the time now seem to be

having second thoughts about the magnitude of the BoT

response to the problem, terming the measures \”draconian\” and

\”using a sledge hammer to kill a fly\”. Financial market

participants with whom we have spoken, including Stock

Exchange of Thailand management, bemoan the \”clear lack of

understanding of how markets work\” within the BoT and the

failure to consult with market participants beforehand. An

SET senior official told us \”we are officials charged with

running the stock market, yet they (BoT) never bothered to

ask us what might happen when they put in their measures

because they don\’t trust us. Actually, they don\’t trust

markets.\” Similar criticisms were directed at Deputy PM (and

former BoT Governor) Pridiyathorn. The CEO of a major stock

broker said \”what sort of policy do you expect from a

regulator\”? Pridiyathorn did not help his case when he

announced that the market\’s steep decline in the wake of the

capital controls announcement was \”illogical.\”

7. (SBU) Senior officials at the BoT continue to insist that

they had no choice but to act as they did; arguing that they

could not segregate capital flows and so had to apply the

reserve requirement to all incoming capital (a policy quickly

reversed for equities and that has been slowly and quietly

liberalized on a continuing basis. Many believe that the

controls will be mostly lifted within another month). Deputy

Governor Atchana, when asked why the BoT did not try and use

interest rate reductions as a first step to reduce baht

appreciation replied that the Bank was concerned about the

Ministry of Commerce lifting price controls on about 100

controlled items and what such an action might do to

inflation. She also argued that more severe action was needed

to drive out the speculators considered to be the cause of

the rapid baht appreciation and cutting rates \”was just what

the speculators want us to do. Why should we reward them.\”

Several observers told us that Pridiyathorn\’s philosophy is

that speculators only respond to \”severe punishment\” and that

over time, markets always revert to their underlying value

regardless of short-term shocks.

8. (U) The SET was the worst performing stock market in Asia

in 2006, down about 4.8 percent for the year. Even before the

capital controls were put in place, the market still

underperformed its regional competitors, up only 3.5 percent

through the end of November on the back of foreign investors

buying over net US$2 billion (Thais were net sellers

throughout the year). Over the past month, the SET has

declined 9 percent while Asia ex Japan has appreciated 3

percent. In spite of recent polices, foreigners have sold

only a net US$700 million of their Thai equity holdings.

Reasons given for this are 1) long-term funds are content to

maintain their exposure to Thailand to be in line with the

MSCI global index benchmark, 2) with limited liquidity in the

market, funds were concerned about moving the market further

if they attempted to sell too quickly and 3),hedge funds have

come back into the market over the past week expecting a

bounce-back because the market is seen as being unusually

cheap. As an indication of the lack of trading volume,

year-to-date foreigners were net buyers of US$206.3 million

in equities and contributed 42.1 percent of total market


No Keeping the Baht Down


9. (SBU) Some local observers believe that the BoT analysis

of the causes of the baht\’s appreciation was both overly

simplistic in blaming the problem on \”speculators\” and not

simplistic enough given the increasing current account

surpluses in the last half of the year. Some note that,

despite BoT rules requiring exporters to remit all their

export earnings and convert them to baht within 14 days of

payment, many kept US$ accounts overseas funded (contrary to

BoT regulations requiring all export earnings to be remitted

BANGKOK 00000499 003.2 OF 005

and converted into baht within 14 days) by a portion of their

earnings. With the accelerating decline of the dollar, there

was a rush in the last quarter of 2006 for Thais to stem the

depreciation of these holdings and convert to baht. Several

bankers have told us that their exporter clients had an

insatiable demand for baht every time the US$ had even a

small rebound and that this accelerated the baht\’s rise.

10. (SBU) Further exacerbating the baht\’s strength was the

practice of some multinationals (especially Japanese) to

undercapitalize their Thai operations and then fund them

through intra-company loans. By doing so, the local operation

would remit interest payments to the parent with only a 15

percent withholding tax and no problems from the BoT for the

remittance (as opposed to occasional problems receiving BoT

approval for remitting surplus capital). This practice also

reduces the Thai operation\’s profitability, and therefore the

amount due the Thai taxman under the 30 percent corporate tax

rate. Many of these companies also participated in the

Japanese carry trade; borrowing at about 30 basis points in

Japan to fund their Thai operation, plus some extra to invest

in RTG short-term debt to earn 5 percent which would then be

sent back to the parent as part of their debt repayment. This

prompted the BoT to include intra-company loans under their

new reserve regulations with the effect that now many local

operations of multinationals must either prove to the BoT

that the loans really are for operating purposes (a

cumbersome process) or borrow from local banks at

considerably higher interest rates.

11. (SBU) In any case, the result has been the baht

stabilizing at around 36/1USD but has caused the cost of

capital to increase by about 30 basis points and liquidity on

the capital markets to decrease. Bankers here tell us that a

significant amount of baht trading now takes place in

Singapore and that there is a wide spread (about 1 baht)

between offshore and onshore baht/US$ exchange rates. Bank

liquidity, while more than adequate for the larger banks,

will be impinged by the application of International

Accounting Standard 39 by the BoT. This rule requires Thai

banks to set aside more collateral for non-performing loans,

a rule that some of the less-well capitalized Thai banks will

have to stretch to comply with. All this has acted as a

further brake on Thai business\’ impetus to invest more in

their operations. Exacerbating that reluctance has been the

proposed amendments to the Foreign Business Act.

Foreign Business Act – So Many Questions…


12. (SBU) As has been reported (reftels), there remains

considerable uncertainty about the final form of the proposed

FBA amendments and how they will be implemented. We have been

told by several sources that the amendments as drafted by the

Ministry of Commerce would have opened several service

sectors to unlimited foreign ownership but that, after

considerable cabinet debate, the amendments focused on

extending the definition of an alien corporation to include

as a measure voting rights (as well as share ownership)

controlled by non-Thais, to increasing penalties for

non-compliance, and to offer the possibility of receiving a

license to continue operating and shareholder structures for

some existing businesses that in future will not be


13. (SBU) At a time when private investment is moribund and

FDI is down by more than half from 2005, less than one month

after investor sentiment was why wounded by the promulgation

of the capital control regulations and only weeks after the

New Year\’s Eve bombings, why would the RTG choose this time

to propose new laws restricting new foreign investment and

threatening some existing investors with the retroactive

aspects of the proposed amendments? If we take at face value

the RTG\’s claim that they are simply \”closing loopholes to

the existing law\”, the questions arise of why they 1) didn\’t

first charge and try companies with violating the FBA under

existing law and 2) why they didn\’t consult with the foreign

BANGKOK 00000499 004.2 OF 005

business community before making the changes?

14. (SBU) It is privately acknowledged by the Deputy PM and

widely understood in Thai society that the real reason for

the amendments is that there is a political imperative to

find the Shin Corp-Temasek transaction illegal. Despite the

fact that former PM Thaksin has already received US$1.9

billion for the shares he and his family sold in the

transaction (now mostly residing in accounts at Siam

Commercial Bank and Krung Thai Bank where they are closely

monitored to ensure no funds are transferred abroad) and

there are no Thai laws that make the seller of an asset

responsible for ensuring the buyer complies with FBA

regulations, the current government is anxious to show that

this transaction was illegal in order to \”prove\” the corrupt

nature of the former PM but are apparently unable to do so

under the present FBA. However, if this is the only reason to

amend the FBA, the government could have amended the National

Telecommunications Act, the law which governs all aspects of

that sector including limits on foreign equity participation,

rather than the more general FBA.

…And So Many Answers


15. (SBU) The answer to this question as provided by DPM

Pridyathorn was that, because the current FBA (and Telecom

Act) lack an effective definition of the term \”nominee\”, and

it was through the use of nominees holding shares on behalf

of Temasek that the Singapore company worked around the 49

percent limit on foreign ownership of Thai telecom companies,

it would be up to a court to provide a definition of the

term. Rather than \”the nightmare\” of leaving such a

definition to the court and then having it apply to all

nominee structures in Thailand, Pridiyathorn argues that his

government has taken the initiative to better define legal

and illegal structures and to offer a way forward for most

existing companies that might fall afoul of the amendments.

He has said that by providing a better law, foreigners in the

future will know what they can or can not do in Thailand and,

as a result, Thailand will attract more FDI. Unfortunately,

the fact that the term \”nominee\” remains undefined means

there remains considerable scope for imaginative lawyers to

find ways around the new restrictions. It also means that

companies will not necessarily know if they are violating the

new law or not. We believe that one reason \”nominee\” is left

ill-defined is because many Thai companies and families get

around non-FBA restrictions on ownership (especially laws

limiting a person to 5 percent shareholding in a commercial

bank or cross-holdings between banks and non-financial

companies) through the use of nominees.

16. (SBU) As is often the case in Thailand, there are various

stories to explain that which is difficult to understand. We

have been told, for instance, that a major Thai conglomerate

with interests in telecom and retail has sought the FBA

restrictions as a way to further their current market

position and limit future competition. The quid pro quo will

be that the group will help finance a marketing campaign for

a positive vote on the referendum required for approval of

the constitution currently being drafted. This is a response

to the RTG concern that Thaksin will use his funds to finance

a \”no\” vote campaign against the new constitution.

17. (SBU) While there may be some truth to the story, we find

it more likely that the recent moves of the interim

government directed at foreign interests are primarily moves

by the traditional Thai elite reasserting control over the

Thai economy. Following the Asian financial crisis and

Thaksin\’s policies that had the potential to significantly

liberalize the services sector, these recent laws and

regulations are a reaction to the perceived further potential

loss of Thai-elite control over critical aspects of the Thai

economy. It probably is a safe bet that the current

government would never have negotiated the 1994 GATS

agreement, with its phased liberalization of the retailing

and telecoms sectors, and is looking for a way to duck its

BANGKOK 00000499 005.2 OF 005

GATS commitments or at least minimize their practical impact.

The moves are also part of the general roll-back of all

things Thaksin-related. In the minds of the elite, these

actions are not considered anti-foreign. They are considered

as protection against the vagaries of foreign capital and the

assurance that such critical sectors as telecom, banking and

transport remain under Thai control and, therefore, are

managed for the long-run good of Thailand (as opposed to the

\”short-term interests of foreigners who tend to focus on

quarter-quarter financial results\”). There may have been a

desire to liberalize less critical sectors; architectural

services, advertising or restaurants, for example. But the

political capital needed to liberalize some and not other

sectors would cost more than the government was willing to


What Next?


18. (SBU) Most foreign businesses that are here will stay

here despite the increased policy uncertainty. Many note that

the BoT has already considerably softened its capital control

rules and expect that there will simply be a new series of

loopholes when the FBA is promulgated. New investment will

also continue for sectors in which Thailand is most

competitive, especially automotive and tourism. But in other

sectors where Thailand is growing increasingly uncompetitive

or if there is less reliance on existing investment, new

investment is increasingly going to go elsewhere. An example

of this thinking is a US technology company with factories in

Thailand, Malaysia and Taiwan in addition to the US. A new

plant was destined for Thailand but, following the coup and

then the capital controls, the decision was made to put the

investment into Malaysia. As the regional manager told us,

\”even though the capital controls and FBA won\’t affect us,

why should we put additional money into Thailand when we

can\’t see what the political system is going to be a year

down the road and the current government seems uninterested

in what the foreign community thinks.\”

19. (SBU) Most economists here predict 4-5 percent GDP growth

for 2007. When asked to explain how that can be when domestic

consumption, private investment and exports are all forecast

to grow at a lower rate than in 2006 when 4.6 percent growth

was achieved, they point to anticipated increase in

government spending. Given the fact that increased

disbursements are unlikely until Q3 this year, the impact of

government spending on GDP growth for the year as a whole

will be marginal. The confidence in continued 4-5 percent

economic growth is based on faith that this is the nation\’s

\”natural\” rate of expansion. And no matter how poor

government policy may be, as long as private companies have

the financial flexibility to operate and the exchange rate

remains competitive to that of Thailand\’s competitors, the

country will grow at its \”natural\” rate, regardless of what

most long-term foreign investors do. We agree that the Thai

economy has underlying strengths that probably will prevent

2007 GDP growth from falling much below 3 percent. If the

stock market is a forecaster of future economic events, it is

projecting a weak performance for Thailand this year.



Written by thaicables

June 14, 2011 at 2:05 am

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