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“38553”,”8/15/2005 8:41″,”05BANGKOK5217″,



“This record is a partial extract of the original cable.

The full text of the original cable is not available.













E.O. 12958: N/A









1. Sensitive but Unclassified. not for Internet Distribution.


2. (SBU) Summary: Increasing oil prices exacerbated a turn

in Thailand\’s business cycle resulting in GDP growth of 3.3

percent in 2Q 2005. Continued declines in consumer and

business sentiment caused weakness in consumer spending and

private investment leaving 12 percent growth in imports as

the primary source of economic strength. The 35 percent

increase in imports, primarily oil, more than offset the

export growth and resulted in a large Current Account deficit

over the fist half of the year. The Bank of Thailand is

expected to increase its policy interest rate by as much as 1

percent by year-end in a bid to control inflation, maintain

stability in the baht and reduce the negative spread between

nominal and real interest rates. This is somewhat at

cross-purposes with RTG policy which would prefer a

relatively weaker baht and continued low interest rates to

augment the fiscal stimulus policies it has put in place.

Economists have reduced 2005 GDP growth forecasts to 3.5-4.5

percent from 4.5-5.5 percent thre

e months earlier. We believe that the government\’s strong

fiscal position, commercial bank\’s improved financial

condition and strong corporate balance sheets will see

Thailand through what the Bank of Thailand terms \”the year of

adjustment which tests the economy\’s resilience.\” The main

risk factors to this upbeat scenario are continued increases

in world oil prices and weakening in the economies of

Thailand\’s major trading partners. End Summary.


Economy Growing More Slowly



3. (U) The Thai economy grew 3.3 percent in the first quarter

compared to the same period last year, and declined 0.6

percent from the last quarter of 2004. Initial projections

for the 2nd 2005 quarter show no improvement. This continues

a trend of declining GDP growth over the past 1.25 years. The

Bank of Thailand attributes the relatively poor economic

performance so far this year primarily to the increase in

world energy prices. This global problem has been exacerbated

in Thailand by the effects of the December 26 tsunami,

drought in certain agricultural regions and the on-going

violence in three far southern provinces of the country. In

addition, the global economy grew only modestly over the past

year limiting growth opportunities for Thai exports.


The Fallout from High Oil Prices



4. (U) There is no doubt that the rise in oil prices has

been a major contributor to Thailand\’s swing to deficit in

its current account, from a US$7.1 billion surplus in 2004 to

a US$6.2 billion deficit in 2005\’s first half. Foreign

exchange reserves have declined modestly over the first half

from US$49.8 billion to US$48.4 billion-about 3.5 months of

imports; 3.6 times short-term external debt. Analysts

estimate that oil costs have doubled, going from 4 to 8

percent of GDP and subtracting about 5.5 percent from the

country\’s rate of growth. Oil has accounted for more than 33

percent of total Thai imports this year. In addition, the

cost to Thai consumers and businesses was more keenly felt

than were last year\’s increases in world energy prices due to

the end of the RTG\’s subsidy on diesel beginning on July 13.

Diesel prices at the pump have increased 4.1 percent and

would have been up by around 10 percent had excise taxes on

the fuel not been reduced at the same time as the subsidy

ended. According to the B

ank of Thailand, the increase in fuel prices has been the key

cause of inflation rising to 5.3 percent in July (core 1.9

percent). 2004 headline inflation was 2.7 percent.


5. (SBU) The deficit in the current account, rising prices

and the negative news from natural causes have all taken a

toll on consumer and business sentiment. Both these

indicators have been declining for the past six quarters and

business sentiment is at its lowest point since 2001. This is

reflected in both the Private Consumption Index (growing at

only 0.3 percent in 1H 2005) and low rates of fixed asset

formation, even though capacity utilization continues to run

above 70 percent. Consumer purchasing power going forward

will be further constrained by recent Bank of Thailand moves

to restrict credit growth in the sub-prime market (from

concern that these consumers were becoming over-extended) and

interest rates that are expected to increase 75-100 basis

points by year-end as the Central Bank tries to rein in

inflation and increase savings by reducing the 3.5 percent

negative spread between real and nominal short-term interest

rates. The Monetary Policy Committee (equivalent in function

to the U.S. Federal

Open Markets Committee) is faced with pressure to raise

interest rates to protect the value of the Baht and reduce

inflation even as the RTG is anxious to keep rates at a level

that continues to be a stimulus to the economy.


Fiscal Stimulus, But Not Much This Year

——————————————— ——


6. (SBU) As reported in reftels, the RTG must identify the

next driver for economic growth now that consumers are

nearing their maximum debt levels and private investment is

not picking up the slack. While most analysts are sanguine

that recent positive growth in the economies of Thailand\’s

major trading partners should translate into a renewed

upsurge in Thai exports, we question the ability of Thailand

to meet any significant increased demand given the lack of

investment in increased capacity. The government\’s five-year

\”megaprojects\” infrastructure development program remains on

the drawing board at this point, slowed by the huge size of

the proposed projects, the need to create institutional

capacity to manage several large projects simultaneously, the

RTG\’s desire to postpone projects requiring large amounts of

imported inputs while the current account is in deficit and

reported in-fighting over which companies will be awarded

these contracts. Analysts don\’t expect any real progress on

these projects un

til sometime in 2006.


7. (SBU) To stimulate the economy this year, the government

is taking the following actions:

-Bt50 billion accelerated disbursement of RTG budget.

-5 percent increase in salaries of civil servants

-5 percent increase in pension payments

– 3.5 percent increase of the minimum wage

– Directing state-owned commercial banks to accelerate a loan

expansion program (Note: Most commercial banks have tightened

lending standards for loans to SMEs in anticipation that

slower economic growth could result in tougher trading

conditions for small companies and, therefore, more potential

loan defaults. End note.)

-Increase in the \”Village Fund\” program to direct more funds

to rural areas.

Due to a balanced budget, a government debt/GDP ratio of

around 45 percent, and continued strong growth in government

revenue (up 10 percent in 1H 2005), the RTG has the fiscal

wherewithal to undertake these programs without undue risk.


8. (SBU) Newly appointed Finance Minister Thanong Bidaya has

pledged to make financial stability his key concern. However,

he has also said that he is investigating means to reduce

consumer debt burdens. While it is unclear how he will

accomplish this, some analysts are concerned that it will

result in some sort of socialization of consumer debts as a

means to provide consumers with the ability to re-leverage

themselves and again act as a stimulant to the domestic

economy through their renewed purchasing power. Meanwhile,

private commercial banks have tightened up their standards

and practices for consumer loans and credit cards. The RTG

is also studying ways to restructure the debt of small

farmers suffering from drought. We expect that this will be

extended to small farmers in general via the RTG-owned

special purpose banks (Bank for Agriculture and Agricultural

Cooperatives and the Government Savings Bank.) Note: The

rural areas are the political base of PM Thaksin and his

party. End Note.


Oil Anomaly



9. (SBU) To reverse the current account deficit, the RTG has

asked Thai Airways to delay purchase of two A340 jets and

requested importers not to stockpile goods, especially oil,

gold and steel which have been major contributors to the

deficit. We noted that customs statistics show the value of

energy imports in 1H 2005 increased over 80 percent in dollar

terms and over 100 percent in May and June from the previous

year. The increase in oil prices only account for about 60

percent of this increase in imports. Meanwhile, the Ministry

of Energy reports that overall domestic demand for refined

product declined 16 percent over the 1H 2005 in response to a

slowing economy and increased prices and that there was no

net increase in oil imports. The official Bank of Thailand

explanation for this anomaly is that Thai customs is

reporting imports in arrears with a mismatch between when oil

is contracted, imported and accounted for while the Ministry

of Energy records imports based on invoice dates. Industry

contacts also suggest that 2004 customs statistics understate

imports, thereby distorting year-over-year comparisons.


10. (SBU) A different explanation put forward by some

analysts is that oil companies may have been importing large

amounts of oil (stockpiling) earlier in the year to gain

inventory profits, i.e. they import crude at prices

prevailing earlier this year but sell refined product later

in the year and price the refined product at the then

(higher) prevailing world prices. There is little available

excess crude storage capacity in Thailand so, if this sort of

speculation did in fact occur, it could not have accounted

for a 40 percent increase in oil volume imports. Contacts

familiar with the petroleum refining industry in Thailand

have suggested that the reason for increased oil imports is

that at current prices and refinery margins Thailand is

exporting refined petroleum products to other countries in

the region, although Energy Ministry statistics don\’t support

this theory. Finally, some say that because the subsidy on

diesel caused fuel to sell for below market prices in

Thailand, some smuggling of product to

neighboring countries took place. The RTG has repeatedly

stated that they expect oil import bills to decline the

second half of the year in response to energy saving measures

and \”closing loopholes\” in accounting.


11. (SBU) Comment: Most analysts expected the Thai economy to

weaken through the first half of the year (reftels) and they

have proven correct. Now they are anticipating recovery in

the second half. They expect the government\’s relatively

modest fiscal stimulus, combined with somewhat improved

export performance, a recovery in tourism to tsunami-affected

regions and moderation of imports to bring the current

account deficit down to around US$3 billion by year-end. The

US$2.6 billion net increase of foreign portfolio investment

this year also displays some degree of investor confidence

going forward (although at least some of this is probably

speculation based on Yuan appreciation using the Baht as a

proxy). Finally, bankers tell us that they have seen no

deterioration in loan performance to date. The Bank of

Thailand is carefully monitoring the lending of state-owned

banks to ensure proper credit standards are maintained in the

face of RTG pressure to increase loan volumes. So far, this

pressure seems to be m

ostly talk as part of the government\’s efforts to reverse

negative public sentiment about economic prospects.


12. (SBU) Nevertheless, we believe that there are significant

risks to the positive scenario; above all the price of oil

which would both further increase Thailand\’s import bill and

negatively affect Thai export market\’s ability to grow. If

growth stays below 4 percent for more than another year,

there is a strong likelihood that NPLs would again rise as

companies fail to grow at anticipated rates and restructured

loans return to default status. While we believe banks have

rebuilt their collateral and reserves to levels sufficient to

deal with this problem, the effect on sentiment could

exacerbate current confidence problems.


13. (SBU) There are no discernable bubbles in the Thai

economy, but there are also few signs of robust growth in the

short-term. Consumers will be hit by increases in interest

rates and high energy prices, the real estate construction

boom is slowing and domestic manufacturers still show no

evidence that they are willing to invest in any major

expansion. In 2001 Thaksin was successful in bringing

Thailand back economically through policies that stimulated

domestic consumption while export markets recovered. Now,

Thailand is returning to a period where it must rely on

export markets for growth until RTG infrastructure spending

kicks in. The government is keenly aware of the risks of

overdependence on the performance of other economies in this

\”year of adjustment which tests the economy\’s resilience.\”

End Comment.



Written by thaicables

July 7, 2011 at 5:45 am

Posted in Economy, Unclassified

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