05BANGKOK7000 EXPORTS REVIVE THAI ECONOMY

“44756”,”11/9/2005 4:23″,”05BANGKOK7000″,

 

“Embassy Bangkok”,”UNCLASSIFIED”,

“04BANGKOK7349|05BANGKOK3463|05BANGKOK6217”,

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

The full text of the original cable is not available.

 

“,”UNCLAS SECTION 01 OF 02 BANGKOK 007000

 

SIPDIS

 

STATE FOR EAP/MLS AND EB

TREASURY FOR OASIA

COMMERCE FOR 4430/EAP/MAC/KSA

STATE PASS TO USTR FOR WEISEL, COEN

 

E.O. 12958: N/A

TAGS: ECON, EFIN, ETRD, TH

SUBJECT: EXPORTS REVIVE THAI ECONOMY

 

REF: A. BANGKOK 6217

B. 04 BANGKOK 7349

C. BANGKOK 3463

 

1. Summary: After a weak showing in the first quarter, the

Thai economy has strongly recovered, achieving 4.4 percent

GDP growth in the second quarter with even stronger growth

anticipated for the second half. Exports account for almost

all this growth as domestic consumption and private

investment remain weak. Inflation, which grew at 6 percent

in September, is a concern but should be managed as the Bank

of Thailand raises interest rates and energy prices

stabilize. Thailand\’s reliance on exports is reflected in RTG

efforts to rapidly negotiate as many Free Trade Agreements as

possible. As Thailand\’s most important export market, we

believe that we will ultimately be successful in our

bilateral FTA talks with the Thais, even though they will

have to swallow hard to accept some of our market-opening

demands. End Summary.

 

Growth is Back

——————

 

2. Thailand\’s GDP rebounded from its poor first quarter

performance, growing 4.4 percent over the previous year\’s

second quarter. While third quarter GDP will not be released

until December, the outlook is positive. Growth will likely

be led by a 22.7 percent increase in exports for the quarter

compared to 13 percent export growth in the first half.

Exports benefited from various factors: a continuing upturn

in the business cycle of the global electronics sector, an

increase in vehicle exports as new production facilities came

on line, a recovery of the tourist sector post-tsunami, and

an end to the drought which negatively affected food exports

in 2004. In addition, prices received for many of these goods

(especially rubber) were higher than last year as

inflationary costs were to some extent passed through to

buyers.

 

3. An additional impetus to GDP will be provided by a slower

rate of import growth compared to the first half of 2005. The

key factor in this slowdown was a reduction in the volume of

oil imports in the quarter following the end of government

subsidies on diesel in early July. The anticipation of the

end of subsidies caused significant stockpiling of oil in the

first half leading to imports of crude 30 percent above

normal volumes. In the third quarter, oil imports reverted to

normal levels. Due to government suasion, gold imports also

fell and state-owned enterprises appeared to delay imports of

capital goods. Finally, consumer demand was weak, limiting

growth of consumer imports. All this combined to reverse the

trade and current account deficits of the first half and turn

them into surpluses of US$200 million and US$1.2 billion

respectively in the latest quarter.

 

But Only Thanks to Exports

———————————-

 

4. This export-led growth is not reflected in other sectors.

Consumers, hit by rising energy prices, inflation, rising

interest rates and with already-high debt burdens, limited

their new purchases so that domestic consumption for the

quarter was basically flat. Similarly, private investment

grew by only 5.6 percent for the quarter. Sales from

inventory represented an abnormally high percentage of total

sales for the quarter. This was reflected in weak levels of

investment and manufacturing production growth as some of the

inventory overhang was worked off. Increased government

expenditure (funded by strong government revenue growth in

the wake of better tax collection capabilities, greater

consumer use of formal, VAT-paying markets in lieu of

informal markets, and the running down of tax-loss

carryforwards from the crisis era) helped alleviate some of

this private sector weakness.

 

Inflation a Concern

———————–

 

5. The greatest current concern of the Bank of Thailand and

most analysts is inflation which reached 6 percent in

September (core inflation, excluding food and energy, was 2.3

percent). Most of the inflation has been caused by the end

of diesel subsides which has increased costs throughout the

economy over the last three months (ref A). Most analysts

expect that, assuming crude prices stabilize or decline from

current levels, inflationary pressure should peak by this

year\’s fourth quarter and then return to a 2-3 percent annual

range. Aside from oil prices, an additional risk to this

scenario is the extremely tight labor market with

unemployment falling to 1.4 percent in August. While the Thai

data includes numerous persons the US would consider severely

underemployed, anecdotal evidence indicates that available

skilled workers are becoming harder to find. As the auto and

electronics industries continue to expand production, the

Bank of Thailand is concerned that a wage-price spiral could

result.

 

6. In an effort to keep inflation at bay and to close the

spread between US and Thai short-term rates, the BoT has

aggressively raised its policy rate (by 125 basis points)

over the course of 2005. This has had the desired effect of

helping reduce domestic consumption and the corollary effects

of keeping the baht strong (it has appreciated 4 percent

against the dollar since July) and bank margins under

pressure. Real interest rates on consumer bank deposits

remain negative, however, and the BoT is expected to raise

rates an additional 50-100 basis points (to 3.75-4.25

percent) before it eases off. This will continue to restrain

the ability of Thai consumers to consume as they work to pay

off their outstanding debts at higher interest rates.

 

7. Despite these headwinds, most analysts remain positive.

The BoT has raised its GDP forecast for 2005 from 3.5-4.5

percent to 4.25-4.75 percent and some analysts have followed

suit. They see continued strong export growth, especially as

Japan continues its economic resurgence and Thailand makes

further inroads into the China market. Also, in 2006 the

RTG\’s much-anticipated \”megaprojects\” (US$48 billion in

infrastructure development over 5 years, see ref B) is

expected to get fully underway. Finally, tourism is

expected to fully recover from the 2004 tsunami by next year;

already Phuket hotels anticipate 80-90 percent occupancy for

their high season this winter. An avian influenza outbreak

would, obviously, change these forecasts.

 

8. Comment: The Thai economy continues to be largely

well-managed with problem areas such as inflation being

addressed. However, Thailand remains exceptionally reliant on

exports for its economic well-being, comprising about 55

percent of GDP so far this year. The RTG and many analysts

presume that, so long as China continues its rapid growth,

Thailand will be pulled along in its wake. We occasionally

need to remind RTG officials that the US is Thailand\’s second

largest export market and source of its largest trade

surplus, and that one reason the PM sought an FTA with the US

is to cement Thailand\’s position in their most profitable

market. We believe that after more than fifteen months of

negotiations, the RTG now accepts that we will not compromise

on the principle of an agreement that is comprehensive and

lays out a plan that fully opens Thai markets to US service

suppliers and investors.

BOYCE

“