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“56948”,”3/17/2006 9:20″,”06BANGKOK1665″,”Embassy Bangkok”,



“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

TAGS: ECON, EFIN, PREL, TH, Elections – Thai







1. (SBU) Summary and Introduction. It has been less than two

months since the news that the Prime Minister\’s

publicly-listed holding company, Shin Corp, was to be bought

by Temasek of Singapore. This event catalyzed opposition to

Thaksin and has led to almost two months of political

uncertainty. With this limited timeframe, there is little

hard data to judge the effect of the political situation on

the economy nor to separate out economic declines

attributable to the end of a business cycle from reaction to

political concerns. Nevertheless, following a series of

discussions with foreign and Thai businesspeople, economists,

market analysts and government economic officials we believe

that in the short term the economy will whether this storm

achieving positive GDP growth albeit at a rate up to 2

percent slower than if the political situation were stable.

If the current political instability persists for more than

another three months, however, the effects could be more

severe and long-lasting. End Summary and



FDI Down but Not Out



2. (SBU) Anecdotal evidence indicates that companies with

existing operations in Thailand have proceeded with planned

additional investment thus far in 2006. This is especially

true of Japanese companies which had been preparing to expand

their Thai operations in conjunction with a Thai-Japan FTA

(awaiting final signature) and of some foreign-owned

manufacturers whose Thai output is primarily for export. We

understand that investors that had been considering an

initial investment into Thailand are taking a \’wait-and-see\’

approach. We believe the overall effect on FDI so far is

minimal but, as prognosticators here continually point out,

if the political uncertainty lasts more than a few more

months FDI could dry up. In 2005, the Bank of Thailand

reported FDI of US$ 2.7 billion, 1.5 percent of 2005 GDP and

a 223 percent increase over 2004 (a year which some

substantial disinvestment). Foreign portfolio investment was

very strong the first two months of 2006. Foreign portfolio

managers reportedly had an excess

of cash, were fully invested in other Asian markets and

underweighted in Thailand, and with the Thai market selling

at a price/earnings ration of about 9 vs. 12-13 for the rest

of Asia found the Thai market too attractive to ignore. These

managers and most economists point out that the issue in

Thailand is political, not economic, and therefore expect

economic conditions to improve as soon as the political

situation is resolved. Over the past week or so, foreigners

have stopped adding to their portfolios here as they bought

to their targeted levels. There are no signs indicating that

they are exiting the market.


Thai Investors on Hold



3. (SBU) The available evidence so far points to a marked

slowdown in domestic investment. Banks have told us that

their corporate loan growth is very slow and preliminary

customs figures reportedly show imports of capital goods

declining. Meanwhile capacity utilization, especially in

export sectors, is reportedly up to 90 percent. Exacerbating

Thai business reluctance to invest is that the

much-anticipated \”megaprojects\” (a multi-billion dollar,

5-year infrastructure development program) that had been

expected to begin by now is indefinitely on hold pending

resolution of the political impasse. One reason Thaksin had

promulgated the megaproject program was to stimulate private

investment and counteract the negative effect of slowing

consumer demand.


4. (SBU) One analyst attributed the slowdown in investment

directly to political uncertainty: \”the businessmen don\’t

know who to pay for contracts anymore.\” A reflection of how

important this aspect of doing business here is; none of the

major business organizations have taken a public position on

the political situation – a reflection of divided membership

but also a desire not to be seen as backing the wrong horse.

There are voices in the business community arguing that their

businesses are suffering and pleading for a quick political

settlement, including one of the vice-chairs of the

Federation of Thai Industries – one of the countries major

business associations. But we were told by the secretary

general of another business group that there is no way they

will take a public stand favoring one side or the other in

the political battle.


5. (SBU) Demand for new housing units reportedly remains

strong at the luxury-end of the market although slower in the

rest of the market. Applications for new construction are

down 31 percent from the same period last year. This is

probably as much a function of the real estate cycle as any

other factor. Thais have been liquidating holdings in the

Thai stock market and buying bank CDs (as reflected in

decreasing loan/deposit ratios) and government debt. The SET

Index is down about 3.5 percent from its 2006 high, but still

trading significantly above the levels of the second half of



Consumers Wary



6. (SBU) As previously reported (reftels), domestic

consumption was expected to slow this year in the wake of

high consumer debt levels, rising interest rates (up 125

basis points over the last 12 months) and inflation which ran

at 6.1 percent in 2005 (5.6 percent February 2006). While new

car sales were reported strong in January and February, some

analysts argue that this is a reflection of new model

introductions and accounting practices which pushed sales

into the new year from December rather than particularly

strong underlying demand. Travel agents report a slowdown in

their Thai outbound business. Preliminary customs reports

are said to show a slowing of imports of consumer goods.


The Bottom Line



7. (SBU) There is no panic and no evident slowdown of

economic activity in Bangkok. That said, everyone with whom

we have spoken believes a slowdown in investment and consumer

activity is occurring and will worsen if the current

political instability lasts more than a few months longer

(the consensus is June, for no apparent economic reason but

because of concern that if things aren\’t resolved in time for

the King\’s 60th anniversary of his coronation, then things

must be really bad.) The expectation is that events to date

will reduce 2006 GDP by 0.5 – 1 percent (resulting in 4-5

percent growth for the year). However, if the situation

persists, GDP could grow by as little as 3 percent.


8. (SBU) There is clearly no flight from the baht. The Thai

currency has continued to perform well this year (down 0.6

percent against the US$) and official foreign exchange

reserves have increased to US$54.5 billion from US$52.1

billion in December. While some of this strength is

attributable to US$1.8 billion inflow from Temasek to fund

their purchase of Shin Corp and foreign portfolio investment

inflows, there is no evidence of significant outward currency

flows. Analysts attribute this vote of confidence to several


– Thais are naturally optimistic and are confident that,

somehow, all the political issues will be resolved; \”don\’t

forget, we always have the King to settle matters if things

get too out of hand\” one analyst told us.

– The export sector is \”unaffected\” by all these problems.

Thai analysts are generally confident that so long as the

world economy stays healthy, the Thai economy can continue to

grow in its wake.

– \”We are non-violent people, so tourists will continue to

visit.\” \”Tourists came back after the tsunami, so they will

not be put off by demonstrations no different than they have

in their home countries.\”

– \”Our economy has survived many problems; we can survive

this one too.\”


A Comment about Taxes, Demographics and Street Protests

——————————————— ———–


9. (SBU) Septel will examine the structure of the Thai tax

system and its effect on the economy. But we note here that

the failure of the PM to pay any tax on his US$1.8 billion

capital gains has been a major source of anger among the

Bangkok middle class and business people. Thailand\’s salaried

employees are the only Thais who pay personal income tax and

while this group has increased rapidly with Thailand\’s

industrial development, such tax payers still number only 4

million of Thailand\’s 64 million population, and the vast

majority of these 4 million live in Bangkok. Rural people

typically earn below the minimum taxable income of Bt80,000

(US$2048) per year and usually operate outside the formal

economy in any case. Since Thaksin took office, he has

modernized the Revenue Department and made them far more

efficient tax collectors. Although most of their efforts have

gone to better collection of corporate taxes, they have also

improved collection of personal income taxes mostly through

payroll withholding. T

he very wealthy, especially the owners of businesses, pay

minimal income tax because most of their personal expenses

are borne by their companies which write off the costs as

business expenses. This sense that the rich \”Thaksin cronies\”

and Thaksin\’s rural support base (who receive the benefit of

better tax collection through debt write-offs, almost-free

hospital visits and other redistributive policies) are free

riders tax-wise has been an additional impetus for Bangkok

middle class people to take to the streets to oust the PM.



Written by thaicables

July 10, 2011 at 5:29 am

Posted in Economy, Unclassified

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