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“61475”,”4/24/2006 9:00″,”06BANGKOK2360″,




“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: Over the past few years, the Thai economy

has weathered SARS, bird-flu, tsunami, increased competition

from China and unrest in the country\’s south, all with only

limited impact to growth. The ongoing political crisis that

has gripped the country throughout this year, combined with

record-high energy prices and a surprisingly strong currency,

bring new challenges to continued economic strength. As we

have reported (reftels), the economy has grown increasingly

dependent on exports for its growth and will become even more

so if the current political instability persists. End



2. (SBU) In a meeting with Assistant Governor for Domestic

Economy of the Bank of Thailand (and key member of the

monetary policy committee), Dr. Atchana Waiquamdee told us

that domestic demand would grow slowly, if at all in the face

of high energy prices, high consumer debt levels and

increasing interest rates. Because of increased salaries

(5-10 percent varying by sector) and continued low (1.7

percent) unemployment, there has been no increase in consumer

debt defaults and spending on non-durables remains strong

even as consumer confidence continues to slide. This decline

in consumer confidence is reflected in slowdowns in first

quarter 2006 new home sales (exacerbated by a 50 percent

decline in bank mortgage approvals as banks have tightened

lending standards in anticipation of weaker economic growth),

new car sales and sales of other consumer durables all lead

to a general consensus among Thai economists that consumers

will not be a factor in the growth of the Thai economy in

2006. Most observers expect consumer demand to grow only at

the rate of the overall economy (3.5-5.5 percent), at best as

consumers continue to use -and borrow on- their credit cards

to keep non-durables spending near current levels. Dr.

Atchana also pointedly said that the government should never

have expected economic growth to come from domestic

consumption given GDP/capita is only about US$2000. Comment:

This is a dig at the Thaksin administration\’s \”dual-track\”

economic policy which emphasized increased domestic

consumption alongside export growth. One of several

anti-Thaksin comments she made to us. End comment.


Government Spending Slow



3. (SBU) Dr. Atchana believes that, because of the caretaker

status of the current government and the likelihood that

political instability will persist for some months,

government disbursements for capital investment will be a bit

slow (80 percent of target in the first quarter) even though

spending should remain on track through the remainder of the

fiscal year (ending September 30). If political instability

persists, however, there may be no new budget in place for

the new fiscal year. In any case, in April the government

announced that the much-anticipated tenders for

infrastructure \”megaprojects\” would be delayed until a new

government is in office. These projects were expected to add

0.5-1 percent to GDP and help stimulate private investment.

Anecdotally, several businesses have said that government

decision making has been slowed considerably because of the

administration\’s caretaker status. As a result, there are

many procurement decisions that remain on hold.


Companies Keep the Money in Their Pockets



4. (SBU) Private investment continues at a slow pace despite

continued high capacity utilization rates (in excess of 73

percent). Foreign companies that use Thailand as an export

base, especially in the auto and electronics sectors, have

added capacity over the past year (a major factor in

increased Thai exports–see para 5). Thai companies,

however, continue their hesitancy to take on debt or spend

much of their cash flow on new capacity. This is reflected in

very slow bank corporate loan growth (1-2 percent). Dr.

Atchana guessed that Thai exporters are able to increase

output by running multiple shifts (a factor not captured in

capacity utilization figures). First quarter private

investment grew at a 5.4 percent annual rate, and much of

this was investment by foreign companies and foreigners

buying Thai property. Further evidence of slow investment

rates are seen from March imports which increased by only 1.3

percent from last year, mostly because of higher oil prices.

Imports of steel and machinery declined sharply, suggesting a

slowdown in capital investment.


Export Sector Saves the Day, Again



5. (SBU) With public and private spending and investment all

in stasis, it has been the export sector that has driven

Thailand\’s growth. Exports increased 17.3 percent in the

first quarter, including a 20 percent increase in exports to

the US market in March and a double-digit increase in exports

to Japan. Further helping the export figures, Thai

commodities including sugar, rice, tapioca and rubber, have

all benefited from increases in global prices and a recovery

in output after the drought of 2005. With exports comprising

more than 60 percent of GDP, the continued health of this

sector can maintain Thailand\’s general economic health.


6. (SBU) The improved trade balance and continued positive

portfolio investment flows combined with a generally weak US$

has caused the baht to appreciate 7.3 percent against the

dollar so far this year. While the Indonesian rupiah has

appreciated at a similar rate, other regional currencies

whose products compete with Thai exports such as the Korean

won, Phillipine peso, Singapore dollar and Malaysian ringgit

have increased by 4.7, 3.3, 3.0 and 2.8 percent respectively.

This has created considerable apprehension among Thai

business and government officials who fear that Thailand will

lose competitiveness in export markets. 80 percent of Thai

foreign trade is conducted in US$ and our contacts tell us

that Thai exporters do not hedge their US$ income streams.

Combined with increased labor, energy and interest rate

costs, Thai company margins will be considerably squeezed if

the baht remains so strong.


Bank of Thailand Allows Strong Baht



7. (SBU) The Thai Ministers of Finance and Commence have both

told the press that the baht is too strong and should be

targeted at a rate of about 39/US$ (current rate is just

below 38/US$). Dr. Atchana advised us that the Bank of

Thailand has not made much effort to prevent the baht run-up

and implied that it would be unlikely to do so in the future

as \”the Bank does not have a policy to promote the export

sector\”, especially since \”intervention is effective for only

a limited period.\” She also noted that the cost of

intervention is increasing because, in order to keep

inflation down as the money supply has increased from the

inflow of fx, the Bank has had to sterilize the baht created

when it buys US$ and therefore issued bonds which, in a

rising interest rate environment, is an expensive operation.

There is also the problem of adding liquidity when the BoT

has been trying to reign in inflation. One analyst posits

that \”the BoT is less (not more) likely to intervene and will

allow the baht to appreciate in accordance with market

forces.\” As an aside, Dr. Atchana noted that when Temasek was

remitting funds to pay for its purchase of Shin Corp, the BoT

was completely out of the market, allowing the baht to rise,

at least in part because the Bank \”saw no reason to allow the

PM\’s family to earn more baht because of any action from the



8. (SBU) Comment. In the wake of inconclusive elections in

April, the political situation remains uncertain. Reftel A

notes the many analysts and businesspeople who expressed

concern for the economy if the political situation did not

stabilize by June. Dr. Atchana told us she thought that

domestic consumption and investment could actually begin to

decline if Thai politics did not stabilize within three

months. If this consensus proves correct, Thailand would

become even more reliant on its one remaining economic

engine, and that sector is under pressure from the strong

baht and rising operating expenses. The Thai economic

forecast for the rest of the year depends largely on the

global economy maintaining its current momentum and the Thai

political scene achieving some sort of clarity. The good news

is that business and government debt levels are low and bank

liquidity is ample, so there is some general flexibility in

the system. The question is how long an economy can function

without any economic policy-making from government.



Written by thaicables

July 11, 2011 at 7:56 am

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