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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




REF: A. 04 BANGKOK 6918

¶B. BANGKOK 1169




1.(SBU) SUMMARY AND INTRODUCTION. The overwhelming victory

achieved by Prime Minister Thaksin’s Thai Rak Thai (TRT)

party in the February 6, 2005 general elections, in which TRT

won 376 of 500 parliamentary seats, offers Thaksin an

unprecedented degree of political power for a democratically

elected Thai politician. This cable is a first-take (before

a new cabinet has been named) on what economic policies the

new administration will pursue in the aftermath of TRT’s

electoral mandate. Our conclusions are:


– There will not be any policy surprises. Thaksin will follow

the goals he laid out in his electoral platform.


– These goals are to undertake catch-up infrastructure

“mega-projects” to stimulate domestic investment, continue

raising rural incomes, encourage the development and

expansion of SMEs, increase the competitiveness of Thai

industry and Thailand’s logistical ability to compete, and

conclude regional and bilateral trade agreements to gain a

market advantage for Thai producers and make Thailand a

center of Asian trade; all while slowly reducing government



¶2. (SBU) Thaksin, flush with victory and confident that his

first term economic polices (which his critics described as

overly populist) have been vindicated by Thailand’s economic

growth record, has the political power to push all these

programs ahead. The questions are how he chooses to spend his

political capital – since many of his programs will call for

such unpopular actions as privatization of state-owned

enterprises and other sorts of economic liberalization,

including FTAs with the U.S. and others, – and whether his

penchant for clever-but-complicated financial engineering to

fund projects off the RTG books proves sustainable. It is an

open question whether Thaksin, ever sensitive to criticism,

will husband his political capital and not undertake needed

economic liberalization if opposition proves too fierce or

there is any significant slowing in the Thai economy. END



¶3. (SBU) On February 7, immediately following TRT’s historic

sweep of 75 percent of parliamentary seats, the party

released an outline of its economic goals for the next four

years entitled “Towards economic transformation.” It begins

by identifying the previous four-year period as a time to

“repair and revive” and sets a new goal of “transformation

and restructuring of Thailand to meet the challenges of the

increasingly competitive global arena.” The document then

lays out four sub-goals; ‘assuring prosperity of the people;

enhancing the production sector’s competitiveness, building

infrastructure to enable progress and from local links to

global reach.”


Trickle-Down Economics, Thai Style



¶4. (SBU) As has been reported (ref A), a key component of

Thaksin’s first administration was the stimulation of

domestic demand to revive the economy following the 1997-1998

economic crisis. RTG programs designed to funnel cash into

the hands of rural citizens combined with commercial bank’s

post-crisis focus on consumer credit which introduced credit

cards and other consumer finance products to many Thais for

the first time, led to a surge in demand for Thai-made

motorbikes, cars and appliances (because of the weak baht and

tariff barriers, imported goods at the lower-end of the

market are not competitive with domestic producers). This

recovery of domestic demand with a revival of export markets

helped Thai manufacturers utilize the enormous capacity they

had added in investment boom of the 1990s. The RTG focus on

domestic demand, combined with continued efforts to increase

exports, was the heart of Thaksin’s first term economic

approach – the so-called “dual-track strategy”.


¶5. (SBU) Under the rubric “assuring the prosperity of the

people”, Thaksin has identified “strengthening the

grass-roots economy” as a continued focus during his coming

term. This is defined largely as programs to “empower local

communities to better manage their own finances” together

with “removing barriers” and “unlocking the great potentials

that flow from(grassroots knowledge, creativity and skills.”

Most of our interlocutors argue that the economic development

aspect of Thaksin’s rural programs have actually done little

but provide a quick boost to rural consumption and

confidence. A program which provided each village a Bt1

million revolving loan to invest as they pleased, for

example, was largely used to fund consumption rather than

investment. Aggressive lending by special purpose government

banks (the Government Savings Bank and Bank for Agriculture

and Agricultural Cooperatives) also served largely to finance

the many new one-ton pickup trucks and color TVs that are

seen in the countryside. Consi

derable anecdotal evidence indicates that when these loans

came due, the borrowers reverted to traditional village money

lenders (who charge usurious rates) to pay off the official

loans that were typically collateralized by houses and

farmland. The RTG can be expected to continue to encourage

programs to lend to rural sectors and keep the

credit/consumption cycle flowing.


¶6. (SBU) These programs and such others as “One Village One

Product” handicraft development plan are marketed by the RTG

as empowerment and development programs. However, many

observers believe they are actually more akin to an income

redistribution policy. With 60 percent of all Thais still

living in villages and no other government social safety net,

these programs are both politically expedient and have been

an effective way to “prime the pump” economically while

calling it “rural empowerment” rather than rural welfare.

Although these programs will continue over the next four

years, they are not the centerpiece of the Thaksin economic

strategy going forward. With pent-up consumer demand largely

satisfied and consumer indebtedness at record heights, Thai

economic policy is to look elsewhere for future economic



Enhancing Competitiveness Through FTAs



¶7. (SBU) In order to assure a continuing surplus available

for redistribution, and to generate the growth in GDP that

Thaksin views as the bottom-line measure of his success, the

new Thaksin administration has said “the private sector needs

to focus on restructuring to compete effectively in the

globalized marketplace.” What this restructuring and reform

are supposed to look like is not identified, perhaps because

it is widely accepted that Thai industry needs to end such

practices as rent-seeking behavior, poor corporate governance

and a failure to upgrade labor and management skills that are

below those of Thailand’s competitors – all problems

attributable in large measure to long-standing protection

from foreign competition for many industry sectors.


¶8. (SBU) Key RTG policy-makers have identified FTAs as a

means to force the private sector to reform by removing trade

barriers, thereby exposing Thai companies to global

competition in their home market. Officially, Thaksin views

FTAs as part of a “global reach” strategy designed to open

doors to the “unique” qualities of Thai goods and services

and place Thailand at the center of a web of bilateral and

regional trade agreements. While these stated goals make

sense, we believe the greatest benefits to a comprehensive

FTA with a country like the US would be in the positive

effects on the Thai economy from liberalization; a view

espoused by at least one senior advisor to the Prime

Minister. The political difficulty of carrying forward such

liberalization, even under the cover of an FTA (“the

Americans made us drop your protection”), was evidenced by

the hiatus on bilateral FTA talks with the US in the run-up

to the Thai elections – primarily out of concern that the FTA

could be used by the opposition to bludgeon the government.

We are not sure if Thaksin and his government will be able to

muster and sustain the political will to successfully

conclude comprehensive FTAs with Thailand’s major trading

partners. We are certain, however, that in the absence of

such an external influence, real reform in the private sector

will not occur – a view shared by most Thais.

¶9. (SBU) An indication of the seriousness with which Thaksin

is taking his new economic agenda (and perhaps indicative of

the difficulty he anticipates in its implementation) is the

mooted elevation of Finance Minister Somkid to Deputy Prime

Minister responsible for economic affairs. Somkid is the

Prime Minister’s key economic advisor and one purpose of

giving him effective strategic control over all aspects of

the Thai economy would be to ensure that implementing

agencies carry out the administration’s strategic vision and

that necessary decisions are made quickly. This was related

to Ambassador Boyce during a February 13 meeting with Thaksin

at which it was suggested that Somkid would play an important

role in the FTA talks with the U.S. (ref B).


¶10. (SBU) Another difficult area we expect Somkid to manage

is the privatization of state-owned enterprises (SOEs).

During his first term, Thaksin failed in his attempt to sell

shares in the government electricity company EGAT following

strong opposition from the company’s labor unions and NGO

groups which argued that the exercise was simply a way for

company management, TRT officials and other insiders to make

a quick buck from the floating of shares – as they argue

occurred in the partial privatization (corporatization) of

Thai Airways and oil giant PTT. The government has pledged to

again try to privatize EGAT (and perhaps some of the other

60-70 SOEs) through a process that begins with a relatively

small (20 percent of total equity) floatation on the Bangkok

stock exchange, leaving the RTG as majority owner. The

Thaksin privatization goals are to eventually remove the

government’s contingent liabilities associated with SOEs, to

encourage greater competition in the business sectors in

which the SOEs operate and promote sound business practices

in these companies.


¶11. (SBU) The emphasis Thaksin puts on markets is somewhat

belied by the continuing subsides the RTG provides to

consumers for diesel fuel and electricity prices. The diesel

subsidy is expected to start phasing out as of March 2005

(although there is talk of waiting until May so that the

economic impact of the tsunami dissipates first). There is no

indication, however, that electricity prices will be unfrozen

and the subsidy to make up the cost differential to EGAT will

change. We believe that Thaksin and his advisors continue to

wrestle with the issue of ensuring Thai businesses have

low-cost basic inputs in order to be competitive with their

regional competitors while realizing that such subsides

distort company business decisions. We believe that during

the second Thaksin term, subsidies will very slowly be phased

out with the RTG stepping back in to prevent any price






¶12. (SBU) The government has announced a series of

“mega-projects”, primarily to upgrade Thailand’s transport

infrastructure. The RTG estimates that its companies pay 20

percent more than regional competitors for logistics and

transportation due to inefficient and antiquated

infrastructure. It is true that since the late 1990s

economic crisis, few new infrastructure projects have been

started due to the need for fiscal rectitude and, as a

result, Thailand needs to play catch-up with much of its

infrastructure. We believe, however, that the government’s

primary purpose for the US$20-26 billion that it plans to

spend on such projects is the need to create a new driver to

Thailand’s economic expansion – investment -to replace the

now largely played-out consumer consumption driver.


¶13. (SBU) Some observers are concerned that the RTG will fund

these projects through increased government spending and

additional debt issuance. While there is little doubt that

there will be some increased government spending and new

RTG-backed debt associated with these projects, we believe

that Thaksin feels strongly that government spending should

not significantly exceed its current rate of about 16.8

percent of GDP and overall government debt should slowly

decline. The Finance Ministry has announced that public debt

will not exceed 50 percent of GDP (currently around 48

percent) and the government debt/service ratio will stay

below 15 percent of GDP. Thaksin views monetary and fiscal

stability as prerequisites to business confidence and

progress on these metrics as a sort of report card on how

well his administration is proceeding on the economic front

in general. Besides, he believes there is another, more

effective, way to finance his ambitious plans.


¶14. (SBU) There is no shortage of capital in Thailand. Banks

remain flush with more than Bt200 billion in unloaned funds

even though real interest rates on deposits are negative and

commercial bank lending rose 6.8 percent in 2004. The RTG is

seeking to mobilize this capital to fund infrastructure and

upgrade private sector capacity and efficiency. The buzzwords

to accomplish this are “public-private partnerships” and,

“Special Purpose Vehicles” (SPVs). An example being mooted of

how this might work for an extension of the Bangkok subway

system is the creation of an SPV to which the RTG would cede

control on government-owned land under which the subway would

be routed. The SPV would develop the property above ground

and finance the digging of subway tunnels below. In return

for the land, the RTG would own a minority share of the SPV.

The SPV would issue bonds – not backed by an RTG guarantee

-to finance the real estate development projects and subway

construction with interest and principle repayments financed

by the rent and eventual sale of the office and/or commercial

sites developed and rent on the tunnels paid by the subway

operator. A second SPV would run the subway with the

purchase of rails and rolling stock financed by a second

issuance of non-guaranteed bonds to be repaid from subway

fares and underground real estate development. A major

purchaser of the bonds would probably be government pension

and social security funds (the social security fund currently

has Bt268 billion – US$6.7 billion, in assets). In one blow

infrastructure is developed and Thai savings mobilized all at

no change or risk to the government balance sheet. Should

anything go wrong, however, and pensions put at risk from

non-performing SPV bonds, the RTG would have a major problem.

There is also the question of how much real estate would need

to be developed to finance the subway and whether this

supply-led building boom would negatively influence the

Bangkok real estate market.


¶15. (SBU) In addition to the physical infrastructure to be

developed, the government recognizes that for industry to be

more competitive the intellectual and job skills of Thai

workers must be enhanced. Thai schools are widely seen as

poorly funded and teachers badly trained with most teaching

by rote. The individual Thaksin names as new Education

minister will indicate the seriousness of the new

administration in tackling this matter. Thaksin is also keen

to increase the amount Thai companies spend on research and

development, currently only 0.13 percent of GDP (Malaysia-a

country Thaksin views as a key competitor-spends at rate

about five times greater).


¶16. (SBU) COMMENT. The Prime Minister has a clear vision

for Thailand’s economy and usually takes decisive actions

towards its realization. The risk that he, and the country,

run is that sometimes his decisions are not well thought-out

and may result in short-term gains and long-term costs. An

example; Thai commercial banks have become quite conservative

lenders following their climb back from the 1997 crisis.

Seeing a lack of lending to stimulate the economy, Thaksin

ordered state-owned Krung Thai bank to be more aggressive in

making loans. The bank did so, increasing its loan portfolio

at a rate more than double that of its nearest competitor.

Unfortunately, the quality of some of the larger loans was

poor and Krung Thai has been forced to make major asset

write-downs and some of its top executives are being indicted

for corruption and malfeasance. Other quickly and poorly

executed plans, such as the agreement with China for free

trade in certain agricultural goods, was based more on vision

without sufficient attention to details.


¶17. (SBU) We know the direction Thaksin wants to take the

economy during his second term. We do not know if he has

learned the need for better preparation and better guidance

for the implementing bureaucrats. We also must wait and see

if Thaksin’s stated vision of a reformed business sector is

something he is willing to aggressively fight for, e.g.

taking on entrenched local elites who are likely to oppose a

comprehensive FTA with the U.S. The structure of his new

cabinet should be the first clue in answering these




Written by thaicables

August 26, 2011 at 5:28 am

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