Cablegate: Thai Economic Forecasts Revised Downward
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #1695/01 0810547
ZNR UUUUU ZZH
R 220547Z MAR 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 5750
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASH DC
RUCNASE/ASEAN MEMBER COLLECTIVE
UNCLAS SECTION 01 OF 03 BANGKOK 001695
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COMMERCE FOR EAP/MAC/OKSA
TREASURY FOR OASIA
STATE PASS TO USTR FOR WEISEL
STATE PASS TO FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN
STATE PASS FEDERAL RESERVE NEW YORK FOR MATT HILDEBRANDT
E.O. 12958: N/A
TAGS: ECON PGOV PHUM PREL TH
SUBJECT: THAI ECONOMIC FORECASTS REVISED DOWNWARD
REF: BANGKOK 1399
SENSITIVE BUT UNCLASSIFIED HANDLE ACCORDINGLY
1. (SBU) Summary: Government officials (including newly appointed
Finance Minister Chalungphob) and private sector analysts expressed
deep concerns about the economy in meetings with visiting US
Treasury officials. Growth forecasts for 2007 have recently been
revised downward - from 4.5 to 5 percent to 4 to 4.5 percent by
government agencies, and to as low as 3 percent by some private
sector analysts. Political uncertainty and the poor policy
environment have driven consumption and investment to multi-year
lows, leaving exports, once again, the main engine of growth for
2.(SBU) Many meeting participants shared a view that increased
public expenditure to "pump prime" the economy, particularly through
expedited implementation of mega-infrastructure projects, would
boost growth. However, financing is off-track and bureaucrats are
unlikely to expedite their decisions, making mega-infrastructure
disbursements unlikely to happen in time to influence 2007's growth
3. (SBU) Meeting participants shared a common assessment on the need
for the Bank of Thailand (BOT) to aggressively cut interest rates.
Markets have already priced in a 50-75 bps cut, with some private
analysts suggesting a full percentage point cut to 3.75 percent at
the BOT's next meeting on April 11. However, it is unclear whether
lower interest rates, without a significant improvement in
regulatory and policy certainty, will do much to spur investment and
growth in a politically chaotic environment.
4.(SBU) On the issue of proposed revisions to the Foreign Business
Act (FBA) and of capital controls, meeting participants lacked
consensus and were not able to give a clear picture on the direction
of these issues. Minimizing the apparent anti-foreign investor
aspects of the proposed FBA revisions and lifting of capital
controls would be key signals of an improving policy environment and
of a receding of anti-foreign sentiments.. End summary.
2007 Growth - Not Looking Good
5.(U) The National Economic and Social Development Board (NESDB),
the Thai government's main economic statistics and forecasting body,
recently published forecasts for 2007 growth of 4 to 5 percent,
warning 4 to 4.5 percent as a more likely scenario. The forecast
presumes a recovery in consumption and investments (4 and 4.8
percent growth respectively, from 3.1 and 4.0 percent in 2006) and
export growth of 7.9 percent.
6. (SBU) NESDB's presumption of consumption and investment recovery
in 2007 may be overly optimistic, however, given prospects for
continued political disarray in 2007, lack of timely
mega-infrastructure disbursements and continued perceptions of
anti-foreign investment policies (details in Para. 7). Further, as
appreciation pressures on the baht may continue in 2007, export
growth may be lower than forecast further denting 2007's growth.
The economy's high dependence on exports (gross exports is 65 to 70
percent of economy, two times the regional average) makes it
susceptible to any slowdown in export growth.
7. (SBU) Political uncertainty has been the main factor driving
private investment and consumption to multiyear lows. Thailand's
private investment activity index fell 0.6% y/y in January, the
first negative reading of the indicator since February 2002.
Private consumption's fourth quarter growth of 2.5 percent was the
lowest since 1999. Total domestic sales of pickup trucks, a key
leading indicator, in January to Februrary fell 28 percent from the
same period a year ago and total vehicle output is down 3.3 percent.
Citigroup forecasts Thai listed firms to average 3 percent earnings
growth for this and next year, compared to Asia ex-Japan of 13
8. (SBU) While growth was a respectable 5 percent in 2006, this
number hides the significant decline in growth over the course of
the year. The fourth quarter saw the weakest results for the Thai
economy in two years, notably in private investment and consumption
which fell from 4 percent growth each in the first quarter to 2.3 to
2.5 percent, respectively, in the final quarter. In its survey of
listed companies, Citigroup found net profits of non-financial
companies down by 56 percent y/y in the final quarter of 2006. The
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combined profit of 46 of the 50 biggest publicly traded companies by
value dropped 70 percent in the fourth quarter of 2006, compared to
a year earlier.
9.(SBU) On export growth, NESDB's target appears achievable; exports
rose 18 percent y/y in January, despite a 13 percent y/y
appreciation of the baht. And the government is fiscally strong,
with low debt and predominantly fiscal surpluses over the past few
years. Finally corporate balance sheets are strong and high
leverage not a concern for the economy. However, downside risks
remain. Tourism, which contributes to approximately 7 to 8 percent
of GDP, has remained surprisingly resilient in the face of
September's coup and January's Bangkok bombing. Thus far, political
unrest has mainly affected domestic consumption and investment.
Should violence spread beyond the three southern provinces, the
impact on tourism and the general economic climate will see GDP
growth fall lower than the bottom-range of current forecasts.
10.(SBU) Government officials and market participants are calling on
the BOT to aggressively cut interest rates, with some suggesting a
full percentage point cut to 3.75% at the next monetary policy
committee meeting on April 11. Inflation is clearly on a downward
trend (BOT forecasts 2007 inflation of 1.5 - 2.5 percent, down from
2006's inflation of 4.7 percent) leaving room for aggressive cuts.
However, interest rate cuts may not be enough to boost growth.
BOT's benchmark rate mainly affects bond markets which account for
only 15 percent of corporate funding. The remainder of funding for
Thai companies comes from commercial banks loans, and these are
priced off the Thai equivalent of prime rate (currently 7.25
percent) and lags policy rates. Further, it is unclear whether
lower interest rates, without a significant improvement in policy
certainty, will do much for growth in a politically chaotic
environment. Anecdotally, companies and analysts with whom we speak
all say that they want to wait "until after the elections" before
making any significant new investments. The Japanese economic
counselor related that Japanese companies are inclined to wait "at
least one more year, to see how things go" before adding new
capacity in Thailand.
Attempts to Pump Prime the Economy - the Mega-Projects
11. (SBU) The Ministry of Finance (MOF) has forecast that in order
to reach 4.5 percent growth, government and state-owned enterprises
(SOEs) will have to spend 93 and 83 percent, respectively, of their
FY07 budget (ending in September). With the approval of the FY07
budget delayed by three months due to the September coup, full
disbursements for the fiscal year began only in February 2007. With
the government now having only 9 months to disburse an amount that
normally takes 12 months, senior staff in the MOF's fiscal policy
office expressed some concern that they will not meet their targets.
MOF staff noted that Thailand historically disburses an average 92
percent of its annual budget over a full fiscal year.
12. (SBU) To reach these targets, officials have hinged their hopes
on rapid implementation of two of Thailand's mega-infrastructure
projects. The MOF is waiting for the Japan Bank for International
Cooperation (JBIC, a hybrid governmental financing agency mixing
Ex-Im and USAID-like functions) to approve a loan for initial
financing for both. However, as related in reftel, former Deputy
Prime Minister Somkid who has close relations with Japanese
investors, indicated that JBIC will not be funding these projects.
The Japanese economic counselor effectively confirmed this
information. JBIC, as embassy has repeatedly heard from other
foreign investors, is not increasing its exposure in Thailand due to
the uncertain political situation and anti-foreign sentiments.
FBA Revisions and Capital Controls - What Next?
13. (SBU) Government officials' sentiments on capital controls
appear to be slightly contradictory. Officials and market
participants were painfully aware of the negative toll capital
controls (and proposed FBA revisions) have taken on the markets and
investor sentiment. Given the weak domestic economy, both officials
and market participants were sensitive to the need to support export
growth, in part by keeping the baht weak. The Federation of Thai
industries (FTI) is forcefully advocating for continued controls,
but there appears to be no well-organized advocacy group(s) willing
to publicly argue against controls or highlighting the negative
implications of controls for Thailand. (Currently the 30 percent
reserve requirement applies only to non-hedged investments in bonds,
mutual funds, real estate funds, and foreign currency loans.)
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Further there is no open debate to exporter's assertion that
continued appreciation will hurt their growth (as noted earlier,
exports grew 17 percent y/y in January despite appreciating baht) or
that exporters should hedge and manage their own exchange rate risk.
This is attributed to the recognition of exports as the key sector
of the Thai economy and the unwillingness of the financial sector to
criticize policies believed to benefit the real sector.
14. (SBU) Yet, as of three months after imposition of capital
controls, Thailand continues to face strong appreciation pressures.
Whereas the BOT had targeted capital controls to "get foreign
speculators" appreciation pressures since the beginning of the year
have been due predominantly to high net export earnings. In the
past, exporters' demand to purchase baht (Thai regulations limit the
number of days before exporters must convert foreign exchange
earnings into baht) had been relatively balanced by importer's
demand to sell baht. However, with depressed domestic demand,
imports have greatly reduced. Thus Thailand finds itself in an
unintended situation of depressed economic prospects with
appreciation pressures on the baht from its own exporters. Septel
will examine the issue of baht appreciation and capital controls in
15, (SBU) As noted in reftel, Finance Minister Chalungphob has
stated he will keep some form of capital controls in place, but
stressed that they will be "appropriate," not "shock markets" and
will be used as a tool to manage "market psychology." Analysts
believe that Chalungphob is trying to find middle ground, to cast
his capital controls in a more market friendly light.
16.(SBU) On FBA revisions, while aware of its negative market
impact, officials were not able to offer a good sense of where this
issue may be heading, but were able only to point to the strong
political motivations behind the revisions - the need to
"nab-Thaksin" by targeting his sale of Shin Corp to Singapore's
Temasek. Finance Minister Chalungphob stated boosting investor
confidence, particularly foreign investor confidence, would be a
priority for his tenure. He told us that the current FBA draft is
"too broad" and the telecom sector should be the only one under
consideration currently since it is an area deemed to be of national
security and was the original case of the entire FBA amendment
effort due to the Shin Corp-Temasek transaction (reftel). However,
FBA revisions fall outside his portfolio and so he will have to
influence others rather than directly administer his vision.
17. (SBU) Comment: While concern about economic growth is deep and
wide, prospects for a strong policy response to boost growth are
dim. The political leadership is still uncoordinated and civil
servants are reluctant to make firm decisions under the interim (and
increasingly unpopular) government. Deputy Prime Minister for
Economy (excepting Finance) Kosit this month set up an economic
committee to guide economic policy, but its effectiveness and
direction remains to be seen; it's first meeting was held last week.
18. (SBU) Further, the contradictory responses to capital controls
and FBA revisions by meeting participants reveal the lack of policy
debate in the current politically incoherent environment.
Minimizing the anti-foreign investor aspects of FBA revisions and
lifting of capital controls would be key signals that the regulatory
bias against foreign investment is lessening and could give a boost
to lackluster investment and consumption activity.
19. (SBU) However, political uncertainty remains a dark cloud that
hangs over all activities. Two key private sector meeting
participants noted that the release of the first draft of the new
constitution (scheduled for April 19) will be a major event that
will determine the political (and thus economic) stability for
Thailand for the near term. Pro and anti-government groups are
currently fiercely debating provisions for the constitution. The
first draft of the constitution will either alleviate or only
further exacerbate political tension.