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Cablegate: Price Controls in Thailand

VZCZCXRO5754
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #4343/01 2010351
ZNR UUUUU ZZH
R 200351Z JUL 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 0297
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHCHI/AMCONSUL CHIANG MAI 2172
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 BANGKOK 004343

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EAP/MLS AND EB
COMMERCE FOR 4430/EAP/MAC/OKSA
TREASURY FOR OASIA
STATE PASS TO USTR FOR WEISEL

E.O. 12958: N/A
TAGS: ECON ETRD PGOV TH
SUBJECT: PRICE CONTROLS IN THAILAND


BANGKOK 00004343 001.2 OF 003


1.(SBU) Summary. With inflation (CPI) running at about 6 percent and
interest rates, energy prices, commodity prices and labor costs all
near multi-year highs, the margins of many companies operating in
Thailand are being squeezed. This situation is exacerbated for some
firms due to the RTG's ability to control prices for a broad range
of goods. The general effort to keep prices for most basic consumer
goods (rice, soap, milk) down can be seen as a part of the Thaksin
regime's overall populist approach combined with a slowly weakening
economic situation due in large part to ongoing political
uncertainty. Although even the Department of Internal Trade
acknowledges that proper Competition Law should render price
controls unnecessary, the political benefits the current law brings
make its termination unlikely anytime soon. End Summary.

The Committee Can Set Prices
----------------------------

2.(U) Under the 1999 "Act Relating to Price of Merchandise and
Service, B.E. 2542," a government committee headed by the Minister
of Commerce has the authority to "Prescribe the purchase price or
distribution price of merchandise or service...", Prescribe maximum
profit per unit..." and set the terms and conditions - including
maximum permissible volumes - of any good or service in the Kingdom.
The law was amended in 1999 with the advent of a Competition Law and
was meant to be phased out. However, with several critical aspects
of Competition Law still undefined (such as the measure for market
dominance), and the political utility of the 1999 Act, the old law
continues in place with no expiration under current consideration by
the RTG.

3.(U) In practice, the Department of Internal Trade within the
Ministry of Commerce administers this law and interacts with the
affected companies although only the "Committee on Price of
Merchandise and Service" make the final decision on what products to
add or remove from price controls. The Committee is comprised of the
Minister and Permanent Secretary of Commerce, the Secretary General
of the Board of Investment and between four and eight "qualified
persons" appointed by the Council of Ministers of whom not less than
half are "not to be political civil servants, persons who are in
political posts, Directors or persons responsible for the
administration of political parties."

The Price Control List
----------------------

4.(U) As of May 10, there are 35 items formally listed as under
price control:

Liquefied petroleum gas
Paddy/uncooked rice
Compact diskette/recording device
Compact diskette copy machine
Student uniform
Milk powder/fresh milk
Sugar
Edible or inedible oil from vegetable and animal
Fuel
Fertilizer
Pesticide
Pharmaceuticals
Motorcycle/passenger car/truck
Animal feed
Steel
Jewelry
IP rights management service
IPR permission for trade
Corrugated paper
Typing and written paper
Kraft paper
Imitation condensed cream, condensed milk, skimmed milk
Shampoo
Liquid detergent
Cement
Powdered detergent
Dishwasher detergent
Sanitary napkin
Plastic pellet
Motorcycle/bicycle tire
Fiber paper
Soap
Electricity wire
Pig and pork
Processed (canned) food


BANGKOK 00004343 002.2 OF 003


5.(SBU) While these are the products with explicit price controls,
effectively any producer of consumer products is prohibited from
raising prices without first notifying the Committee of their
intention to do so. While explicit permission is not required in
these cases - manufacturers are merely asked to "cooperate" with the
Department of Internal Trade - producers tend not go forward with
price increases without at least a verbal approval because of
concern that they might later be instructed to roll the prices back
or see their product added to the control list. We understand that
soft drink makers sought for five years to increase their prices by
1Baht (2.6 cents) but were only granted specific authorization to do
so in May.

Listing Criteria
----------------

6.(SBU) The Director of the Internal Trade Department told us that
there are six criteria considered by the Committee when determining
whether price should be controlled. These are 1) whether there is
sufficient competition in the market for the product, 2) whether the
consumer good is "necessary for living", 3) whether there is a
record of "bad behavior" by a specific company or industry category,
4) whether a product is "significant to the economy" e.g. cement,
steel, 5) whether a product is significant for agriculture e.g.
fertilizer and pesticide, and 6) to conform with government policy.


7.(SBU) The prices are controlled at the wholesale level except for
sugar where the controls are exercised directly at retail. In
addition, the terms and conditions under which manufacturers and
service providers offer control-listed product can not be altered
without Committee authorization. Companies have tried to get around
the controls by changing the portion or sizing of their products or
introducing "new/improved" aspects to command a higher price. The
Department of Internal Trade has caught on to this and threatened
punitive actions against those seeking to circumvent price controls
in this manner. The law states that violators are subject to a
maximum penalty of five years imprisonment and a Bt100,000 (US$2600)
fine.

Good Politics Vs. Good Economics
--------------------------------

8.(SBU) Several companies with whom we have spoken have complained
about the "populist" nature of the law's application and one
surmised that more products seem to be added to the control list in
the run-up to elections. Another firm said that they were
considering expanding another of their Southeast Asian plants
instead of their Thai operations because of the margin squeeze they
are experiencing in Thailand. However, one major food processor said
that although his margins might be under pressure in some product
categories, he could sometimes make up the lost profits by expanding
margins in other, less sensitive, categories. A Thai cement
company, while complaining about the price controls, noted that Thai
cement prices are still higher than what they earn on their exports
because of high Thai tariffs on imported product. Note: We are not
aware of any companies that have divested their Thai interests due
to the enforcement of the 1999 Act. As is so typical here, there is
usually a "Thai way" to work things out. End Note.

A Small Victory for Producers
-----------------------------

9.(SBU) In a sign that inflationary and other cost pressures are
finally proving too much, on July 14 the Commerce Ministry announced
that it will consider allowing two or three consumer products per
month to increase their prices. The Ministry reports that 60
companies in 23 product categories have sought permission to
increase prices. News reports have failed to note that companies
have always been able to request price relief but must supply data
regarding their costs of raw materials, production, packaging,
general operations, efficiency and margins. A response is promised
by the Department of Internal Trade within thirty days of receiving
all the data the Department determines it requires. The Ministry
recently advised that alkaline batteries will be the first product
to receive approval for a price rise under the new policy because
they first sought permission three years ago, not detailing the
specific price pressures which presumably brought about the
Committee decision.

10.(SBU) Comment: One third of the 300 items in the CPI basket of
goods is on a Department of Internal Trade "price watch list" in
addition to a host of services. The opportunity for playing
political favorites using the extremely expansive terms of the

BANGKOK 00004343 003.2 OF 003


Pricing Law has not gone unexploited. There is a reason that pork
prices are controlled but that chicken (the major producer of which
is politically close to the government) and beef (a program with
considerable royal support) are not. An example of the potential
price distortions from the law are seen in consumers converting
their vehicles to run on (controlled) LPG fuel rather than more
logical alternatives.

11.(SBU) Further evidence of the largely political purposes of price
controls was found when we asked the Department of Internal Trade if
there was a study of the influence their efforts had on inflation.
No study has been done and the officials could only guess about how
their work affects macroeconomic conditions. For the first half of
2006 the Producer Price Index for Mining and Fuel products is up
25.3 percent, for Agricultural goods 21.7 percent but for
Manufactured food and beverage products the increase was only 4.3
percent. We believe the Bank of Thailand's July 19 decision to not
raise its benchmark interest rate and the Committee's decision to be
more lenient on increases for listed products are indicative of the
RTG's growing concern with the economy's slowing trend and need to
provide some relief to the business sector.
ARVIZU

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