Cablegate: 2009: A Tough Year for the Thai Economy and Recovery May

VZCZCXRO8659
OO RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHBK #3283/01 3650448
ZNR UUUUU ZZH
O 310448Z DEC 09
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9447
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RUEHCHI/AMCONSUL CHIANG MAI IMMEDIATE 7440

UNCLAS SECTION 01 OF 03 BANGKOK 003283

STATE FOR EAP/MLS, EEB
STATE PASS TO USTR FOR BWEISEL, BKLEIN
COMMERCE FOR EAP/MAC/OKSA FOR JKELLY
SINGAPORE FOR FINATT BLEIWEIS
TREASURY FOR OASIA

SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: ECON ETRD EINV KIPR PREL TH
SUBJECT: 2009: A TOUGH YEAR FOR THE THAI ECONOMY AND RECOVERY MAY
NOT BE ALL IT COULD BE

BANGKOK 00003283 001.2 OF 003

1.(SBU) SUMMARY: After dropping 7 percent early in the year,
Thailand's GDP recovered to where the government now expects 2009 to
be only 3 percent worse than 2008. With exports picking up and
tourism bouncing back, 2010 may see 3 percent growth. The Abhisit
government implemented a number of economic programs to bolster its
standing among lower-income and rural voters, was responsive to U.S.
concerns on troublesome customs issues, but has not yet been able to
transform well-intentioned policy innovations into widespread
political support. As epitomized by the shutdown of projects at the
huge Map Ta Phut industrial estate for failure to meet environmental
standards, Thailand's economy may be in for slower economic growth
in the next years as the country absorbs increasing, but uncertain,
impact from NGOs, independent commissions and activist courts. END
SUMMARY.

2. (SBU) COMMENT: The economists we note at the end of this message
told us that, harking back to when they got burned in the 1997
crisis, the powerful, monied elites in Bangkok are willing to forego
more rapid growth in the Thai economy if need be to protect their
comfortable oligopolistic business interests. In areas ranging from
a tightening of insurance company ownership to a very sluggish
opening of the Thai market to the deployment of 3G
telecommunications technologies, these elites would rather see
slower growth than greater competition, especially from foreigners.
We believe the Abhisit government favors economic growth and
understands the key role that open markets play in achieving that,
but sits atop a difficult coalition representing many vested
interests and may not be strong enough to rein in deeply entrenched
elites, especially in an increasingly complex political environment.
END COMMENT.

Worst is Over; 2010 Should be Better
------------------------------------

3. (SBU) Following global trends, Thailand's economy had a rough
ride in 2009, with the GDP downturn bottoming out at over 7 percent
below 2008 on a year-to-year basis during the first quarter of the
year. Fourth quarter results are not yet in, but are expected to
show that the worst has passed and that the turnaround is gaining
strength. For the year as a whole, the National Economic and Social
Development Board (NESDB) estimates that the GDP drop will be no
more than 3 percent. These trends are largely driven by exports,
which are equivalent to between 60 and 70 percent of Thailand's GDP.
For the first half of the year, exports were down about 25 percent
from 2008 but with improvement in the second half are expected to be
down only about 14 percent for the year as a whole. Tourism also
rallied moderately, after last year's 'high season' was pummeled by
Bangkok's airport closure last November, the widely-watched protests
in April, and the onset of the global economic crisis, but tourist
arrivals remain well down from 2008.

4. (SBU) Other economic indicators were also down accordingly.
Headline inflation is expected to be about negative 1 percent for
2009. Total investment is forecast to be off 8.6 percent for the
year, but that figure hides the fact that private investment dropped
an estimated 13 percent, while investment by the government was up
nearly 10 percent in the second half and will likely grow further as
the full effect of the stimulus packages kicks in. Fortunately for
Thailand, there is still enough rural-urban labor migration that
lay-offs in export factories did not cause a significant jump in
unemployment rates as laborers were often able to return to provide
extra hands on farms. Widespread unemployment never became a serious
social problem, as was feared early in the year; the official
unemployment rate (very generous in its definition of employment)
never rose above 2 percent.

Policies Still Do Not Win Government Popular Support
--------------------------------------------- -------

5. (SBU) The performance of the Abhisit government on the economy
this year has been the source of much commentary in the media. Most
surveys gave the Prime Minister's team only middling grades, though
such survey results may reflect continuing hard economic times as
much as clear-headed assessments of the policies implemented.
Moreover, with an economy so dependent on world trade and commodity
prices, Thailand is to a significant extent dependent on global
trends beyond its control. For its part, the government has claimed
many successes, including:

-- implementation of two stimulus packages (the second and larger of
the two for infrastructure projects is only now beginning to kick

BANGKOK 00003283 002.2 OF 003

in);

-- breathing life, as ASEAN Chair, into the Chiang Mai Initiative,
which should eventually provide a regional source for sovereign
borrowing apart from the International Monetary Fund;

-- free education through high school (public education was always
free, but this new program sought to cover books, uniforms and other
school fees which had become onerous for many families);

-- the extension of free utility services for low-income families,
including free public bus service;

-- the creation of a slick new "One Start, One Stop" office housing
all relevant agencies to facilitate paperwork and approvals for
foreign investors;

-- a significantly increased effort to promote intellectual property
rights, led by Deputy Commerce Minister Alongkorn;

-- a guaranteed income scheme for farmers and takeover of onerous
informal debt burdens.

6. (SBU) When we asked Finance Ministry officials for their views on
what were their most important accomplishments this past year, they
highlighted the programs in the last bullet above. They were
particularly proud of the income insurance program for farmers,
whereby the government supplements the income of farmers directly
when market prices (for rice, tapioca, and animal feed corn) drop
below a certain threshold, as opposed to the previous price
guarantee program where the government would intervene in the market
and buy up commodities to keep prices up, resulting in sometimes
huge agricultural stocks subject to spoil or sale with huge losses.
The government claims the new program saves money and eliminates the
often corrupt role of middlemen. The second source of pride at the
Ministry is a program whereby government-run banks will pay off loan
sharks and replace those debts with loans to low-income borrowers at
reasonable interest rates. The officials claim that by the end of
the year a million people will have taken advantage of the program.
(COMMENT: The Finance Ministry officials we spoke with were almost
apologetic that they had spent relatively less time on issues that
might have been of greater interest to foreign business people. The
Abhisit government is endeavoring to implement policies that will
win favor in the rural strongholds of the political opposition, but
it is not clear that they have the political skills to turn these
policy programs into votes. END COMMENT.)

Progress on Some Bilateral Concerns, Not Others
--------------------------------------------- --

7. (SBU) The Embassy has advocated with the government on a number
of high-profile commercial cases, including meetings between the
Ambassador and the Prime Minister, with moderate success. Most have
had to do with customs disputes. U.S. companies Amway and Philip
Morris, for example, were surprised with the threat of up to $2
billion in fines and penalties for alleged underpayment of customs
duties over the past 10 years. In the case of Philip Morris, despite
having reached an agreement with Thai Customs on valuation
methodology, Thailand's Department of Special Investigations (DSI)
nonetheless felt compelled to forward the case to the Attorney
General. In the case of Amway, the Abhisit government has since
provided assurance that the matter will be resolved with only a
relatively minor penalty. (NOTE: The government also heard loudly
from other Embassies whose companies were being similarly treated by
Customs. END NOTE.) The government was also responsive earlier in
the year to the Ambassador's demarche regarding access to a terminal
jetty essential to Dow Chemical's multi-billion dollar petrochemical
plant expansion -- the construction of which has now been halted as
a result of a court injunction in Map Ta Phut. The case of the
online digital lottery is still pending as U.S. company GTECH sits
on the sidelines awaiting the launch of the lottery after having
invested over $35 million in the build-out of the infrastructure.

8. (SBU) We told the government that customs problems were our
number one difficulty on the business front. Perhaps in response to
these complaints, Finance Minister Korn sacked the Director General
of Customs, even though he had just three months before retirement
(and who under the Customs Department penalty-sharing scheme would
have made millions personally if the threatened huge penalties
against foreign firms had materialized). Korn since installed a
hand-picked Customs Director General, who announced bold plans to

BANGKOK 00003283 003.2 OF 003

transform the Customs Department from a "revenue collector" to a
"trade facilitator." The new DG has let it be known that he did not
pay anything to get his position, and thus does not need to
perpetuate "off-book" revenue generation.

9. (SBU) On other matters, the government has not been so
responsive. After beginning its administration early in the year
with a series of large-scale, interactive meetings with the foreign
business community, Abhisit and his economic team have not followed
up effectively on a number of complaints and recommendations.
Despite a demonstrably increased effort to protect and promote IPR,
including having the Prime Minister himself lead the national IPR
committee, Thailand remains a significant source of pirated goods
with few takedowns of major IPR violators. Efforts by FedEx to
remedy the antiquated postal regime whereby they have to pay fines
for delivery of international express mail have gone nowhere. The
pharmaceutical industry continues to struggle to get a seat at the
table as Thailand's National Health Assembly and its subcommittees
discuss key issues like patent reform, a call for a certain number
of compulsory licenses to be issued every year in Thailand, and
pharmaceutical marketing and sales practices.

Uncertainties at Map Ta Phut: The Beginning of a Trend?
--------------------------------------------- ---------

10. (SBU) By the end of the year, the dominant issues with regard to
Thailand's investment climate revolved around the court-ordered
shutdown of 65 construction projects at Map Ta Phut, Thailand's
premier industrial estate, for failure to comply with the 2007
Constitution's requirements for environmental and health impact
assessments. While the validity of community groups' complaints
about some companies' poor environmental practices were generally
acknowledged, the government was caught flat-footed when the courts
required strict compliance with the constitutional mandates, even
though the government itself had not put in place the necessary
regulations and procedures for companies to comply with the law. The
Ministry of Natural Resources and Environment and the Industrial
Estate Authority of Thailand (IEAT) had already issued environmental
certifications and construction permits allowing the projects to
proceed. Both Thai and foreign companies, with billions of dollars
at stake and the prospect of laying off tens of thousands of
workers, are deeply troubled that what were thought to be low-risk
ventures are now thrown into question.

11. (SBU) When the Embassy convened a group of leading economists to
comment on Thailand's economic prospects earlier this month, the
consensus was that the uncertainties that surfaced in Map Ta Phut
were the manifestation of strong currents that have been growing
under the surface for several years. While business in Thailand has
traditionally relied on informal "work-arounds" to deal with
difficult laws and regulations, that means of doing business may be
coming to an end with the rise in influence of NGO's, independent
committees and commissions, and, especially, activist courts. The
ability of foreign companies to control local ostensibly "Thai"
firms through proxy voting structures and the ability of foreigners
to effectively own land through the use of nominees are but two
additional areas where strict compliance with the law would throw
many foreign business practices into upheaval.

12. (SBU) The economists noted that Thailand should be poised to
regain the 6-8 percent growth that neighboring countries are
expected to enjoy in the coming years. But the growing uncertainties
in the investment environment, coupled with the general political
uncertainty, will likely continue to dampen investment and keep Thai
growth to no more than 3 percent in the coming years. (NOTE: Other
forecasts range from 3-5 percent. END NOTE.) "We appreciate that the
new civil society groups represent many worthwhile interests," one
economist said. "But we don't know how competent these groups are
and there is no overall vision or strong leadership in the
government. It all adds up to a lot of uncertainty for business
investors."

JOHN

© Scoop Media