US embassy cable - 05BANGKOK1266

UNCLAS SECTION 01 OF 05 BANGKOK 001266 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EB AND EAP/BCLTV 
TREASURY FOR OASIA 
COMMERCE FOR 4430/EAP/MAC/OKSA 
PACOM FOR FPA (HUSO) 
STATE PASS TO USTR FOR WEISEL AND COEN 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EFIN, PREL, TH, Economic Policy 
SUBJECT: THAKSIN,S ECONOMIC POLICY: THE NEXT FOUR YEARS 
 
REF: A. 04 BANGKOK 6918 
     B. BANGKOK 1169 
 
SENSITIVE BUT UNCLASSIFIED 
 
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 
debt. 
 
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 
SUMMARY AND INTRODUCTION. 
 
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 
drivers. 
 
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 
spikes. 
 
Infrastructure 
--------------- 
 
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 
questions. 
BOYCE