US embassy cable - 05BANGKOK7000

UNCLAS SECTION 01 OF 02 BANGKOK 007000 
 
SIPDIS 
 
STATE FOR EAP/MLS AND EB 
TREASURY FOR OASIA 
COMMERCE FOR 4430/EAP/MAC/KSA 
STATE PASS TO USTR FOR WEISEL, COEN 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, TH 
SUBJECT: EXPORTS REVIVE THAI ECONOMY 
 
REF: A. BANGKOK 6217 
     B. 04 BANGKOK 7349 
     C. BANGKOK 3463 
 
1. Summary: After a weak showing in the first quarter, the 
Thai economy has strongly recovered, achieving 4.4 percent 
GDP growth in the second quarter with even stronger growth 
anticipated for the second half. Exports account for almost 
all this growth as domestic consumption and private 
investment remain weak.  Inflation, which grew at 6 percent 
in September, is a concern but should be managed as the Bank 
of Thailand raises interest rates and energy prices 
stabilize. Thailand's reliance on exports is reflected in RTG 
efforts to rapidly negotiate as many Free Trade Agreements as 
possible. As Thailand's most important export market, we 
believe that we will ultimately be successful in our 
bilateral FTA talks with the Thais, even though they will 
have to swallow hard to accept some of our market-opening 
demands. End Summary. 
 
Growth is Back 
------------------ 
 
2. Thailand's GDP rebounded from its poor first quarter 
performance, growing 4.4 percent over the previous year's 
second quarter. While third quarter GDP will not be released 
until December, the outlook is positive. Growth will likely 
be led by a 22.7 percent increase in exports for the quarter 
compared to 13 percent export growth in the first half. 
Exports benefited from various factors: a continuing upturn 
in the business cycle of the global electronics sector, an 
increase in vehicle exports as new production facilities came 
on line, a recovery of the tourist sector post-tsunami, and 
an end to the drought which negatively affected food exports 
in 2004. In addition, prices received for many of these goods 
(especially rubber) were higher than last year as 
inflationary costs were to some extent passed through to 
buyers. 
 
3. An additional impetus to GDP will be provided by a slower 
rate of import growth compared to the first half of 2005. The 
key factor in this slowdown was a reduction in the volume of 
oil imports in the quarter following the end of government 
subsidies on diesel in early July. The anticipation of the 
end of subsidies caused significant stockpiling of oil in the 
first half leading to imports of crude 30 percent above 
normal volumes. In the third quarter, oil imports reverted to 
normal levels. Due to government suasion, gold imports also 
fell and state-owned enterprises appeared to delay imports of 
capital goods. Finally, consumer demand was weak, limiting 
growth of consumer imports. All this combined to reverse the 
trade and current account deficits of the first half and turn 
them into surpluses of US$200 million and US$1.2 billion 
respectively in the latest quarter. 
 
But Only Thanks to Exports 
---------------------------------- 
 
4. This export-led growth is not reflected in other sectors. 
Consumers, hit by rising energy prices, inflation, rising 
interest rates and with already-high debt burdens, limited 
their new purchases so that domestic consumption for the 
quarter was basically flat. Similarly, private investment 
grew by only 5.6 percent for the quarter.  Sales from 
inventory represented an abnormally high percentage of total 
sales for the quarter. This was reflected in weak levels of 
investment and manufacturing production growth as some of the 
inventory overhang was worked off. Increased government 
expenditure (funded by strong government revenue growth in 
the wake of better tax collection capabilities, greater 
consumer use of formal, VAT-paying markets in lieu of 
informal markets, and the running down of tax-loss 
carryforwards from the crisis era) helped alleviate some of 
this private sector weakness. 
 
Inflation a Concern 
----------------------- 
 
5. The greatest current concern of the Bank of Thailand and 
most analysts is inflation which reached 6 percent in 
September (core inflation, excluding food and energy, was 2.3 
percent).  Most of the inflation has been caused by the end 
of diesel subsides which has increased costs throughout the 
economy over the last three months (ref A). Most analysts 
expect that, assuming crude prices stabilize or decline from 
current levels, inflationary pressure should peak by this 
year's fourth quarter and then return to a 2-3 percent annual 
range. Aside from oil prices, an additional risk to this 
scenario is the extremely tight labor market with 
unemployment falling to 1.4 percent in August. While the Thai 
data includes numerous persons the US would consider severely 
underemployed, anecdotal evidence indicates that available 
skilled workers are becoming harder to find. As the auto and 
electronics industries continue to expand production, the 
Bank of Thailand is concerned that a wage-price spiral could 
result. 
 
6. In an effort to keep inflation at bay and to close the 
spread between US and Thai short-term rates, the BoT has 
aggressively raised its policy rate (by 125 basis points) 
over the course of 2005.  This has had the desired effect of 
helping reduce domestic consumption and the corollary effects 
of keeping the baht strong (it has appreciated 4 percent 
against the dollar since July) and bank margins under 
pressure. Real interest rates on consumer bank deposits 
remain negative, however, and the BoT is expected to raise 
rates an additional 50-100 basis points (to 3.75-4.25 
percent) before it eases off. This will continue to restrain 
the ability of Thai consumers to consume as they work to pay 
off their outstanding debts at higher interest rates. 
 
7. Despite these headwinds, most analysts remain positive. 
The BoT has raised its GDP forecast for 2005 from 3.5-4.5 
percent to 4.25-4.75 percent and some analysts have followed 
suit. They see continued strong export growth, especially as 
Japan continues its economic resurgence and Thailand makes 
further inroads into the China market. Also, in 2006 the 
RTG's much-anticipated "megaprojects" (US$48 billion in 
infrastructure development over 5 years, see ref B) is 
expected to get fully underway.    Finally, tourism is 
expected to fully recover from the 2004 tsunami by next year; 
already Phuket hotels anticipate 80-90 percent occupancy for 
their high season this winter. An avian influenza outbreak 
would, obviously, change these forecasts. 
 
8. Comment: The Thai economy continues to be largely 
well-managed with problem areas such as inflation being 
addressed. However, Thailand remains exceptionally reliant on 
exports for its economic well-being, comprising about 55 
percent of GDP so far this year. The RTG and many analysts 
presume that, so long as China continues its rapid growth, 
Thailand will be pulled along in its wake. We occasionally 
need to remind RTG officials that the US is Thailand's second 
largest export market and source of its largest trade 
surplus, and that one reason the PM sought an FTA with the US 
is to cement Thailand's position in their most profitable 
market. We believe that after more than fifteen months of 
negotiations, the RTG now accepts that we will not compromise 
on the principle of an agreement that is comprehensive and 
lays out a plan that fully opens Thai markets to US service 
suppliers and investors. 
BOYCE