THAKSIN,S ECONOMIC POLICY: THE NEXT FOUR YEARS

UNCLAS SECTION 01 OF 05 BANGKOK 001266

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E.O. 12958: N/A
TAGS: ECON ETRD EFIN PREL TH
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