EXPORTS REVIVE THAI ECONOMY

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