THAILAND: INVESTMENT SLOWDOWN

UNCLAS SECTION 01 OF 02 BANGKOK 002978 SIPDIS SENSITIVE STATE FOR EAP/MLS AND EB COMMERCE FOR 4430/EAP/MAC/OKSA TREASURY FOR OASIA STATE PASS TO USTR FOR WEISEL STATE PASS TO FEDERAL RESERVE FOR MATT HILDEBRANDT E.O. 12958: N/A TAGS: ECON EFIN TH SUBJECT: THAILAND: INVESTMENT SLOWDOWN REF: A. BANGKOK 2360 (THAI ECONOMY REACTS TO POLITICAL UNCERTAINTY) ¶B. BANGKOK 1665 (POLITICAL PROBLEMS EFFECT ON THAI ECONOMY) ¶C. BANGKOK 551 (MEGAPROJECTS CONFERENCE PRODUCES MORE SMOKE THAN LIGHT) ¶D. BANGKOK 492 (WITH TEMPORARY PATCH ¶E. THAILAND RESUMES APPROVING US SERVICES INVESTMENT UNDER AMITY TREATY) ¶1. (SBU) On May 16, Econoff met with Mr. Vittaya Praisuwan, Senior Executive Advisor at the Thai Board of Investment (BOI). Most foreign investment in Thailand comes in under BOI auspices due to the various tax advantages and other benefits BOI-approved status confers. Vittaya confirmed that applications for investment through the first four months of 2006 are down almost 47 percent from the same period last year (from Bt137.7 billion -US$3.6 billion- to Bt74 billion- US$1.9 billion). The BOI does not track actual investments completed or when these investments are executed so final investment amounts are not available. ¶2. (SBU) Vittaya attributed the FDI decline to high oil prices and the political uncertainty in Thailand that has prevailed since late last year. When asked how his organization will try and overcome these difficulties, Vittaya responded "we will work harder." He also noted that historically 60-65 percent of BOI approvals are associated with existing investment, so the reduction in investment can be interpreted as "simply a delay while the political situation works itself out." Bangkok lawyers who work with foreign investors have also noted the decline in FDI this year. One lawyer who works for the local branch of a major international law firm said several of his clients, including a large Japanese automotive company, are taking a "wait and see" approach to additional Thai investment pending a resolution of the political situation. ¶3. (SBU) From a U.S. aspect, the situation has been exacerbated to some degree by confusion at the Ministry of Commerce regarding the status of our bilateral Treaty of Amity and Economic Relations (AER) which covers US-Thai investment (see reftel D). Working level MoC personnel are advising callers that they should complete their AER applications before June 5 "when it must be renewed." This is contrary to what we were told by MoC permanent secretary Karun i.e. that the terms of the treaty would remain in effect unless the RTG made a proactive decision to terminate. We have not been advised of any anticipated action and are seeking clarification from Karun regarding the AER's status. In the interim, however, lawyers are advising clients that unless an application can be completed by June 5, they should consider alternative means of investing in Thailand. Such confusion has contributed to declining inward investment. ¶4. (U) Recent data highlight the importance of FDI to the Thai economy. The Business Sentiment Index compiled by Bank of Thailand has been below 50 for 20 consecutive months through March 2006. An index below 50 indicates worsening business sentiment. Since December 2005 the index has steadily declined, from 45.9 to 44.8 in March 2006. Consumer confidence has also declined steadily since December, from 88.7 to 82.5 in April. A level below 100 means more consumers are pessimistic about their future economic prospects than optimistic. These data are reflected in the slowdown in consumer spending and capital investment so far this year. ¶5. (SBU) Comment. Thailand has always been a country where business is typically conducted through personal relationships and in which the government plays a significant role in the economy both directly through its spending and investment (15 percent of GDP) and indirectly through economic policies, SOEs and government-controlled specialized financial institutions. With the government in caretaker status, any issues that are not strictly routine are not being addressed. Pending decisions range from proceeding with "megaproject" infrastructure developments to approval for FDI that does not fit the strict criteria laid out for BOI. Thailand has always operated via someone at the top making decisions - the bureaucracy is not empowered and would be ill-at-ease if faced with the responsibility. Since the February dissolution of government, there has been no one with the ability to make many of the decisions that are needed to keep "Thailand Inc" running normally, so corporate investment gets delayed or is diverte d to other nations. No one expected government to be in caretaker mode for more than two months. We are now going on four months with no certainty on when it will end. BOYCE