NEW THAI ECONOMIC TEAM - HIGH ON PHILOSOPHY, LOW

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E.O. 12958: DECL: 10/06/2016
TAGS: ECON PGOV PHUM PREL TH
SUBJECT: NEW THAI ECONOMIC TEAM - HIGH ON PHILOSOPHY, LOW
ON GROWTH

REF: A. BANGKOK 6002


B. BANGKOK 6080

C. BANGKOK 5706

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Classified By: CDA ALEX ARVIZU FOR REASONS 1.4 B AND D.


1. (C) Summary: Thailand's new economic team, led by the
highly respected Bank of Thailand Governor Pridyathorn
Devakula, faces the challenge of maintaining steady economic
growth, reassuring foreign investors, and ensuring that the
previous regime's rural base continues to receive special
economic attention, even while attacking Thaksin's "populist"
and "corrupt" polices and practices. Pridyathorn's views on
sound economic policy are shaped by his experience from the
1997 crisis as well as his conservative, royalist views
(largely based on the teachings of Thailand's ruling
monarch). Thailand is fortunate in having a sound fiscal and
monetary base from which to build. While Thailand's economic
policies are unlikely to take a radical turn away from trade
and investment openness, there will be a reduced emphasis on
growth and a heightened wariness toward "excessive"
dependence on foreign capital. If Pridyathorn's
interpretation of King Bhumipol's "sufficiency economy" is
put into practice, Thailand will likely achieve only the
modest expectations that are set, thereby under-performing
its peer countries for years to come. End Summary.

The New/Old Team
--------------


2. (U) While it is still very early days for the Surayud
administration, the military-appointed PM's economic team is
coming together. It will be led by Bank of Thailand (BoT)
Governor Pridyathorn Devakula, who is expected to be named
Finance Minister and Deputy Prime Minister overseeing the
Commerce, Transport and Energy ministries. Bangkok Bank
Executive Chairman, Kosit Panpiemras, is expected to be named
either Agriculture or Industry Minister and Deputy Prime
Minister responsible for the Industry, Science and
Technology, Natural Resources and Social Development and
Welfare ministries (reftel A provides biographic information
on various ministers-to-be). As reported in reftel B,
Pridyathorn expects to be the overall economic tsar.


3. (C) Since Pridyathorn became BoT Governor in May 2001, the
Bank of Thailand has come to be generally regarded as one of
the most effective public institutions in the country; it is
seen as being staffed by highly skilled technocrats immune
from the corruption and nepotism that plague many other Thai
government institutions. This is in marked contrast to the
widespread criticism of the Bank following the 1997 financial
crisis, which was caused in part by poor BoT supervision of
the banking system and ineffective and badly timed
interventions in currency markets. Pridyathorn's credibility
as a principled and apolitical figure was significantly
enhanced in 2005 when he arranged the removal of the
President of state-owned Krung Thai Bank for overly
aggressive (and poorly underwritten) lending; this despite
then PM-Thaksin's public support for the banker and
widespread belief that Krung Thai was acting at Thaksin's
behest to stimulate the economy. The Governor's royal
pedigree (he has a hereditary title more
or less equivalent to Earl or Duke and his grandfather was a
son of "The King and I" King Rama IV, who reigned 1851-68)
also lends him an aura of respect in Thailand's hierarchical
and monarch-revering society.

Economy on Auto-Pilot
--------------


4. (C) The economic situation Pridyathorn faces has numerous
challenges but is not dire, at least in the short-term.
Although FDI is running at a much slower rate than last year
and domestic consumption, and private investment have been
growing at ever slower rates since 2005, the economy
continues to be buoyed by strong export performance and
tourism revenue so that the current account is in surplus,
official reserves are over US$60 billion (about five months

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worth of imports and three times short term external debt)
core inflation is below 2 percent and slowing, and official
unemployment is low. GDP is expected to grow 4-5 percent for
2006 with similar growth anticipated for next year. Since the
coup, the baht has remained unchanged in value against the
US$ and the stock exchange index has fallen only marginally
(down 1.9 percent through Oct 4 from the September 18 close)
with foreigners net buyers during the period. Pridiyathorn
believes that, given the economy's current structure, factor
inputs, coupled with sustainable fiscal and monetary policy
(and assuming the country's principle export markets continue
to perform at current levels),Thailand can achieve 4-5
percent GDP growth. In other words, this 4-5 percent growth
rate is Thailand's "natural" GDP growth rate.

"Sufficiency Economy" - Aiming Low
-------------- --------------


5. (C) Pridyathorn and Surayud have both said that their goal
is not to maximize economic growth, but to aim for "economic
self-sufficiency." Buttressing the view of many here who see
the new Thai leaders as imbued with royalist principles, the
principle of economic self-sufficiency is derived from the
statements of the currently reigning King Bhumibol. The
King has stressed that "what is important for us is to have a
decent standard of living and sufficient food to eat. . . .
Self-sufficiency . . . means having a moderate and reasonable
standard of living (and) knowing what is enough. . . and no
greed." Pridiyathorn interprets this principle through the
eyes of a central banker and comes up with a policy
prescription for the "economy to grow within the limitations
of existing resources...Economic growth must not exceed
existing savings, which would cause problems." This reflects
Pridyathorn's consistent criticism of Thaksin's "populist"
economic policies, especially making credit widely available
to rural Thais. The Governor argues that he is not against
extending credit per se, but that the farmers "can not manage
their debt;" borrowing primarily to satisfy their demand for
consumer products such as cell phones, televisions and
vehicles. (Comment: Household debt in Thailand did increase
during the Thaksin regime, from about Bt60, 000 per family to
Bt110, 000. However, this remains among the lowest household
debt/GDP per capita ratios in Asia and loan performance has
been generally quite good. End Comment.) As central bank
governor, Pridyathorn has over the past two years acted on
his concerns by using BoT regulatory authority and lobbying
parliament to place rate caps on credit card debt and
personal loans, in an effort to reduce incentives for debt
providers to provide their products to small borrowers.

Why Pridyathorn Is How He Is
--------------


6. (C) Pridyathorn's outlook is informed by his background as
a member of Thailand's elite, his generally conservative
political views and royal connections, and by the 1997
financial crisis. As the economic behavior of most Americans
who lived through the 1930s Great Depression was forever
changed by the experience, so many Thais, especially well-off
ones, had their confidence (and, in many cases, family
wealth) shattered by the rapidity and depth of the 1997
crisis. This was exacerbated by the sense that while Thais
were largely responsible for creating the problem, it was
foreign banks who lit the final fuse to the crisis and then
largely failed to help ameliorate the problem. Pridyathorn
has told us, in emotional tones, that foreign (particularly
U.S.) banks overlent in the 1990s and then, in Thailand's
hour of need, not only failed to work with their Thai
customers to get through the crisis but actually called loans
in early and simply stopped lending. When Thailand offered
domestic banks for sale to foreign institutions as part of
the plan to rescue the financial system, Pridyathorn
pointedly notes that "no U.S. bank was interested." In spite
of this experience, Pridiyathorn is not hostile to U.S. and
other foreign bankers; on the contrary, U.S. bankers here
generally enjoy a good relationship with Pridiyathorn. We
would describe his attitude toward foreign banks and capital
as wary: Pridyathorn has vowed never again to allow

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Thailand's finances to be in the hands of non-Thais. To
ensure this end, he espouses the idea of Thailand growing
only in so far as domestic savings can finance the growth
(Pridiyathorn seems to calculate that growth rate as 4-5
percent annual GDP growth). Similarly, he argues that Thai
farmers should increase their capital assets only as fast as
their cash flow allows, with debt kept to a minimum.


7. (C) Pridyathorn is generally described as an economic
nationalist. This does not mean that he does not welcome
foreign investment - as an economist. he knows that his
country is highly dependent on exports, especially the
exports of multinationals with operations in Thailand.
However, he believes that foreign investors are temporary
guests who could change locations without a second thought;
therefore, sectors of special sensitivity or that would
effect the ability of the RTG to implement economic policy
should remain in Thai hands. We don't know precisely which
industrial sectors he would include in this analysis, but we
do know that the banking system would be among them. How long
should this sector be protected? Pridiyathorn probably would
argue, at least until there is a sufficiently deep and liquid
public capital market (not overly dependent on foreign
capital) that can be relied on to provide long-term finance
to Thai business.

Crime and Punishment vs. Foreign Investment
-------------- --------------


8. (C) We will soon have the opportunity to see how economic
nationalism vs. practicality plays out as the investigation
of the Shin Corp sale to Singapore Government-controlled
Temasek continues. In the final days of the Thaksin regime,
the battle over the use of "nominee" companies to get around
Thailand's restrictions on foreign ownership of companies in
certain industries had the Ministry of Commerce investigating
sixteen foreign-controlled companies to determine if they,
like Temasek, had used nominee structures. (Comment:
Anti-Thaksin forces claimed this wasan effort by Thaksin
allies to demonstrate that there were wider risks tin trying
to take apart the Shin/Temasek transaction. Given the
literally thousands of companies which operate through
nominees, a wholesale finding that such structures are a
violation of Thai law would have major economic
repercussions, impacting foreign investment here. End
Comment) It is not yet clear what the new regime will do
with investigations of nominee structures beyond Shin. We
have been told that on September 29, Pridyathorn told some
Thai money managers that, so far as he was concerned,
companies that were in violation of Thai ownership laws
should be required to restructure and come into compliance.
On the other hand, a close aide of the Governor assured us
that Pridyathorn has already devised a way to deal with this
problem in a way that would not unduly affect foreign
investors.

Politics and the Economy
--------------


9. (C) As noted in previous Embassy reporting, much of the
political battle over the past year can be viewed as a
struggle of competing visions -- between the traditional
Bangkok elite (of which Pridyathorn is a prime example) and
the nouveau riche represented by Thaksin. The elite did not
mind more Thais becoming wealthy, but Thaksin's cornering of
political power without paying proper attention to elite
views and concerns and especially attempting to build a power
base among rural Thais using economic policies that, critics
charge, amounted to vote buying. The new government's
economic policies in the rural areas will require an
especially deft hand. Notwithstanding vote buying charges,


10. (C) Thaksin's economic policies boosted rural incomes by
40 percent over the course of his regime. Already, the new
leaders have promised to continue Thaksin's popular "30 baht"
healthcare scheme. But will they instruct the state-owned
Bank of Agriculture and Government Savings Bank to tighten
credit standards? Will they change the many crop subsidy

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programs that, although plagued with charges of corruption,
provided a higher and guaranteed income for many farmers? And
with commodity prices softening, especially rubber (which
tends to move in correlation with oil prices),will the
technocrats comprising this government cut prices paid to the
farmers? Will rural Thailand begin to yearn for the "good
old days" under Thaksin? The risk of alienating rural Thais
(farmers make up 50 percent of the Thai work force) is high,
especially if the world commodity cycle turns down. Amid all
these uncertainties, what is clear is that the economic
challenge of unwinding rural "Thaksinomics" without provoking
a rural reaction will be one of the most difficult issues
faced by Pridiyathorn and his team.


11. (C) Coup supporters have repeatedly noted that under the
1991-1992 military-appointed government of Anand Panayarchun,
significant legislation was passed which helped progress
economic liberalization. This included reforming VAT,
creating the Thai Securities and Exchange Commission, and
promoting the ASEAN Free Trade Area. History may repeat
itself: many expect Pridyathorn, who told us he plans to
retire after his one-year stint with the military-appointed
government, to lead the way towards promulgating long-delayed
and much-needed legislation including improved copyright
protection, rationalizing bank deposit insurance, and better
labor laws. Embassy Bangkok is working with the local AmCham
to identify legislation of interest to the US business
community for promotion to the new Thai economic team.


12. (C) Of course, at this early stage it remains to be seen
if the anticipated legislative activism will materialize. We
are fairly certain, however, that some economic issues,
notably privatization of state-owned enterprises and
initiation of additional bilateral free trade negotiations,
are unlikely to go forward (although the Thai-Japan FTA,
which is only awaiting signature, may proceed). These issues
have been closely identified with the Thaksin government and
are not very popular among the Thai public, so the new
leaders probably will not pursue them.


13. (C) Comment: Pridyathorn and his mooted economic team
(reftel A) are widely respected for their probity and
technical skills. But Thaksin was seen as bringing Thailand
out of its post 1997 funk and restoring rapid growth, which
included programs to better distribute that growth throughout
Thai society. While Pridyathorn and Surayud have said that
their goal is to better distribute Thailand's GDP, how they
will do that while attacking Thaksin's populist polices is
unclear, especially in view of Pridiyathorn's calculation of
Thailand's "natural" growth rate. Pridiyathorn's number --
4-5 percent annual GDP growth -- strikes us as
disappointingly low. That growth rate puts Thailand well
below Korea's and Taiwan's growth rates when they were at
similar stage of development (Korea grew more than 9 percent
during this stage and Taiwan more than 6 percent),and
generally lower than its keenest current competitors in
international trade and FDI If Pridiyathorn is right,
Thailand has been demoted from "Asian tiger" to the slow
track in economic development (with obvious and negative
implications for prospects for improving Thais' living
standards) But perhaps this is the point: At the height of
the 1997 economic crisis, King Bhumipol said, "I have
repeatedly said that striving to become a 'tiger' is not our
main concern. . . . What is important is to maintain a
self-sufficient economy." But this policy has its limits,
and we don't see any risk of Thailand turning severely inward
or becoming hostile to international trade and investment.
The King has conceded that total self-sufficiency is neither
possible nor desirable since trying to achieve it "would be
going back to the Stone Age." As a compromise, the King
says, "perhaps we can substitute the current market economy
with a self-sufficient economy, if not entirely or by half,
then at least one-fourth."


14. (C) If Thailand fails to start attracting increased
private investment, both domestic and foreign, its export
growth will inevitably begin to slow. That development
inevitably will have negative implications for the current

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account, the currency, and the quality of banks' loan
portfolios. Many place hope on the new government's pledge
to quickly get out its 2007 budget and to begin investing in
infrastructure by the first quarter of 2007, but this may be
insufficient to provide much impetus to growth, especially if
the agricultural sector starts hurting. The new economic team
will have to balance its own priorities with the need to
avoid alienating sectors that benefited most under those of
Thaksin. Much will depend on their success in getting this
balance right.


ARVIZU