"GRAVE CONCERN" ABOUT PRIVATE INVESTMENT IN

UNCLAS BANGKOK 007435 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS AND EB COMMERCE FOR EAP/MACK/OKSA TREASURY FOR OASIA STATE PASS TO USTR FOR WEISEL STATE PASS TO FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN STATE PASS TO FEDRAL RESERVE NEW YORK FOR MATT HILDEBRANDT E.O. 12958: N/A TAGS: EFIN ECON TH SUBJECT: "GRAVE CONCERN" ABOUT PRIVATE INVESTMENT IN THAILAND ¶1. (U) Amid pressure to take action in the face of a rapidly appreciating currency and tepid economic growth, on December 13 Thailand's Monetary Policy Committee met and decided to keep the Bank of Thailand (BoT) policy rate unchanged at 5 percent. Committee chair and BoT Assistant Governor Suchada Kirakul told the press after the meeting that the BoT has "grave concern" over the slow growth of private investment which has increased only 2.9 percent through Q3 2006 while GDP has increased 4.7 percent over the same period. ¶2. (U) Private investment has been in a declining trend since 2004 even while capacity utilization has been increasing. While Suchada expressed confidence that private investment will increase next year due to high corporate and financial sector liquidity , low inflation and increased RTG spending, some private sector analysts have noted the strong correlation between export growth and private investment and expect the strength of the baht to limit export growth going forward and, therefore, limit private investment as well. The investment bank UBS, for example, has lowered their GDP forecast for 2007 from 3.9 percent to 3.5 percent. ¶3. (SBU) Further hindering investment and the general confidence level has been the strength of the baht which has appreciated over 14 percent against the US$ this year. According to Citibank's Bangkok branch manager for F/X, other regional currencies have appreciated less against the dollar in 2006 ranging from the Korean Won up about 11 percent, the Indonesian Rupiah 7.5 percent, Malaysian Ringgit 6 percent and Philippine Peso 8 percent. The reasons given for the outperformance of the baht include: - The baht underperformed in 2005 and is merely "catching up' to other Asian currencies. - Thai exports have done especially well this year and Thai exporters typically do not hedge. There has therefore been unusually heavy inflows of US$ even as import growth has been low due to stable oil prices, low consumer demand and low private investment. One bank currency trading desk official told us that every time the baht depreciates slightly, exporters who have not yet converted their dollar earnings quickly enter the market and the baht resumes its upward trend. - There is almost no borrowing in US$. - Tourism income has been above expectations. - There is a general sense that the US$ will continue to weaken for some time. - The BoT, having learned their lesson from trying to intervene heavily in 1997, now only intervene on the margins. ¶4. (SBU) Comment. As Thailand has grown into a middle income economy, it has inevitably been losing its competitiveness in labor intensive exports to competitors in China and other less developed SE Asian neighbors. That fact accounts for some of the decline in FDI. However, private investment is further restrained due to the continuing debate in Thailand about how to handle the question of foreign participation in the services sector. Thai law limits foreign ownership to 49 percent; a limitation that since the promulgation of the Alien Business Act 30 years ago has routinely been avoided through he use of nominee companies and shares with differing voting rights. Since mid-year the RTG has been debating how to close these loopholes and thereby created significant uncertainty among foreign investors considering investing in Thailand. Between the growing domination of China and Vietnam's emergence as the new "hot spot" for FDI, added uncertainty in Thailand only adds to the uphill battle to attract additional inward investment to this country. An appreciating baht that increases the relative cost of doing business here only adds a further complication. ARVIZU