FINANCE MINISTER UPBEAT ON THAI ECONOMIC PROSPECTS

C O N F I D E N T I A L SECTION 01 OF 03 BANGKOK 005824

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/14/2017
TAGS: EFIN PREL ECON TH
SUBJECT: FINANCE MINISTER UPBEAT ON THAI ECONOMIC PROSPECTS

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Classified By: Ambassador Ralph L. Boyce, reason 1.4 (b) and (d).

SUMMARY
--------------


1. (C) Most financial liberalization legislation should be
completed before the December 23 elections, the Finance
Minister told the Ambassador. The interim government is
seeking &fast track8 trade agreement negotiating authority
under a new constitutional requirement that requires
parliamentary concurrence in international treaties. Thai
foreign exchange reserves, now over USD 100 billion, are
¬ large,8 given the need to guard against short-term
capital outflows. The baht need not appreciate to reduce the
burden of higher oil prices because Thai inflation is low.
Foreign investors are keen to invest in ASEAN to diversify
away from China and India and, absent major external shocks
such as a U.S. recession, Thailand should boost GDP by over 5
percent next year. End summary.

Most Financial Legislation Moving Forward
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2. (C) During a farewell call by the Ambassador on November
14, Finance Minister Chalongphob Sussangkarn said that the
Currency Act had proved too controversial and that the next
government would have to take it up. He expects the three
remaining financial liberalization bills to be passed by this
government, so long as there are no &major difficulties8
when the bills are reviewed by the NLA committees. He noted
that the review of the Financial Institutions Act, the
longest of the three with over 100 sections, is already 75
percent done. The Bank of Thailand Act and the Deposit
Insurance Act should be less trouble, but they have not yet
been reviewed by the relevant committee. Chalongphob added
that a new law on public debt management and new laws on
excise taxes (on cigarettes and alcohol in particular) are
not controversial, but may not be ready in time for passage
before the December 23 election. The Ambassador noted that
we have no issue with excise tax revision, so long as
domestic and imported goods are treated the same.


3. (C) The Ambassador asked about the Foreign Business Act
(FBA),and whether if passed it could force firms considered
foreign under the new rules to divest control. The Finance
Minister said that firms operating in areas restricted in the
FBA's List Two, which restricts foreign involvement in
industries that affect national security, culture, and
natural resources, would have three years to come into
conformity with the new law, while those in the less
restrictive List Three would be grandfathered. He added that
the NLA is still considering whether to pare back the number
of industries on the lists. Chalongphob also related that he
is dissatisfied with the way the new Retail Act has
proceeded. He said that the Council of State, which should
have only an advisory role, has rewritten the bill in such a
way as to give inordinate power to the Minister of Commerce,
with attendant possibilities for mischief. The NLA may yet
walk that back.

A Positive Outlook for More Trade Deals
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4. (C) When asked about the prospects for a new trade
liberalization agreement with the United States, the Finance
Minister said he believes that Article 190 of the new
constitution, which mandates parliamentary approval of
international agreements, will strengthen the prospects for
future deals. Any government will have majority control of
parliament and so should be able to get approval of such
agreements. The key, he said, is for the parliament to have
a final yes-or-no vote, similar to &fast track8 authority
in the United States. The Ministry of Foreign Affairs has
drafted legislation which would limit Article 190,s
application to trade-related agreements and allow only an up
or down vote. It is not clear whether this legislation will
get passed this term, but it should go before the Cabinet

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November 20.

FOREX Reserves &Not Large8; Baht Need Not Appreciate
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5. (C) The Finance Minister said that Thailand,s foreign
exchange reserves, which topped USD 100 billion last week,
are not large relative to Thailand,s needs and should
continue to grow. The critical requirement for such reserves
is not just to cover import needs, he explained, but to guard
against short-term capital flows. Most Asian countries
learned from the 1997 financial crisis to restrict short-term
debt, but unrestricted flows for portfolio and bond
investments also require deep foreign exchange reserves.
Chalongphob said he could foresee Thailand accumulating USD
150 billion in reserves.


6. (C) On the value of the baht, the Finance Minister said
Thailand should not depart from the policy of its neighbors,
in particular export competitors such as Malaysia, Vietnam,
Indonesia and China. As the Chinese yuan remains &rigid,8
the baht should not appreciate too rapidly. He believes it
is important to &convince the market of your intentions,8
but admitted that there is a diversity of opinion within the
Bank of Thailand on appropriate baht policy.


7. (C) With core inflation running at a mere 1.1 percent,
Thailand has plenty of &cushion8 to deal with rising oil
prices without adjusting the baht, Chalongphob said (Comment:
A number of local analysts have questioned the government,s
focus on core inflation, which does not include oil or food
prices.) The Ministry is more concerned with potential
economic fall-out from the sub-prime mortgage crisis in the
United States (Thailand,s largest export market) than with
rising oil prices, which fluctuate in the short term. Part
of the decline in the dollar is the effort of many central
banks to move reserves from the dollar to the Euro.

ASEAN a Focus for New Investment
--------------


8. (C) The Finance Minister related that when he was in New
York recently on an ASEAN road show, there was &no need for
a hard sell8 as investors are already keen to invest in the
region. Not wanting to put all their eggs in the China
basket, and sensing that India is pressing the limits of what
investment it can absorb efficiently, investors are
interested in ASEAN, with its 550 million people and good
supply networks, according to Chalongphob. Especially in the
automotive area, investments are coming in and should drive
the Thai economy in the next few years. He foresees GDP
growth over 5 percent in Thailand next year, absent severe
external shocks.


9. (C) The Finance Minister believes that the current
cabinet will be in place until a new lower house is seated,
which he believes will occur by early February. Chalongphob
expects to return as head of the Thailand Development
Research Institute when his service in the interim government
is completed.


10. (C) Comment: Most U.S. companies operating in Thailand
receive national treatment under the Treaty of Amity and
Economic Relations or have obtained investment privileges
from the Board of Investment. However, &inland
transportation8 is one restricted industry included on List
Two and FEDEX and UPS could be affected under the new FBA
provisions. Dole and Cargill agricultural production could
also be affected if they are redefined under the new FBA as
foreign entities (foreigners are not allowed to own land).
Separately, we know from discussions with the Bank of
Thailand that there is spirited disagreement over baht policy
and the wisdom of rapid accumulation of foreign exchange
reserves. The Finance Ministry seems committed for now to
restraining the strong baht to support exports, but that is
one policy area we will be watching closely with the change
in government early next year. End Comment.

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BOYCE