THAI GOVERNMENT RESPONSE TO FINANCIAL CRISIS

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TAGS: EFIN ECON EINV ETRD TH
SUBJECT: THAI GOVERNMENT RESPONSE TO FINANCIAL CRISIS

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REF: BANGKOK 2885


1. (SBU) Summary: The RTG agreed October 14 to a series of measures
aimed at helping offset the impact of the global financial crisis
and shoring up economic growth. The plan calls for expanding of tax
exemptions for long-term personal investments; accelerating budget
disbursements and increased investments in megaprojects; the setting
up of government "matching funds" to partner stock market
investments with private sector entities; boosting
government-to-government cooperation through ASEAN; increasing
dollars in supply of dollars in the FX market; encouraging
commercial lending, and export and tourism activities. While the
plan could help shore up the Thai economy if fully implemented, much
of the plan remains short on detail and would take months to enact.
Financial industry leaders also point out that some measures, namely
the setting up of "matching funds," have been tried and failed in
the past, could increase risk for private firms, market volatility,
and crowd out private funds. End Summary.


2. (SBU) Comment: Just announced this week, these new economic
measures have yet to have an appreciable impact. The SET remains
volatile and concern about a global economic slowdown pervade the
financial community. The plan appears to be the handiwork of DPM
Olarn and thus may not last long if, as many predict, the current
administration falls amid continuing political instability. If
fully enacted, the plan could help shore up growth in the Thai
economy at the margin. End Comment.


3. (U) On Monday October 13, Prime Minister Somchai chaired his
government's first Economic Ministerial Committee, which agreed to
enact measures to help offset the impact of the global financial
crisis. On October 14, the RTG cabinet approved the measures so
that implementation can go forward. Deputy Prime Minister Olarn
Chaipravat (a member of the Ministerial Committee) stated publicly
that if fully implemented, the measures will inject $35 billion into
Thailand's economy during the FY 2009. The RTG expects the measure
to help boost the country's economic growth to at least 5.1 percent
(yoy) in 2008 and 4.0 percent (yoy) in 2009. The RTG's reported
plans are organized into six general areas.

The Thai Governments Plans
--------------

4. (U) Capital Markets: The RTG will expand the tax exemption for
personal investment in long-term equities and retirement funds from
the current exemption of $14,700 to $20,590 annually. Deputy
Minister for Finance Pradit Phataraprasit revealed that the new tax
exemption will cost the government $26.5 million annually. In
addition, the Stock Exchange of Thailand (SET) plans to set up two
"matching funds" to buy shares in the stock market: a $294 million
matching fund in partnership with financial institutions and a $59
million fund with major listed companies. The goal of the funds: to
shore up share values in the stock market. The SET would commit to
investing in stocks along side private institutions, at a yet to be
determined ratio. Private companies would manage the funds,
although it is still unclear whether which entity (the SET, fund
managers, or private firms) would determine in which stocks to
invest.


5. (SBU) Liquidity: To ensure that liquidity levels will be
adequate for all entrepreneurs (industries and SMEs),the RTG will
encourage commercial banks to extend loans by at least 5 percent in
2009 (an additional $11.8 billion) and encourage Specialized
Financial Institutions or SFIs (such as the government housing and
savings banks) to increase loans by another $1.47 billion. The Bank
of Thailand (BOT) will also increase the supply of U.S. dollars in
the foreign-exchange market. (Note: a BOT official told Econoff
there are signs of a shortage of dollars in the market, due to
capital outflows from both the stock and bond markets. End Note.)


6. (U) Export and Tourism: By the end of 2008, the government will
attempt to increase revenues from both exports and tourism sectors
by at least 5 percent ($8.8 billion for exports and $1.76 billion
for tourism). The government will focus on expanding export markets
in nations that have not yet been directly affected by the financial
crisis (e.g., the Middle East, Australia, Africa, and Latin
America).


7. (U) Domestic Economic Stimulus: The RTG will accelerate budget
disbursements with a target of $5.3 billion during the first half of
this fiscal year, starting October 2008. It will also encourage
Thais to travel (and spend) domestically. (Note: the FY2009 planned

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budget expenditure is $54 billion. End Note.)


8. (U) Investment: The RTG will accelerate mega-project investments
and increase extra budget expenditures on those projects by another
$2.9 billion from an initial $7.4 billion. Out of the new
expansion, $1.76 billion will be for mass transit in Bangkok, $294
million for national railways, and $882 million for energy projects.



9. (U) Asian Financial Community: The RTG plans to take the
opportunity to boost cooperation between ASEAN and six other
economies (China, Japan, South Korea, India, Russia and Australia)
when Thailand hosts the ASEAN Summit in December.

Reaction/Reality
--------------

10. (SBU) While steps like the accelerated disbursement of state
budgets could provide a relatively quick boost to the Thai economy,
others will require planning (and time) before becoming operational.
As an example, the RTG has yet to announce detail on how it will go
about encouraging loans from commercial banks or SFIs or attempting
to increase export and tourism revenue. It did not provide details
on its plans for the ASEAN Summit, nor on what basis the SET will
match investment funds from financial institutions and major
companies (e.g., a one to one basis, a one to two basis, etc.). In
order to flesh out these and other details, the RTG will likely need
several months.


11. (SBU) Some aspects of the RTG plan have been met with
skepticism. Regarding the SET matching funds, the Chairman of a
Thai investment bank noted prior governments in the early 1990's
initiated similar plans, but they did not succeed. The head of an
asset management company explained that private institutions at the
time remained wary of risky equity investments in a falling market,
and opposed any perceived government pressure to take on additional
risk. As such, the funds were underutilized. He also noted the
matching funds also could be problematic in that, by investing in
equities, banks may increase their risk exposure, a questionable
move in times of volatile markets. Regardless, as the SET's total
market capitalization is approximately $104 billion dollars, the
existence of relatively small SET funds (valued at less than $400
million) may not restore calm to the markets. The presence of
government funds may also crowd out the development of the private
mutual fund industry and could create more volatility. An official
in the legal office of the BOT noted the Financial Institutions
Business Act limits the amount that financial institutions can
invest in equity (e.g., can invest no more than 20 percent of its
total capital funds in equity in general, and no more than 5 percent
of its funds in any one company; can hold no more than 10 percent of
a single company's public shares). While the BOT could relax such
restrictions, it is unclear whether the BOT plans to do so.