POLITICALLY SAVVY, THAILAND'S ECONOMIC STIMULUS PLAN MAY

UNCLAS SECTION 01 OF 03 BANGKOK 000175 STATE FOR EAP/MLS AND EB STATE PASS TO USTR TREASURY FOR OASIA SINGAPORE FOR FINATT BAKER SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON EINV ETRD TH SUBJECT: POLITICALLY SAVVY, THAILAND'S ECONOMIC STIMULUS PLAN MAY NOT BE ENOUGH BANGKOK 00000175 001.2 OF 003 Sensitive But Unclassified. For Official Use Only. REFS: A) 08 STATE 134459 B) BANGKOK 163 ¶1. (SBU) Summary: To reenergize the Thai economy in the face of the global financial crisis, the Royal Thai Government (RTG) has rolled out a USD 4.4 billion economic stimulus plan that aims to increase the purchasing power of Thailand's poor and middle class. The plan is composed of both targeted fiscal expenditures and tax measures. Expenditures include a 2,000 baht (USD 57) cash payment to poor individuals, cash transfers to rural villages, an extension of transportation and utilities subsidies, education allowances, and payments to the elderly. Tax measures include increased deductions on the purchase of new homes, and relief measures to small, medium, and micro enterprises. The RTG will also expedite investments through state-owned enterprises and is developing plans to use specialized financial institutions (such as the state-run Small and Medium Enterprise Development Bank) to support and/or guarantee loans. Because of the plan's small size and legal ceilings on fiscal deficits, many analysts remain skeptical this RTG effort will have significant impact. End Summary. ¶2. (SBU) Comment: The Abhisit government's plan is politically savvy. Doling out aid to villages should tap into the populist sentiments that gave former Prime Minister Thaksin such political power. Handing out cash at the grassroots level is strikingly similar to (always popular) vote-buying methods but will be legal, transparent and come with a reasonable economic justification: putting cash into the hands of people most likely to spend it to stimulate the economy. To its credit, Abhsit's funding of school expenses could give a much-needed boost to education participation levels and have beneficial long-term impact. Toss in money to the elderly and some tax breaks for businesses and you have a plan with a little something for everyone. Even if the analysts are right that the total package is not enough to save Thailand from being dragged down by the global economic crisis, it may be enough to give the Abhisit government a longer lease on life. End Summary and Comment. ¶3. (SBU) In a bid to boost the Thai economy in response to the global financial crisis, the Abhisit administration has rolled out an economic stimulus plan mainly targeting Thai consumers. Confirmed in two separate cabinet meetings on January 13 and January 20, a supplementary budget expenditure of approximately USD 3.3 billion (116.7 billion baht)and a USD 1.1 billion package of tax breaks (respectively) are designed to reduce the cost of living and increase the purchasing power of middle and lower income Thais. The RTG will submit a supplementary budget request to Parliament within the next few weeks. At a January 14 press conference, Prime Minister Abhisit explained the rationale behind the plan: increase consumer spending to help keep Thai businesses afloat, which will in turn create employment and GDP growth. The RTG hopes its USD 4.4 billion plan will increase GDP growth in 2009 by over 1 percent. What follows is a breakdown of the plan as presented in a variety of fora, including a January 15 conference in which the Prime Minister and much of his economic team participated. Stimulus Plan Part I - Fiscal Spending -------------- ¶4. (SBU) Of the USD 3.3 billion supplementary budget request, USD 2.8 billion will be allocated for fiscal expenditures while the remaining will be used to replenish the RTG cash balance at the Bank of Thailand (Note: Under Thai law, should the RTG draw funds from its cash balance account, it must repay some portion of it the next fiscal year. End note). The targeted expenditures include: - A one-time cash payment of USD 57 (2,000 baht) to each adult earning less than USD 429 per month (expected to cover approximately 9.4 million people and cost approximately USD 542 million). - The extension of five public service subsidy programs for an additional six months (e.g., free bus/train, free utilities with maximum usage). The measure is expected to cost approximately USD 326 million. - The provision of a one-month training and a three-month-wage subsidy to approximately 240,000 unemployed persons. The measure is expected to cost approximately USD 197 million. - The provision of free education for 15 years (3 of preschool and 12 in primary and secondary) for state-schools, including free uniforms and textbooks for approximately 10 million students BANGKOK 00000175 002.2 OF 003 nationwide. The measure is expected to cost approximately USD543 million. (Note: K-12 public education has always been "free" but ancillary costs for uniforms, supplies, etc., have amounted to a barrier to education for many poor families. This measure is designed to eliminate that barrier.) - The provision of a USD 17 per month stipend for approximately 830,000 community healthcare workers (as well as funds to improve standards of 2,609 health-care service stations). The measure is expected to cost approximately USD 117 million. - The provision of a "sufficiency economy fund," a cash transfer to 78,358 rural villages. A carry over program by a different name from the prior government, the measure is expected to cost approximately USD 434 million. - The provision of additional pension payments of USD 14 per month to five million senior citizens (sixty years-old and up). The measure is expected to cost approximately USD 257 million. - The investment of USD 121.7 million into rural irrigation projects, small reservoir construction, and rural roads construction. - The construction of public housing units for police officers. The measure is expected to cost approximately USD 257 million. Stimulus Plan Part II - Tax Measures -------------- ¶5. (SBU) Seven tax measures approved January 20 aim to decrease the tax burden on business operators and home buyers, to promote spending in targeted industries, and to support corporate restructuring. The measures are effective retroactively from January 1, 2009. The RTG expects a loss of tax revenue from the measures' implementation of approximately USD 1.1 billion during the current fiscal year. Details of the measures follow: - Real-estate: Buyers of new housing units during 2009 are eligible to deduct taxable income up to USD 8,571 of their loan principal. This is in addition to the current tax allowance of USD 2,857 for interest payments. The RTG also extended to March 2010 (from March 2009) the reduction of related taxes such as transfer fees (paid by home buyers),the mortgage registration fee with banks (normally paid by home buyers),and business taxes (paid by sellers, in this case developers). The RTG expects a loss of USD 186 million in tax revenue for the individual tax deductions and USD 857 million from the extension of the transfer fee and special business tax reductions. - Operators of Small and Medium Enterprises (SMEs): The minimum taxable income for individuals (or a group of individuals) running a SME has been increased from USD 1,714 to USD 28,571. The measure will cover 970,000 SMEs and is expected to cost approximately USD 40 million. - Micro and community enterprises: Similar to the SMEs measure, the minimum taxable income for micro-enterprises will be temporary increased (through 2010) from USD 34,286 to USD 51,429 for two years. The measure is expected to help 58,000 micro-enterprises and result in lost revenue of approximately USD 6 million. - Tourism: Thai companies hosting seminars and training classes within Thailand in 2009 can deduct up to double the expenses incurred. The measure is expected to result in lost tax revenue of approximately USD 51 million. - Venture capital: Venture capital investments in SMEs that register with SEC before the end of 2011 will be eligible for tax exemption from capital gains. - Debt restructuring: Tax exemption will be provided for both debtors and creditors on restructuring of debt (details still to be announced by the RTG). - Corporate restructuring: Similarly, corporate restructuring in listed companies and limited companies will be exempted from tax in 2009 (details still to be announced by the RTG as to whether this would involve exemptions on asset sales, etc.). Looking Ahead -------------- ¶6. (SBU) In addition to the cabinet-approved fiscal spending and BANGKOK 00000175 003.2 OF 003 tax measures, the RTG is developing additional fiscal spending measures (related to the tourist industry, etc.). It is also developing plans to provide businesses with increased liquidity by capitalizing specialized financial institutions (SFIs) with up to USD 286 million in order to support and/or guarantee loans. According to a RTG presentation made January 15, Thailand's SME Bank would provide much of this assistance through soft loans to commercial banks, as would Thailand's Export-Import Bank which would provide increased export insurance for small operators. In addition, the RTG will expedite investment expenditures through state-owned-enterprises (SOEs) (USD 8.8 billion) and municipal budgets (USD 10.5 billion) that have already been approved for the current fiscal year. Finally, the government is pushing forward with its so-called mega-projects amounting to approximately USD 48.6 billion, of which USD 12.6 billion is for commuter transit systems, USD 12.6 billion for road and rail transportation and communication projects, and USD 10.6 billion for energy projects. Domestic Fiscal constraints -------------- ¶7. (SBU) The entire package of supplementary spending amounts to less than 2 percent of GDP, considerably smaller than fiscal packages announced by other Asian nations. Unfortunately, the Thai government is somewhat constrained by budget rules; its annual deficit spending cannot exceed 20 percent of the budget (including the supplemental) plus 80 percent of loan principal repayments of the same budget year. The RTG does have a few options beyond the budget. For example, it may still have up to USD 2.7 billion available for additional borrowing capacity in the current fiscal year. MoF officials suggested January 13 and 15 that the RTG will seek to increase official financial assistance as well; they intend to approach the World Bank and Asian Development Bank (ADB) to secure additional financing. Some, but not necessarily all, of these funds could be used to fund mega-projects. MoF officials admitted that straight budget support from the international financial institutions could be complicated to procure, especially from the ADB which is capital-constrained and targeting loans to low-income countries rather than middle-income countries like Thailand. Private Sector Reaction -------------- ¶8. (SBU) Econoff and Treasury Regional Attache queried multiple private sector analysts (including from both Thai and local banks, foreign and Thai private securities firms, and a rating agency) January 13 - 16 about the RTG economic stimulus plan. While many expressed hope the Abhisit administration -- with which they have a political affinity -- will succeed, most all suggested the fiscal spending and tax measures do not go far enough to fuel domestic consumer demand sufficiently to offset the impact of the global economic crisis. Aware of the RTG's limited ability to stimulate the economy due to debt ceiling limits, some suggested the RTG could have better directed the fiscal spending measures. The head of a private securities firm stated that while putting money directly into the hands of the masses may help secure political support for the Abhisit government, it would do more good economically in job creation programs such as public works projects. While wanting to give the Abhisit government's plans the benefit of the doubt, most analysts with whom we spoke believe it will not succeed in turning around the beleaguered Thai economy and many are concerned that the fiscal constraints the government faces would limit its ability to provide further fiscal stimulus if this plan fails.