Cablegate: Thai Exports Up, but Margins Squeezed by Strong Baht

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RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #6076/01 3410940
ZNR UUUUU ZZH
R 070940Z DEC 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 0998
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/USDOC WASHINGTON DC

UNCLAS SECTION 01 OF 02 BANGKOK 006076

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STATE PASS USTR
USDOC FOR 4430/EAP/MAC/OKSA

E.O. 12958:N/A
TAGS: ECON ETRD TH

SUBJECT: THAI EXPORTS UP, BUT MARGINS SQUEEZED BY STRONG BAHT

1. Summary: Thailand's exports continue to show strong growth and
are on track to surpass the RTG's target of 12.5 percent growth in
2007. However, Commerce's statistics are somewhat misleading as
export value in baht terms is not nearly as strong as the reported
dollar values. Thailand's large export industry has lamented
frequently and loudly about the impact of the appreciating local
currency on their competitiveness. Exports with low import content
and those aimed at the U.S. market have been particularly hard hit
by the strong baht. Export industries are keeping up shipments to
maintain market share but with margins cut to bare minimums. A
strong showing by the auto, electronics and agricultural industries,
and rapidly expanding markets in East Europe, China, the Middle East
and India are keeping overall exports booming. Industry and RTG
export promoters are focusing on expanding these non-traditional
export markets and promoting Thailand's nascent service exports.
End Summary.

2. The Thai baht has rapidly appreciated against the dollar in the
last two years, up 17 percent since the beginning of 2006, and up
over six percent thus far in 2007 alone. Thailand's large export
industry has put substantial pressure on the RTG to rein in the
strengthening baht which has crimped competitiveness for their
exports. Despite the baht's climb, however, the Ministry of
Commerce's trade statistics through October detail a 17 percent
increase in exports over the same time period in 2006. Exports are
expected to slow in the last two months of the year compared to last
year but will still likely surpass the RTG's export growth target of
12.5 percent for the year.

3. Despite the strong growth, Thailand's swelling export statistics
mask declining returns, particularly in baht terms. Although
exports are up over 17 percent in 2007 in dollar terms, in actual
baht terms exports are up only a relatively meager 5.8 percent. In
volume, exports are up approximately six percent. Officials at the
Federation of Thai Industries (FTI) told Econoff that the
Federation's members are continuing to export at record pace to
maintain market share in critical markets, hoping to ride out the
baht's rise. In the meantime, companies are facing increasingly
narrow profit margins and in some areas suffering losses as they try
to maintain their overseas markets.

4. Industries with high local content, particularly processed food
products and apparel, have been hardest hit. In baht terms, garment
exports are down over 15 percent in 2007, canned fruits are off four
percent, and furniture is down three percent. Although these
industries do not make up a large percentage of the value of
Thailand's exports, they are large employers and account for tens of
thousands of jobs. A recent FTI survey of their members concluded
that the food processing sector needed at least a 38 baht/dollar
rate to thrive, and apparel would need 37. The current exchange
rate is below 34 baht to the dollar with little prospect of
depreciating anytime soon.

5. Exporters focused on the United States, Thailand's largest
export market, have been disproportionately hit as the dollar has
underperformed most global currencies in the last year. In contrast
to the overall positive export growth, exports to the United States
are down 2.6 percent through October in dollar terms, and down over
12 percent in baht terms. Garment manufacturers export half their
product annually to the U.S. alone; exports for that sector are down
17 percent in 2007. Fresh and processed seafood exports, a third of
which typically go to the United States, are off nearly 10 percent.
A possible slowdown in the U.S. economy threatens to bring those
numbers down even further. The U.S. market has traditionally been
the destination for over 15 percent of Thailand's exports; however,
that number is down to 12 percent in 2007 and the U.S. is poised to
fall behind Japan as Thailand's top export market.

High-end manufacturing, new markets brighten the picture
---------------------------------------------

6. Exports with high import-content have also been hit by the
strong baht, but to a substantially lesser degree thanks to lower
costs for imported components. The auto and electronics industries
have continued to show strong results. Much of the import/export in
these major industries is intracompany trade and therefore
relatively unaffected by the strong baht. Auto and auto parts
exports which make up eight percent of Thailand's total exports are
up 15 percent globally. Computer parts and other electronics
products, Thailand's top exports, have shown above average growth.
Ms. Atchaka Sibunruang Brimble, Director-General of Office of
Industrial Economics at the Ministry of Industry said the RTG had
expected the agricultural industry to be harder hit, but a
combination of good crop yields in Thailand and relatively poor
yields in competing nations blunted the impact of the strong baht.
Rice exports are up over 16 percent for the year and sugar nearly 70
percent.

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9. While the U.S. market has declined so far this year, strong
growth in non-traditional markets has helped keep Thai exporters
busy. Although the U.S. dollar has tanked compared to the baht,
other global currencies have not fared nearly so badly and Thai
products remain competitive in many countries. Thailand found above
average growth in new markets in Eastern Europe and Russia, the
Middle East, Africa, and the biggest economic player in the region,
China. New FTA partner Australia tallied up a 33 percent growth
rate, building on the previous year's 37 percent growth. India,
Thailand's 16th largest export market, recorded the highest growth
among Thailand's top trading partners, chalking up a 54 percent hike
in imports from Thailand. An Early Harvest FTA with India completed
in 2003 covered only 82 products, but sparked a substantial growth
in trade. Trade officials expect to complete the agreement in 2008
and boost exports further. It is too early to gage the impact of
the new Thai-Japan trade agreement, which came into effect late in
the year.

Plans to cope
-------------

10. Under pressure from exporters, the RTG's Department of Export
Promotion (DEP) has laid out a plan to keep Thailand's exports
steady. Mr. Verachai Srisuwannivej, Senior Trade Officer of DEP,
said that DEP plans to hold the line in its primary export markets
of the United States, Japan, and its top markets in the EU and
ASEAN, holding regular trade exhibitions and maintaining market
share. For newer markets in the rest of the EU, Russia, Latin
America, China and India, DEP is ramping up its trade fairs,
promoting Thai brands and shooting for higher than average export
growth. DEP plans to push agricultural and processed food products
hardest. Verachai recognized that the food industry is not
necessarily one of the industries of the future for Thailand, but
the RTG is looking to assist Thailand's numerous small-scale
producers. To promote more promising industries, DEP's 56 overseas
offices are also planning to push Thailand's growing restaurant and
spa industries, and entertainment, education and medical services.
To take advantage of the baht's appreciation, DEP is implementing an
"internationalization" program, encouraging Thai businesses to
expand their supply chain networks into countries where the baht is
strong. Verachai emphasized the RTG would not extend incentives to
relocate factories from Thailand, but only to expand production
capacity in other countries and open overseas branches.

11. Mr. Payungsak Chartsutipol, Vice President of the Federation of
Thai Industries, said the Federation's members are also promoting
new markets and new trade agreements to expand exports. However, he
said many companies are beginning to focus inward on the domestic
market where they are not affected by currency fluctuations. He
included neighbors Laos and Cambodia in the domestic market as much
of the trade with those countries is carried out in Thai baht.
Payungsak recognized that domestic consumption is still sluggish,
but hoped for a rebound in 2008.

12. Near-term prospects for relief for exporters from the strong
baht are bleak. Estimates are that the baht will remain at its
appreciated level and may strengthen further if the balance of
payments surplus remains high. As well, the World Bank is
predicting a drop in export growth for 2008 due to slowdowns in GDP
growth in Thailand's key trading partners. The National Economic
and Social Development Board is also predicting a slowdown in
overall exports, but nevertheless projects an increase of ten
percent in value and four percent in volume for 2008.
BOYCE

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