ASIA HAND The limitations of Samakonomics
By Shawn W Crispin
BANGKOK – Thailand's newly installed government has big spending plans to
kick-start the local economy and catapult economic growth onto a higher
trajectory.
While most economists welcome the expansionary designs, which will be
officially unveiled by Prime Minister Samak Sundaravej early next week, there
are market concerns that the new administration’s economic team lacks the
technocratic expertise to efficiently manage the pump-priming.
Samak's political staying power hinges largely on his government's ability to
revive the local economy and restore foreign investor confidence, which was
badly dented by the
previous military-appointed government's surprise implementation of capital
controls, proposed protectionist amendments to the Foreign Business Act and
talk of moving the country away from its previous embrace of laissez faire
economics and towards more self sufficiency.
Despite those controversial policies, Thai gross domestic product (GDP) grew
around 4.5% last year, driven mostly by stronger than expected export growth.
This year, however, Thai export growth is projected to tail off due to slowing
demand in the US, Japan and Europe and if the Thai economy is to stay on track
economic analysts say the new government must implement policies that quickly
restore consumer and local investor confidence.
Political volatility has weighed heavily on the local economy. Domestic demand
expanded a meager 2% in 2007, with substantial slumps in big ticket
expenditures on automobiles and housing. It's not clear yet that the new
government's still amorphous spending plans will be enough to encourage locally
oriented businesses to make new capital outlays that set in motion a
sustainable cycle of private investment-led economic growth.
Inflation, meanwhile, has recently transcended the 3.5% upper range of the
central bank's inflation targeting regime and was up at 4.3% in January.
Thailand is especially prone to cost-push inflation due to its reliance on oil
imports for its fuel needs. At current global prices, fuel
imports represent around 11% of Thailand's GDP, the highest such ratio in
Asia. Balancing the need to stoke growth and cap inflation will require strong
technocratic management in the months ahead - credentials its not clear the new
government possesses.
The balancing act has already been complicated by the country's still
unresolved political crisis, pitting supporters and detractors of exiled former
prime minister Thaksin Shinawatra. Polls and pundits predict that if the local
economy has not by October shown clear signs of a turnaround, with the array of
political risks and corruption charges already hanging over Samak and his
People's Power Party (PPP), his government may not last a full year in office.
Investors have so far welcomed his government's expansionary intentions,
including fiscal designs to resurrect many of Thaksin'’s populist policies
ranging from a revival of the village development funds, a low-cost universal
health care scheme and a debt moratorium for two to three million indebted
farmers as well as big ticket infrastructure spending plans.
Technocratic deficit
At the same time, analysts have been less enthused about the quality of top
level appointments to the Finance Ministry and are concerned that Thaksin may
exert influence on the crucial portfolio from behind-the-scenes.
Finance Minister Surapong Suebwonglee, a former communist rebel who trained as
a medical doctor before entering politics, has no professional experience in
the finance sector. Nor do his top two deputies, Pradit Phattaraprasit, a
provincial businessman, and Ranongrak Suwannachawee, a senior police official,
both of whom earned their portfolios through political horse-trading among
coalition partners.
Nearly two weeks after their official appointments, neither Cabinet member has
been given any official responsibilities. A recent research report issued by
Phatra Securities opined "Surapong will have his hands full because the two
deputy finance ministers are unlikely to provide him with much help in
mastering the macro picture." Economic analysts say the new finance team,
similar though not yet as extreme as their outgoing military predecessors, is
already sending erratic policy signals to investors.
That includes Surapong's announcement earlier this week that he intended to
scrap the capital controls imposed by the previous government, a policy
announcement that immediately cheered foreign investors but one he appeared to
backtrack from after a private meeting with central bank governor Tarisa
Watanagase. To add to the confusion, Pansak Vinyaratn, a former top Thaksin
advisor who holds no official position in the PPP-led government, was
inexplicably in attendance at the closed-door meeting.
Moreover, the Commerce Ministry's recent decision to re-impose price controls
to guard against inflationary pressures on 35 necessity goods and monitor the
prices of 200 other essential items has raised the hackles of Thai producers,
who face higher market prices for their industrial inputs, and raised broader
questions among some foreign analysts about the new government's commitment to
upholding market-led economics.
In a sign of how politicized economic policy-making has become, the outgoing
military-appointed government removed the price caps, some of which were first
imposed during Thaksin's first administration to pump prime local consumption,
just two weeks before they left office. By removing them and allowing for
prices to rise to their market-determined levels, higher inflation would
immediately put the new government's grass roots popularity at risk, economic
analysts say.
Fiscal spending too will be politicized, with the opposition and potentially
the military poised to pounce on any allegations of official corruption. With
public debt at around 38% of GDP, down from 58% in 2000 and considerably less
than many of Thailand's regional peers, and with international reserves bulging
at a record level of US$110 billion, Samak’s government has plenty of fiscal
room to stimulate the economy.
Supavud Saicheua, an economist with Phatra Securities, a Bangkok-based
investment bank, estimates that the public and private sectors combined have
the resources to invest 1.5 trillion baht per year over the next three years,
or roughly the equivalent of an additional 5% of GDP per year. By his
calculations, the government could borrow 700 billion baht over the next three
years without harming fiscal discipline.
Supavud also notes that while the military government was still in charge, the
Board of Investment approved 745 billion baht worth of new projects in 2007,
nearly twice the 373 billion approved in 2006. The economist said that he
expects most of those projects to be implemented over the next three years,
barring any major political hiccups. That said, there are still big political
questions about whether funds earmarked for public works will actually be
disbursed.
Spending roadblocks
Samak's government will at least initially be constrained by the 2008 budget,
which was passed by the outgoing government and designed to run a modest budget
deficit of around 2.5% of GDP. That includes 150 billion baht of funds
earmarked for two or three new mass transit rail lines for Bangkok, which, if
all goes to plan, should commence construction by the end of this year.
Transport Minister Santi Prompat has already announced vague plans for nine
other major mega-projects, including additional mass transit lines and an
upgrade for stretches of the national railway system from a single to dual
track. It's still unclear how such projects would be financed under the current
budget's limitations, though officials have hinted a state-backed investment
fund might be established. Samak could also in the months ahead lean on state
banks to accelerate lending and opt to implement a supplementary spending
budget - similar to Thaksin's more controversial fiscal policies.
Big infrastructure spending plans, however, will likely bog down in
bureaucracy. A strict new law passed in late 2007 aimed at preventing future
conflict of interests between ministers and their families' businesses -
charges that persistently plagued Thaksin during his tenure - puts the burden
of proof of innocence on politicians accused of corruption. Transport Minister
Santi, for instance, is known to have business interests in real estate and
machinery, which will come under close scrutiny when projects are up for
bidding.
Ministry bureaucrats, meanwhile, will likely be more circumspect in giving
their approval and signature to public works projects due to fears that a
future change in government could lead to politically motivated corruption
charges - similar to the scrutiny that officials involved with the construction
of the new Bangkok international airport came under after military coup makers
toppled Thaksin's regime.
That means that Samak's government will at least initially rely more on
populist handouts than more productive big-ticket investments in infrastructure
to stimulate the economy and maintain his government's popularity. Already
there are doubts about the efficiency of that spending. Fredric Neuman, a
regional economist with HSBC, describes it as "hair-raising" from a
sustainability perspective a new populist policy proposal that will effectively
hand between 300,000 to 700,000 baht to village headmen across the country
without clear spending guidelines.
Others, including the Thailand Productivity Institute, an independent think
tank, have likewise raised red flags about the medium-term viability and even
short-term desirability of populist policies that only encourage one-off
spending rather than stoke multiplier-effect driven growth, including among
them the new government's plans to purchase and distribute two million cows to
poor rural farmers.
Unlike when Thaksin ramped up his popular grass roots spending programs
beginning in 2001, Thailand now faces a new host of inflationary risks that if
mismanaged could be accentuated by ill-conceived populist spending or other
interventionist policies which build up pricing distortions in the market.
While Thailand’s domestic economy definitely needs a shot in the arm, how that
economic injection is administered and managed will be the difference between
economic and political stability in the year ahead.
Shawn W Crispin is Asia Times Online’s Southeast Asia Editor.
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