ASIA HAND Thailand's conflict gets economic
By Shawn W Crispin
BANGKOK - Thailand’s political troubles are fast morphing into economic woes as
Prime Minister Samak Sundaravej’s coalition government moves slowly to rein in
inflation and some say that with continued complacency it risks a sharp and
sustained economic downturn.
Earlier expectations that his four-month-old administration may be toppled in a
military coup or through a still possible court-ordered dissolution of his
ruling People's Power Party (PPP) on electoral fraud charges are now joined by
speculation that Samak's beleaguered government may instead collapse under the
weight of
its own economic mismanagement.
Driven by spiking global oil prices, Thai headline inflation hit a 10-year high
of 9.6% in June, further undermining already flagging consumer and investor
confidence. Core inflation breached the 3.5% upper band limit of the Bank of
Thailand's inflation targeting regime, a floating mechanism implemented in the
aftermath of the 1997-98 Asian financial crisis to anchor market expectations
about future inflation. That's taking a toll on business, seen in the estimated
4,000 to 5,000 small- and medium-sized enterprises that shuttered operations in
June due to rising input prices.
While several countries in the region are now grappling with how to handle oil
price-driven cost-push inflation, Thailand is exceptionally exposed due to its
heavy dependence on imported oil, which at 12.5% of gross domestic product is
among the highest ratios in Asia. That risk is compounded by the country's
grinding political conflict, which includes a vocal anti-government street
protest movement and an outspoken parliamentary opposition, both bent on
bringing down the government before its four-year term is up.
Political criticism has put Samak's government on the defensive and has
arguably complicated its ability to respond to the challenge of rising
inflation. Foreign investors have shown they believe his government has fallen
far behind the monetary policy curve. Since the beginning of May they have
driven down the local bourse by nearly 15%, with foreigners selling Thai
equities worth a net 62 billion baht (US$1.8 billion) over the first half of
this year.
Bond traders have in recent months bid up yields by 150 basis points on Thai
10-year notes, indicating that they believe the Bank of Thailand has
underestimated the underlying risk posed to future economic growth by
fast-rising inflation. Foreign skepticism has put new downward pressures on the
baht, marking a sudden reversal of the baht's recent foreign-driven
appreciation.
"Political uncertainties and a sense of policy drift have contributed to
downward pressure on the baht," says Frederic Neumann, an economist who tracks
Thailand for HSBC in Hong Kong. "As macroeconomic challenges grow, not least in
the form of spiraling inflation and slowing growth, the market is looking for
firm policy direction. But recent political events have drawn energy away from
the government's reform program and clouded the economy's prospects."
Before those clouds gathered, there were already market questions about the
PPP's technocratic credentials, particularly in relation to politically
motivated appointments to the crucial finance and commerce portfolios. Neither
Finance Minister Surapong Suebwonglee, a former communist guerilla, nor
Commerce Minister Mingkwan Sangsuwan, a former auto industry executive, has a
technocratic education or background.
Investors were previously willing to overlook that lack of experience on the
expectation that former prime minister Thaksin Shinawatra's more seasoned
economic lieutenants would provide guidance from behind-the-scenes to the PPP
rookie ministers. Both ministers are now under opposition assault for their
perceived poor handling of economic policy in an inflationary environment and
Mingkwan is likely to be dumped by Samak. The two men have locked horns over
the Commerce Ministry's handling of rising prices and the junior minister is
expected to be dumped at a highly anticipated Cabinet reshuffle.
However, the bigger investor concern is that the PPP-influenced finance
ministry has restrained the Bank of Thailand (BoT) from boosting the benchmark
interest rate due to political concerns that a tighter monetary policy would
slow economic growth and undermine the government's already waning popularity
in Bangkok and possibly in the northern and northeastern provincial areas,
which voted overwhelming for the populist party in elections last December.
Rather than raising rates, the BoT has opted to intervene in off-shore currency
markets in a bid to shore up the baht against rapid foreign selling. The
ministry of finance has estimated that every one baht appreciation of the baht
against the US dollar represents a US$10 fall in the price of oil in terms of
dampening inflation in the Thai economy, according to Phatra Securities, a
local investment bank, in a recent research report.
Other economists question that math, particularly considering the BoT's recent
off-shore interventions have failed to stem the baht's recent slide. According
to HSBC, over the past month the central bank has sold roughly $4.5 billion
offshore to defend the baht, which despite those interventions is still Asia's
worst performing currency so far this year. The baht has fallen from around 31
to 34 per US dollar since the beginning of this year.
Rollercoaster baht
It's unclear how much further the baht would have fallen in recent weeks
without the central bank's hefty interventions. Given Thailand's ample store of
foreign reserves, estimated at around $120 billion, monetary authorities have
the resources to continue to prop the baht for the foreseeable future. At the
same time, market analysts say the BoT should soon supplement those
interventions off-shore with a rise in interest rates at home to signal to the
market that it understands and is moving to mitigate the risk of entrenching
high inflation rates.
The BoT's current credibility crisis among foreign investors, caused mainly by
its surprise decision in December 2006 to impose capital controls on foreign
equity, currency and bond transactions to alleviate then appreciatory pressures
on the baht, has raised overall country risk and means many investors will
infer political interference in anything less than a rapid tightening of
monetary policy in the months ahead. The central bank's next monetary policy
committee meeting is scheduled for July 16, where the consensus view is
authorities will raise rates by a mere 25 basis points over the current 3.25%
benchmark rate.
UBS, an investment bank, estimated in a recent report that the BoT needs to
increase rates 125 basis points to restore confidence in the country's policy
direction. But the Samak government is still reeling from headline-grabbing
anti-government street protests and from opposition charges, nationally
televised during a recent censure debate, that has it sold out a sacred
national heritage site to neighboring Cambodia, has shown disloyalty to the
Thai crown and has displayed overall incompetence. Against that background, a
steep rise in interest rates would inevitably slow growth and would, some
analysts estimate, be tantamount to political suicide.
To his credit among foreign investors, Samak, honoring his campaign trail
pledge, quickly rolled back xenophobic policies including capital controls
implemented by the preceding military-appointed administration. He also won
investor kudos for abandoning the previous government's motion to amend the
Foreign Business Act in ways that foreigners said would jeopardize existing,
and deter future, long-term investments.
By the end of February, the Thai stock market was one of only two in Asia that
had seen a net gain, the other being Taiwan's. Initial investor enthusiasm
faded as political tensions rose and widespread perceptions of economic policy
drift.
A proposed infrastructure-spending program has failed to generate investor or
contractor interest, due mainly to the government's initial reluctance to allow
upward budgetary adjustments to cover future price inflation for key inputs
such as cement and steel.
As prices soar and confidence wanes, the government has, some say belatedly,
recognized the country's changing economic dynamic and backed away from its
previous rigid position on project valuations. PPP proponents say the new
fiscal budget now being drafted and set for implementation in October will be
full of fiscal measures to ramp up growth and fight inflation.
But with the politicization of the Thai bureaucracy, where officials are now
reluctant to sign off on spending for which they could be held accountable with
a change in government or in the event of another military takeover, many
analysts doubt those measures will have the desired stimulatory effect.
Sansern Samalapa, the opposition Democrat Party's shadow deputy finance
minister, says that, if in power, his party would manage differently the
country's mounting inflationary problems. His proposed policies include cutting
into the estimated 1 billion baht annual profit earned by PTT, a majority
state-owned oil-and-gas enterprise, and redistributing it to reduce electricity
tariffs, and implementing new income-generation schemes for the grassroots
economy.
He claims the government ignored a 50 billion baht supplementary budget the
Democrats proposed over three months ago to head off inflationary risks. Some
analysts believe that the recent impact of inflation on business and the rural
poor has taken the pro-growth sheen off the PPP's national image, which was
enhanced by its perceived association with Thaksin’s former ruling and now
disbanded Thai Rak Thai party.
Others predict that a sustained and deep economic downturn might provide a
political opening for the opposition Democrats to retake government without
winning elections on a technocratic savior card.
That's what happened in 1997 when the baht collapsed and the economy froze.
Under pressure from above, then prime minister and former army commander
Chavalit Yongchaiyudh stepped down to allow the more technocratic-minded
Democrats to steer the economy through the crisis. At least one Democrat party
operative recently told a foreign analyst with a multinational bank that the
party is reveling in the public's fading faith in the PPP's ability to manage
the economy.
Opposition politician Sansern says the Democrats have no intention of winning
power in a worst-case economic collapse scenario and that his party would
assume office only with the support of "the people" or "coalition partners".
Unlike in 1997, Thailand's new economic problems are directly linked to the
country's divisive political crisis, leaving some to wonder whether either
party to the conflict necessarily has the country's best interests in mind.
Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be
reached at swcrispin@atimes.com
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