OVERDRIVE: Thaksin has to get tough or economic reality will
Published on Aug 13, 2004
For the first time, Prime Minister Thaksin Shinawatra's ability to manage the economy is going to face some real tests this year as things do not look as rosy as they did during his first three years in office. One's ability to lead is clearest in times of trouble.
Going forward, we're beginning to see a lot of uncertainty and complications shaping up caused by higher oil prices, higher interest rates, inflationary pressure, slower economic growth, plunging consumer confidence, a looming trade deficit, a plummeting stock market and a corporate profit squeeze.
Does Thaksin have a strategy to deal with these complications, which are very complex and will require a mastery of management to sustain Thailand's growth and stability? As you might recall, during his first three years in office, Thaksin acted as if he had the Midas touch. He surprised a lot of people with his magic as the stock market rose sky high, the economy grew by 7-8 per cent, consumers went on a spending spree, the real estate sector saw a turnaround, exports surged to record highs and so on. This allowed him to hand out easy money to the Thai people, who all felt happy to be living in such prosperous times.
However, these phenomena were brought about largely by macroeconomic stability, such as the low interest rate environment, competitive baht devaluation, low foreign debt and stronger international reserves, all of which had been achieved before he came to power. All Thaksin needed to do was to step on the gas pedal.
But he could not keep his foot on the pedal forever. As a driver, one needs to negotiate curves by slowing down or even jamming on the brake when the road gets bumpy. Thaksin is managing the Thai economy as if he were travelling in the fast lane all the time.
It would serve Thailand well if Thaksin steered the Thai economy towards growth of 5-6 per cent. This would give him more time and energy to focus on strengthening the country's fundamentals or to embark on regulatory reform. Strangely, the National Economic and Social Development Board is dancing to Thaksin's tune of 7-8 per cent growth, which is not sustainable. And nobody has raised any objections.
What's happening with all the smart people in Thailand, the ones with PhDs from the famous economics schools in the US and Europe? A growth rate of 7-8 per cent would lead to over-investment and a current account deficit. Didn't we learn anything from the 1997 financial crisis?
The easy money put into the pockets of villagers during the administration's first three years was understandable and forgivable. But Thaksin has continued to poison the public with easy money from the SML programme this year, an election year. This is bad policy.
As the oil prices continue to rise, touching a record US$45 (Bt1,900) a barrel in the US futures crude market, it is clear that Thaksin's energy policy has become a big mess. Instead of allowing domestic oil prices to reflect global oil prices, he has elected to subsidise local prices in order to please local consumers. During an election year, Thaksin does not want to do anything to upset the voters.
So the public goes about its normal business. People fill up their tanks without having any second thoughts because oil prices are really cheap. Trucks using diesel also race against the storm on the highways. As a result, the import bills surge, threatening to wreck Thailand's trade balance. If things continue this way, we'll soon face a lingering trade deficit and a current account deficit.
A current account deficit - in which there are more outflows of goods and services than inflows - would force Thailand to keep interest rates high in order to attract the foreign capital needed to finance the investment gap. During this time of global uncertainty, Thailand is not yet ready to run a current account deficit because there are not a lot of foreign lenders or investors out there who are willing to commit their capital to Thailand over the long term. And higher interest rates would mean that Thailand would have to sacrifice its economic growth.
If the Thaksin government freed up the domestic oil prices, the prices of consumer goods would jump quickly because they have been kept artificially low. Then the Bank of Thailand would have to raise interest rates in order to keep inflation at bay.
The situation has been aggravated by the rise in the US short-term rates, which have already hit 1.50 per cent compared to Thailand's 1.25 per cent. By the end of the year, the US rates are expected to rise further to 2 per cent. The Thai rates will have to play catch up.
We know darn well that if rates rose by two percentage points from their current level, all the Thaksin government's easy money programmes would go bankrupt. A trade deficit would further impair Thailand's stability. Looking ahead, the macroeconomic complications would intensify and there would not be an easy way out for the Thaksin II administration, which would be forced to come to terms with reality. By then it might be too late.
THANONG KHANTHONG
Published on Aug 13, 2004
For the first time, Prime Minister Thaksin Shinawatra's ability to manage the economy is going to face some real tests this year as things do not look as rosy as they did during his first three years in office. One's ability to lead is clearest in times of trouble.
Going forward, we're beginning to see a lot of uncertainty and complications shaping up caused by higher oil prices, higher interest rates, inflationary pressure, slower economic growth, plunging consumer confidence, a looming trade deficit, a plummeting stock market and a corporate profit squeeze.
Does Thaksin have a strategy to deal with these complications, which are very complex and will require a mastery of management to sustain Thailand's growth and stability? As you might recall, during his first three years in office, Thaksin acted as if he had the Midas touch. He surprised a lot of people with his magic as the stock market rose sky high, the economy grew by 7-8 per cent, consumers went on a spending spree, the real estate sector saw a turnaround, exports surged to record highs and so on. This allowed him to hand out easy money to the Thai people, who all felt happy to be living in such prosperous times.
However, these phenomena were brought about largely by macroeconomic stability, such as the low interest rate environment, competitive baht devaluation, low foreign debt and stronger international reserves, all of which had been achieved before he came to power. All Thaksin needed to do was to step on the gas pedal.
But he could not keep his foot on the pedal forever. As a driver, one needs to negotiate curves by slowing down or even jamming on the brake when the road gets bumpy. Thaksin is managing the Thai economy as if he were travelling in the fast lane all the time.
It would serve Thailand well if Thaksin steered the Thai economy towards growth of 5-6 per cent. This would give him more time and energy to focus on strengthening the country's fundamentals or to embark on regulatory reform. Strangely, the National Economic and Social Development Board is dancing to Thaksin's tune of 7-8 per cent growth, which is not sustainable. And nobody has raised any objections.
What's happening with all the smart people in Thailand, the ones with PhDs from the famous economics schools in the US and Europe? A growth rate of 7-8 per cent would lead to over-investment and a current account deficit. Didn't we learn anything from the 1997 financial crisis?
The easy money put into the pockets of villagers during the administration's first three years was understandable and forgivable. But Thaksin has continued to poison the public with easy money from the SML programme this year, an election year. This is bad policy.
As the oil prices continue to rise, touching a record US$45 (Bt1,900) a barrel in the US futures crude market, it is clear that Thaksin's energy policy has become a big mess. Instead of allowing domestic oil prices to reflect global oil prices, he has elected to subsidise local prices in order to please local consumers. During an election year, Thaksin does not want to do anything to upset the voters.
So the public goes about its normal business. People fill up their tanks without having any second thoughts because oil prices are really cheap. Trucks using diesel also race against the storm on the highways. As a result, the import bills surge, threatening to wreck Thailand's trade balance. If things continue this way, we'll soon face a lingering trade deficit and a current account deficit.
A current account deficit - in which there are more outflows of goods and services than inflows - would force Thailand to keep interest rates high in order to attract the foreign capital needed to finance the investment gap. During this time of global uncertainty, Thailand is not yet ready to run a current account deficit because there are not a lot of foreign lenders or investors out there who are willing to commit their capital to Thailand over the long term. And higher interest rates would mean that Thailand would have to sacrifice its economic growth.
If the Thaksin government freed up the domestic oil prices, the prices of consumer goods would jump quickly because they have been kept artificially low. Then the Bank of Thailand would have to raise interest rates in order to keep inflation at bay.
The situation has been aggravated by the rise in the US short-term rates, which have already hit 1.50 per cent compared to Thailand's 1.25 per cent. By the end of the year, the US rates are expected to rise further to 2 per cent. The Thai rates will have to play catch up.
We know darn well that if rates rose by two percentage points from their current level, all the Thaksin government's easy money programmes would go bankrupt. A trade deficit would further impair Thailand's stability. Looking ahead, the macroeconomic complications would intensify and there would not be an easy way out for the Thaksin II administration, which would be forced to come to terms with reality. By then it might be too late.
THANONG KHANTHONG
posted by Bob Boonhod @ 9:59 AM
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