Populist promises could open door to economic reform

EDITORIAL
Populist promises could open door to economic storm
By The Nation
Published on July 27, 2011


Though Thailand's finances are relatively strong, shock waves from crises in US and Europe are a worry

Thailand should be able to withstand the financial turbulence caused by the current international economic whirlwind.

Although the Southeast Asian region is likely to enjoy a strong performance compared to other parts of the world, the crises in the euro zone and the US have affected capital flows in recent weeks.

While euro-zone finance ministers are battling to fix the Greek crisis, US President Barack Obama earlier this week warned of a "deep economic crisis" if Washington fails to raise the US debt limit.

If the US Congress does not reach an agreement to raise the debt ceiling by Tuesday, America faces potential economic disasters that include higher interest rates that could dampen consumption.

Thai stock and currency have been in an upward trend recently, partly because the financial problems in other countries have encouraged foreign investors to deem Thai assets safer than others.

Financial ratings agency Standard & Poor's predicts that the fallout from the US debt ceiling stand-off will have a limited impact on banks in Southeast Asia. The S&P report forecasts continued robust economic conditions in Southeast Asia and strong domestic saving rates.

The baht, according to Bloomberg, will likely strengthen 0.8 per cent against the dollar this week. Thailand's currency may match a 13-year high of Bt29.46 reached in November. "We will probably meet substantial support for the dollar at 29.46 because we are going toward territory we have not been in since 1997," Kobsidthi Silpachai, head of capital-markets research at Kasikornbank, was quoted by S&P yesterday.

But the appreciation of the baht, which recorded an eight-month high this week, does not translate as good news for everyone. Thai exporters may lose some price competitiveness due to higher costs as a result of the stronger baht.

However, though it is generally good news that the region's economic health should give us stronger immunity than others, it would be wise to guard against complacence. Financial woes elsewhere could add to the pressure on the Thai economy.

How to withstand the financial turbulence will be the challenge for the incoming government. Although the robust performance of Thai stocks in recent weeks reflects overseas investors' optimism that the new government's policies will spur the economy, accelerating inflows can also add pressure to the value of the baht.

Of late, the baht's gains have been highest among the Asian currencies. Analysts expect it to appreciate further to Bt29.50 over the next two weeks.

The Thai economy will likely face inflationary pressure, spurred also by robust demand as a result of the new government's policies to boost domestic consumption. Local demand is likely to increase after implementation of the increased minimum wage and other populist policies.

In the meantime, the Bank of Thailand is likely to tighten monetary policy to boost the country's immunity to possible crises.

Although the economies of Thailand and Southeast Asia are considered to be healthy so far, shock waves from the crises in the West could change that picture quickly.

This being the case, the incoming government needs to exercise discretion in its economic policies so as to avoid overburdening the public finances.

Before acting on its election promises, the government should consult with all agencies and carefully weigh up the pros and cons before deciding on critical policies that could otherwise wreck

Thai stability and upset both the monetary and fiscal sides of the economy.