Thailand Needs Reduced Interest Rate to Spur Economy

Bloomberg

By Beth Jinks and Haslinda Amin

March 26 (Bloomberg) — Thailand’s benchmark interest rate
must be cut from 4.5 percent to encourage consumer spending and
spur the slowing economy, Finance Minister Chalongphob
Sussangkarn said.

“Everybody knows that interest rates will go down. People
have stopped buying consumer durables, sales of cars have gone
down, housing loans have gone down,” Chalongphob said in an
interview in Bangkok on March 23. “Why would they buy today
when they can wait maybe a couple of months when rates become
lower, then they can get cheaper loans.”

The International Monetary Fund cut its growth forecast for
Thailand last week and said the government needs to increase
spending to boost growth. Chalongphob, who joined Thailand’s
junta-backed Cabinet earlier this month after his predecessor
quit, aims to spur the economy by restoring consumer and
investor confidence and speeding government spending.

“The finance minister’s most urgent tasks are to restore
confidence and get people to spend money,” said Aathira Prasad,
a Singapore-based economist at DBS Group Holdings Ltd. “There
is a lot of uncertainty about how everything is going to pan out,
and people are not willing to spend.”

The IMF cut Thailand’s economic growth forecast for this
year to 4.5 percent, the second reduction in six months, from 5
percent. The economy grew 5 percent last year as the strongest
baht in nine years erodes overseas sales.

Inflation Rate

Thailand’s inflation rate has dropped more rapidly than
interest rates have been cut, leaving the country with a real
interest rate that encourages saving, Chalongphob said.
Inflation fell to a three-year low of 2.3 percent in February
from a year earlier from as much as 6.2 percent in May last year.

Confidence of Thai and foreign investors was shaken when
the Bank of Thailand imposed currency controls in December,
triggering the stock market’s steepest slide in 16 years. The
central bank has cut its key rate twice this year to 4.5 percent
to stimulate growth amid terrorist attacks and discord within
the government installed after a Sept. 19 coup. Central bank
policymakers next meet on April 11 to decide interest rates.

“We definitely need a lower interest rate to boost the
economy, but I don’t think that will be enough to actually
restore the confidence of the Thai consumer as well as the
private sector,” said Nasu Chunsom, who oversees about $290
million in equity investments at Ayudhya JF Asset Management
Ltd., in Bangkok. “They need to come out with better policy to
actually generate growth and restore confidence.”

Monetary Policy

The Bank of Thailand’s charter gives it independence in
setting monetary policy. While the bank claimed it acted alone
in imposing the currency controls, Chalongphob’s predecessor
Pridiyathorn Devakula said at the time that he’d helped avert an
export “crisis” and an interest rate cut wouldn’t curb baht
gains. Pridiyathorn was central bank governor until joining the
Cabinet in October.

Chalongphob is Thailand’s fourth finance minister in two
years. He is a former World Bank economist who was a member of
Thailand’s monetary policy board from 2000 to 2001. He has a
doctorate in economics from Cambridge University.

“The fact that the interest rate has not dropped very
rapidly has many implications. This is another factor that the
Bank of Thailand monetary policy committee will have to take
into account,” he said. “I hope the way the monetary policy
will proceed from now will be able to look after the situation
better than in the past.”

Fiscal Policy

Thailand needs “counter cyclical” policies to jump-start
the slowing economy, Chalongphob said. The government would
consider raising government spending as a stimulus. Money
earmarked for overseas debt repayments will help as the stronger
baht has reduced the government’s offshore liabilities in baht
terms, he said.

“There is room for some shift in budget to make sure the
money that is spent goes to the people more quickly so it will
generate the multiplier effect that will move the economy
along,” he said. “That will go down to the grass roots
quickly.”

The government plans a third straight budget deficit in the
next fiscal year to Sept. 30, 2008, aiming for spending to
exceed revenue by 120 billion baht ($3.43 billion). This year’s
shortfall is estimated at 146 billion baht.

“We’re not really looking to fiscal policy as a means by
which the economy is going to be stimulated,” said James
McCormack, head of Fitch Ratings’ Asian sovereign ratings group.
He expects delays in starting projects will result government
spending falling short of target.

`Confidence Crisis’

Chalongphob also plans measures to help exporters, small
and medium-sized businesses and to revive the housing market, he
said, without elaborating.

“The economy is facing a confidence crisis,” said
Thanavath Phonvichai, an economist at University of Thai Chamber
of Commerce. “Government spending and lower interest rates
won’t be in time to spur consumption and investments in the
second quarter. Growth in the first half will be very weak.”

The junta-installed government’s reversal of many of
Thaksin’s populist policies that showered cash on rural areas
had caused “too much of a shock” and stalled consumption,
hurting businesses and the population, Chalongphob said.

“One of the main agendas is to inject more money into
grass roots, but try to develop a system that will make it more
prudent,” he said. “Of course you cannot wait until everything
is 100 percent prudent until you inject the money, otherwise
people will be dead.”

Liabilities

Topping Chalongphob’s fiscal reform agenda is public
accounting for contingent liabilities of government projects:
being transparent about the ongoing running costs and subsidies
needed to keep public works such as railways operating, he said.

Among other measures, Chalongphob said proposed tighter
laws on foreign ownership will probably be “weakened” as
previously suggested amendments are “too extreme.” Amendments
to the Foreign Business Act are being reviewed by Cabinet.

Chalongphob has limited time to implement his spending plan
and measures to buoy exports, which account for 60 percent of
the economy.

A national election will be held “on schedule,” junta
leader Sondhi Boonyarataklin said on March 20. Military leaders
pledged an election by October when they staged the Sept. 19
coup.

Last Updated: March 26, 2007 01:25 EDT

Bloomberg



Thailand May `Weaken’ Revised Foreign Ownership Laws (Update2)

By Beth Jinks and Haslinda Amin

March 26 (Bloomberg) — Thailand’s proposed tighter laws on
foreign ownership are “too extreme” and will probably be
“weakened,” Finance Minister Chalongphob Sussangkarn said.

Amendments to the Foreign Business Act, which restricts
overseas investment, voting rights in companies and the use of
local nominees to circumvent limits, are being revised and
should affect fewer industries, Chalongphob said.

“My own position is that this act is too extreme,” he
said in an interview in Bangkok. “We need to make sure that
when we pass this Foreign Business Act, it should be weakened
more than when it was introduced.”

Investors have been spooked by recent government and
central bank rule changes, including tightening foreign
ownership limits, capital controls and shareholder probes. The
military-installed government and regulators are reviewing
economic policies after consumer confidence slid to a six-month
low and foreign direct investment slumped.

“People’s concern reflects growing economic nationalism
and that could affect future policy decisions,” said Sriyan
Pietersz, head of research at JPMorgan Securities (Thailand) Ltd.
“It’s important for Thailand to dispel those impressions.”

Chalongphob joined Thailand’s junta-backed Cabinet earlier
this month after his predecessor, Pridiyathorn Devakula, quit.
Pridiyathorn backed the initial proposed changes to Thailand’s
Foreign Business Act.

`Social Pressure’

The Council of State, which reviews the legality of
legislation, has sent the Foreign Business Act amendments back
to the Cabinet for clarifications, and further softening is
probable before it is passed by the National Legislative
Assembly into law, Chalongphob said.

“There’s a recognition among policymakers that they do
need to be careful about Thailand’s image abroad,” said James
McCormack, head of Fitch Ratings’ Asian sovereign ratings group.
“Rightly or wrongly, from an international investor’s
perspective, it has been tarnished, and I think policymakers are
aware of that.”

The government “was under social pressure” to crack down
after the sale of Shin Corp. to investors led by Singapore’s
Temasek Holdings Pte, he said. Rather than toughening the
Foreign Business Act, which affects “a very broad base of
businesses,” the administration could have simply tightened the
Telecom Act and avoided scaring away investors.

`Wrong Impression’

“Many people within the National Legislative Assembly also
feel the same way, that this law may be giving the wrong
impression and it may impact our business environment in the
medium to long term,” he said. “Foreigners looked at this and
they’re very worried because they think Thailand is now not
welcoming foreigners.”

Thailand must also cut interest rates and speed up
government spending to stimulate consumer and investor
confidence and counter the slowing economy, hurt by prolonged
political instability and “harsh” policies, Chalongphob said.

Temasek, a Singapore state-owned investment company, led
investors last year to acquire 96 percent of Shin, a
telecommunications holding company, from investors including the
family of former Prime Minister Thaksin Shinawatra. The deal
aggravated street protests and deepened a political crisis that
culminated in Thaksin’s ouster in a coup in September.

Army chief Sondhi Boonyarataklin, who led the coup, said on
Feb. 16 he wants the nation to regain control of Thai assets
acquired by Temasek. Sondhi in January said that Singapore may
use Shin Corp.’s mobile-phone network and satellites for spying,
which the city-state and companies involved have denied.

The government can clarify “a few clauses” of the Telecom
Act to resolve ownership and security concerns related to Shin
Corp., Chalongphob said. It can also reduce the number of
industries affected by the Foreign Business Act.

“Thailand’s friendliness to foreign businesses and foreign
people in general is one of our main strengths,” Chalongphob
said. “We don’t want to throw away our main strength just
because we had to deal with something that happened because of
the last government.”

Last Updated: March 25, 2007 23:31 EDT

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