The urge to splurge in Thailand

 Asia Time Online - Daily News

Nov 3, 2007

By Shawn W Crispin
BANGKOK – All of the main political parties set to contest Thailand’s December 23 polls have vowed to ramp up spending and put the economy back on track. Yet the odds are against the country’s next democratically elected government lasting long enough to honor those populist pledges.

The Thai economy has slipped under the junta’s watch, lagging
behind the economic growth rates seen in several other regional economies. Meanwhile, foreign investors have openly lamented the military-appointed government’s economic management since coupmakers seized power from deposed prime minister Thaksin Shinawatra in September 2006.

Those complaints have centered on the decision to impose capital controls on equity, bond and currency transactions, the central bank’s unorthodox and restrictive handling of interest rate policy, nationalistic proposals for amending the Foreign Business Act and the politicized cancellation of certain state contracts and seizure of certain foreign-held assets.

The still unresolved political situation, including lingering concerns that the junta might backtrack on its previous promise to restore democracy through new elections, have weighed against local business and consumer sentiment. Private investment contracted in the third quarter, while whole segments of the local economy are in recession. Mobile telephone companies have reported for the first time ever declining usage rates.

Some economic analysts believe the Thai economy could slip further as a slowing US economy starts to drag on exports, which have recently been strong and contribute 70% of gross domestic product. There are concurrent concerns that spiking global oil prices will start soon to take a heavier toll on Thai industry, considering the country ranks as the largest oil importer as a percentage of gross domestic product (GDP) in Asia.

The poor economic news has been factored into political parties’ electoral strategies, with all of the main contenders avowing vigorous fiscal pump priming if elected. They have universally adopted Thaksin’s past successful campaign strategy, entailing promises of government handouts for the rural poor. While there is some financial space for more government spending, with official public debt at 37% of GDP and near 44% when including off balance sheet liabilities, the next government will be constrained by scheduled fiscal deficits of 1.7% and 1.8% of GDP for this year and next.

Populist consensus

The previous opposition Democrat Party is promising to restore the country’s neo-liberal credentials and usher in a new era of economic optimism, by making amends with alienated foreign investors topped up with aggressive public spending. Democrat party leader Abhisit Vejjajiva has said that if his party wins enough votes to form the next government, he will prioritize scrapping the current government’s capital controls policy.

Deputy party leader and former investment banker Korn Chatikavanij, who would presumably take the finance portfolio of any Democrat party-led coalition, said during a recent private presentation to foreign investors in Bangkok that he would aim to quickly ramp up infrastructure spending, including plans for at least three new mass transit train lines in Bangkok, a major renovation of the country’s decrepit railway system and an expansion of irrigation systems in rural areas.

The party is also offering a raft of populist spending policies, including a new universal education system, an extension of the low-cost universal health care scheme first implemented by Thaksin’s government, and other schemes targeting the rural poor. To finance those schemes, Korn said the Democrats will be willing to pump up public debt to between 55%-60% over the next five years.

That, of course, all rings familiar with the People’s Power Party (PPP), the newly formed incarnation of Thaksin’s disbanded Thai Rak Thai (TRT) party. The PPP says it plans to maintain the TRT’s past policies, including a heavy new dose of populist spending programs and a new push to follow up the ambitious infrastructure spending plans Thaksin first proposed but never implemented, which before the baht’s recent appreciation was scheduled to amount to about US$44 billion over five years.

The PPP’s populist programs include the continuation of the TRT’s former revolving village fund, a debt moratorium for farmers, as well as the establishment of a new so-called People’s Bank, which would be charged with providing start-up capital to budding rural entrepreneurs. The policies also include agriculture price supports, which historically have proved costly and done little to address underlying economic weaknesses in the rural economy. However, the policies are designed to give cheer to the PPP’s faithful supporters in the poor north and northeastern regions of the country, which proportionally accounts for about 260 of the Lower House of Parliament’s 480 seats.

Post-coup party defections and the ban on 111 former TRT executive members, including former finance minister Somkid Jatusripitak, raises new questions about the PPP’s technocratic competence and ability to manage spending. It’s unclear wh

exactly the upstart party would put atop the main economic portfolios if it formed the next government, but the party’s candidate list is lacking in economic and financial gurus.

Meanwhile, the upstart Matchima Thippitai Party (MTP), led by former cement and petrochemical tycoon Prachai Leophairatana, is promising an even more aggressive populism of 42 welfare-oriented policies. The MTP’s targeted infrastructure spending
plans overlap with those of the Democrats and the PPP, including new mass transit lines for Bangkok and a major upgrade of the national rail system. However, Prachai has also oddly broached resurrecting the Kra Canal project, which was first talked of over a century ago but never realized because of the extraordinary costs involved. The project would cut across southern Thailand to link the Andaman Sea and the Gulf of Thailand, saving maritime traffic from having to use the Malacca Strait.

The MTP is also offering to serve up an even larger entree of populist spending programs, including a significant expansion of the previous government’s universal health care scheme, doubling the size of the previous government’s 1 million cows policy to 2 million cattle, and a richer universal education scheme, including free food, uniforms and textbooks for schoolchildren.

Prachai, who famously defaulted on billions of dollars worth of debts held by foreign banks in the wake of the 1997-98 Asian financial crisis, and who also helped to finance the anti-government rallies which contributed to Thaksin’s demise, has let it be known he expects to be appointed finance minister in exchange for delivering his elected MPs to any Democrat-led coalition government.

Moreover, his pitched battle with foreign creditors to retain control of his indebted companies, and his recent statement that Thailand needs to follow the strong state-led economic models seen in Singapore and Malaysia, have already raised reservations among some foreign analysts about a new wave of market-distorting economic nationalism if Prachai has significant sway over the next government’s economic policymaking.

Fiscal fears

Fears of a possible fiscal blowout similarly attended Thaksin’s populist pledges after his landslide election win in 2001. Despite a weak fiscal position and underlying financial problems on bank balance sheets, those concerns never materialized as the country exported itself back to financial health. Despite aggressive political marketing, Thaksin’s grassroots spending never amounted to more than 80 billion baht (US$2.5 billion) per year, much less than the amount he dedicated to bailing out indebted corporate elites through the Thailand Asset Management Company.

While Thailand now has more fiscal room to maneuver, with strong reserves and a more manageable public debt load, some economic analysts still fear that poorly designed populist spending programs could give rise to new financial problems, particularly if they lead to one-off spending and fail to spark substantially faster economic growth. Local investment bank Phatra Securities warned in a recent research note that “more populist spending by the next government could seriously affect the country’s fiscal position over the medium term” – particularly if as expected export growth continues to slow.

Yet it seems just as likely that the next government will not be able to spend as fast as promised on the campaign trail. Even Thaksin’s aggressive approach to fiscal spending was restrained by a slow-moving bureaucracy, where several layers of approvals are required to actually disburse funds earmarked and approved by Parliament. Now with the recent investigations into and recriminations against Thaksin’s government, the bureaucracy is likely to move even slower when making future disbursements, due to concerns that they could be held accountable in a possible future opposition-led purge.

At the same time, the old-school machine politicians queuing up to join the next coalition government will after several years of political paralysis and a recent period of military rule be eager for new government contracts to revive their starved patronage networks. If history is any guide, competing political interests in the next coalition government will complicate the design and delivery of both populist and big-ticket infrastructure projects and the inability to ram through spending will likely put added stress on what is expected to be an already delicate political balance, regardless if the Democrats or PPP are in the lead.

Indeed, Democrat deputy leader Korn recently told a group of foreign investors that his party expects the next coalition government to last for only two of its four-year term before collapsing due to factional infighting. He said that if the Democrats form the next government they plan to quickly ramp up spending and stimulate the local economy to bolster their chances at the next round of polls. If that’s the plan, it seems unlikely all the political spending promises will be money well spent.

Shawn W Crispin is Asia Times Online’s Southeast Asia Editor. He may be reached at
(Copyright 2007 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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