ON AUG 22, when Thailand’s National Economic and Social Development Board (NESDB) announced that the economy had slowed unexpectedly in the second quarter, observers were quick to express dismay. The new administration of Prime Minister Yingluck Shinawatra, however, was probably quite pleased.

Gross domestic product (GDP) rose 2.6 per cent in the three months through June from a year earlier, after climbing a revised 3.2 per cent in the previous quarter, the NESDB said. A survey of 13 prominent economists by Bloomberg had previously shown that most observers were expecting a 3.6 per cent gain.

Echoing the populist policies of her elder brother, deposed former prime minister Thaksin Shinawatra, Ms Yingluck plans to cut taxes, build railway lines and provide free computers to students as part of plans to boost economic growth. Her party has also promised to raise the daily minimum wage to 300 baht (S$12). This is almost double the current pay in some parts of the country. Several economists argue that the move could force small and medium-sized enterprises out of business.

In the weeks leading up to Ms Yingluck’s installation earlier this month, economists had been expressing concern about the inflationary implications of the big-spending programmes promised by the now ruling Puea Thai party during the July election campaign.

“The economy doesn’t need much stimulus like during the recession in 2009,” economist Pornthep Jubandhu at Siam Commercial Bank in Bangkok told Bloomberg News before the second-quarter figures were released. “We should save the bullets to use later when needed as we still have a bumpy road ahead.”

Annual core inflation in Thailand was 2.59 per cent last month, close to the upper end of the central bank’s target range of 0.5 to 3.0 per cent.

Now, however, Ms Yingluck and new Finance Minister Thirachai Phuvanatnaranubala have been given fresh ammunition to support their case. With growth declining, it is much easier to argue that the economic stimulus resulting from a sharp increase in government spending will do little harm.

Senior government officials such as Mr Thirachai and Commerce Minister Kittirat Na Ranong argue that higher interest rates designed to curb inflation will add to the burden of manufacturers already weighed down by the high cost of fuel.

The Bank of Thailand (BOT), however, remains unconvinced. Despite the economic slowdown, the BOT raised its benchmark one-day bond repurchase rate by a quarter of a percentage point to 3.5 per cent on Aug 24. This was the ninth time it has boosted borrowing costs since July last year. Like many independent economists, central bank officials probably see the disappointing second quarter as little more than a temporary blip. After all, much of the weakness was brought about by supply disruptions in the auto industry caused by natural disasters in Japan.

“Inflation targets have been designed to manage future consumption. If we can manage this it will be all right, but if we cannot, investors will lose confidence. High inflation will wipe out profits,” BOT’s director of macroeconomy Songtham Pinto noted in the days leading up to the bank’s announcement.

Government spokesmen admit that some inflation is inevitable, particularly if officials press ahead with plans to raise the price of rice paid to farmers in order to lift their incomes. But they also maintain that the problem can be managed.
According to Commerce Minister Kittirat: “Domestic rice prices might escalate, but be sure the government will assist consumers to cut expenses on other goods through Blue Flag shops.”

Blue Flag is a scheme under which the Commerce Ministry encourages manufacturers and suppliers to sell products at lower prices. There are 4,300 Blue Flag food shops in the country; the ministry plans to raise the number to 6,000 this year.
The new policymakers in Bangkok face other potential objections to their spending plans. The government has made pledges that require financing well beyond what can be provided by tax revenues. This is particularly so since the government has also said that it wants to reduce corporate tax rates.

But running fiscal deficits, and therefore incurring more debt, may not be wise.

Thailand’s debt to GDP ratio (42 per cent) is not high compared to financially troubled countries such as Italy (120 per cent). But seen in the context of the country’s low tax revenue base, the situation looks very different. Local observers are already beginning to point out that Thailand’s debt is equal to 250 per cent of tax revenue, not much different from Italy’s 260 per cent.

For a government intent on rewarding its poor rural supporters yearning for change, however, such matters may not seem very important. The road ahead will therefore require careful handling.

Copyright © 2011 Singapore Press Holdings Ltd