Government Wants People To Spend More

[Jai Dee]

Thailand Needs Reduced Interest Rate to Spur Economy

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.

Source: Bloomberg - 26 March 2007

[thedude]

Thailand Needs Reduced Interest Rate to Spur Economy

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.''

Source: Bloomberg - 26 March 2007

thats my quote of the month.

the most sensible thing i've heard from this government.

so all that chastising of thaksin for injecting money to the grassroots was....misguided?

history will show that it was the populist schemes that kick started the economy after the IMF loans were repaid. between 2002 and 2005 thailand was at the forefront of economic growth in the region, look at us now.