Complacency The Biggest Danger For The Economy: Thai Editorial

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EDITORIAL

Complacency the biggest danger for the economy

The Nation

BANGKOK: -- The government seems oblivious to the dangers of overspending as it forges ahead to satisfy its supporters' craving for populist handouts

A recent warning by former deputy prime minister Somkid Jatusripitak on the possibility that the government may overspend to the point where the level of public debt could be too high to sustain in the future should be taken seriously.

Somkid warned the government over the current Bt400 billion budget deficit, saying that public debt could exceed 50-60 per cent of gross domestic product in the coming years. If that becomes the case, it could threaten sustainable growth.

Although economic ministers in the Yingluck government are trying to ward off such concerns by saying the fiscal stance is still very strong, the warning from Somkid, an economic minister during the Thaksin government, should be well heeded. He is sensibly able to envision the impact from overspending populist projects, especially when the government is finding it hard to finance them.

The government may be right to argue that the country's fiscal stance is still solid, with the public debt ratio to GDP at around 40 per cent. However, based on the current spending plan, the public debt could rise to hit 60 per cent in the next five years, unless the administration comes up with a better plan to finance these projects via other sources - except further borrowing.

However, the government has not spelt out plans to finance its massive populist projects via other potential sources such as tax reforms. The government has so far mentioned only plans to borrow or loosen the monetary policy.

The government may bet that the Thai economy will continue to grow at 5 per cent or more per annum and that it will be able to finance these projects through additional income. But the future of the economy is very uncertain; indeed, it could become highly volatile. Thailand is also set to face a series of challenges such as the effect of the minimum wage increases, whose longer-term impact is not clear yet. The country has barely recovered from the flood disaster of last year, and political divisions still run deep, with the potential for further conflict and destabilisation.

The United Nations Economic and Social Commission for Asia and the Pacific (Escap) has also pointed out that the Thai economy will be more influenced by external factors such as the ongoing euro-zone debt crisis. Apart from an expected lower demand for Thai exports from the EU markets, the crisis there could create more global volatility, affecting the inflow and outflow of capital.

Commodity prices are also volatile. In addition, Thailand is now facing stiff competition from other farm exporting countries in the region. India could soon become the world's biggest rice exporter. The opening up of Myanmar has turned that once-isolated pariah nation into an investment darling overnight. Therefore, the Thai government cannot be complacent with the current economic situation by borrowing more money on future expectations in order to finance the present projects whose returns are uncertain.

The government hopes that this series of big spending projects will generate high returns to offset the huge investments. But what will happen if that does not transpire? The Greek tragedy should serve as an example. The Greek government has not balanced a budget in nearly 40 years. Yet, the government there overspent to finance many projects such as the 2004 Olympics in Athens. Before that, Greece was seen as a rising star in Europe, until the inflated cost of many projects adversely affected its fiscal stance. No one could have anticipated what happened because of other unpredictable factors such as the US economic crisis in 2008, which also hit Europe.

Therefore, the Thai government cannot be too comfortable with the current situation, even though the Thai economy is predicted to grow along with other emerging Asian countries.

Sustainable growth depends on good management, which will provide the country with greater immunity to external shocks. Various economic reforms are still necessary to enable the country to step forward confidently. Unfortunately, these have yet to happen.

-- The Nation 2012-05-15

[Buchholz]

Is the banned-from-politics-until-May-30th Somkid bucking for his old chair as Finance Minister by rubbishing the current economic policies of the sister of his former boss?

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[retarius]

Good sensible stuff. I agree with raising the minimum wage to well above poverty levels but perhaps it should have been done more gradually...if it gives, as it does, reasons for businesses to price gouge, then the raise doesn't do much good as it gets eaten up by inflation.

Personally I don't much care if some of the 'foreign investment' (ie sweatshops) leaves the country...a lot of it is exploitative at best, near slavery at worst...and I still don't understand why I can buy a made-in-Thailand T-shirt in the US or UK for less than a much inferior quality one costs here...someone, somewhere is making a fortune on this

[belg]

with even more populist schemes to hand out the tax payers' money to those who never pay taxes or VAT in their lives, thailand might become the greece of asia

[Thai at Heart]

No one could have anticipated what happened because of other unpredictable factors such as the US economic crisis in 2008, which also hit Europe.

Depends if you realised all along that a monetary union with no fiscal union is in the long run impossible. A bit like running a free current account and a fixed exchange rate. Stupid economics. And as for Greece being considered a "star" of European economics, utter drivel.

It is the state pension, and fraud that has broken Greece.

[bigbamboo]

As someone who wants the best for the Thai people this article rings a warning.

The problem is this. The current government, like many others, is not made up of individuals who are competent and there seems to be little appreciation that the rest of the region is catching up and already overtaking Thailand in many areas they used to be the leaders.

As a teacher might say (in another country) time to buck up your ideas.

[GarryP]

So the gov't continues to do what it does best; line the ministers' pockets, pay back those who need paying back (through rigged bids or whatever) and in the meantime runs the country into the ground through populist policies and bullshit promises. When that happens they finally get voted out and another lot come in with better fiscal policies, which while dragging the country out of the doldrums hurt the average Joe, who then proceeds to vote back in the very people who caused his problem in the first place. Simplified to the extreme, but does that ring a bell.

[JohnAllan]

The government might very well hope that these big spending projects do generate high returns sufficient to offset the huge investments, but its priority with populist spending is to buy future elector loyalty, not to make money. And in many cases, subsidies underwritten by the long suffering taxpayer will undermine the positive benefits of high returns.

[JohnAllan]

So the gov't continues to do what it does best; line the ministers' pockets, pay back those who need paying back (through rigged bids or whatever) and in the meantime runs the country into the ground through populist policies and bullshit promises. When that happens they finally get voted out and another lot come in with better fiscal policies, which while dragging the country out of the doldrums hurt the average Joe, who then proceeds to vote back in the very people who caused his problem in the first place. Simplified to the extreme, but does that ring a bell.

Unfortunately, a global issue, and a side effect of democracy.

Edited May 15, 2012 by JohnAllan

[h90]

Is the banned-from-politics-until-May-30th Somkid bucking for his old chair as Finance Minister by rubbishing the current economic policies of the sister of his former boss?

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If one idiot calls another idiot "idiot", than he is still right...

[slapout]

This sounds like Thai talk/logic. Translation " Do not earmark monies to projects, to individuals or contractors and or Ministries, until we can get back into the feeding pen."

[rakman]

Good sensible stuff. I agree with raising the minimum wage to well above poverty levels but perhaps it should have been done more gradually...if it gives, as it does, reasons for businesses to price gouge, then the raise doesn't do much good as it gets eaten up by inflation.

Personally I don't much care if some of the 'foreign investment' (ie sweatshops) leaves the country...a lot of it is exploitative at best, near slavery at worst...and I still don't understand why I can buy a made-in-Thailand T-shirt in the US or UK for less than a much inferior quality one costs here...someone, somewhere is making a fortune on this

When salaries (minimum wage) are raised by government intervention, with no productivity increase, then inflation (and more unemployment ) is the result.

The unintended consequences is the opposite of what is promised to those on the bottom. Only getting people into better education will solve the problem. An educated work force is worth more and attracts investment. Minimum wage jobs are the entry positions, not a career.