Will Thaksinomic Bubble Burst?

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Will Thaksinomic bubble burst?

TROUBLE IN SOUTH THAILAND, THEN BIRD FLU HITS

By Azhar Ghani

IN 2003, Thai Prime Minister Thaksin Shinawatra could do no wrong.

Thaksinomics resulted in a fast-expanding middle class.

It also gave the Thais a growing domestic economy which promises to free the kingdom from being over-dependent on exports.

Last year, the economy grew 6.3 per cent - second fastest in the world behind the Chinese juggernaut's 9 per cent.

And, as the stock market skyrocketed - by more than 80 per cent - so did the confidence of the tycoon-turned-politician.

While ushering in 2004, Mr Thaksin boldly predicted that it would be 'a golden year for Thais all over the country'.

His optimism was shared by Thai think-tank National Economic and Social Development Board, which said that growth could hit 7 per cent or 8 per cent in 2004.

Indeed, when 2004 began, the year had looked like the providing the perfect run-up to Mr Thaksin's campaign in the 2005 parliamentary elections.

Yet, even before the first month of the year is up, Thailand has been rocked by strife in the Muslim-majority south.

Then, Mr Thaksin had to admit his government made mistakes in the current bird flu epidemic.

Some Thais believe the government had covered it up.

Also, there have been concerns about how Thaksinomics might prove to be a double-edged sword.

Bubble trouble

Essentially based on the old formula of boosting consumption through public spending and easy credit, Thaksinomics can cut two ways.

If the credit goes to productive uses and remains under control, things will go well.

If it goes into speculative bubbles, better pray that they don't burst.

In 1997, the bursting of Thailand's economic boom-turned-bubble set off a regional meltdown.

As it is, Thailand's debt-driven boom looks fine today.

But, only rapid growth and asset inflation can keep borrowers ahead of the game.

If the economy slows down, things will be risky because of Thailand's less than impressive post-1997 progress in ridding banks of bad loans.

In July last year, Standard & Poor's estimated that bad loans in the financial system accounted for about 30 per cent of banks' assets.

With the memory of 1997 still fresh, several observers have been urging the government to monitor prices of assets so that the economy doesn't overheat.

One such bubble could be in the property market - as it was in the 1990s.

Property bubble

Last year, buying and selling of land came up to more than 400 billion baht ($17.4b), up from some 172 billion baht in 2001.

But the Bank of Thailand (BOT) has recently urged all Thai commercial banks to closely monitor mortgage loans and household debt.

Banks were told not to lend buyers more than 70 per cent of a home's market value if they were buying homes costing 10 million baht or more.

Effectively, that required purchasers to make at least a 30 per cent down payment.

Starting this month, the BOT is also requiring financial institutions to report details of project financing for property developers who borrow 100 million baht or more on a quarterly basis.

Analysts believe the new central bank regulations will prevent a bubble-and-burst scenario.

Another potential bubble is in the stock market.

But Mr Thaksin has been quick to manage this, warning speculators.

Stock bubble

In December last year, he had said: 'Don't think that only stock regulations can punish them. If they don't stop, I will intervene.'

Thai regulators have also put in measures to cool the market down by making it more difficult to for stock punting by day traders.

This group buys and sells several times in a single day in the hope of making short-term profits.

Until recently, these trades had been virtually cost-free, with the investors expected to cover only losses and brokerage fees at the end of the trading day.

Since Dec 1, however, they have had to put up collateral amounting to 10 per cent of their purchases.

These anti-speculative measures have been enough to reassure some of those who were concerned about the potential bubbles.

Standard Chartered economist Usara Wirartich told The New Paper: 'I think Mr Thaksin is well aware of the danger of an overheating economy.

'But he doesn't want market forces to be excessively regulated either. His approach has been calibrated carefully.'

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Birds, bahts and blood baths

IF there were bubbles, what could cause them to burst?

Will it come from an economy derailed by the double whammy of the bird flu outbreak and strife in the south?

Signs - from the bird flu at least - have been ominous.

This week, the baht had its biggest decline in three months.

The stock exchange also saw many nervous investors selling off their shares.

But Standard Chartered's Ms Usara brushed these off as the market 'overeacting'.

She was even less concerned about troubles in the south.

In the latest round of violence, four Buddhist Thais - three monks and a policeman - were killed in separate incidents in the largely Muslim region.

Police believe the killings were carried out by apparently resurgent separatist groups which are also accused of attacking an army base and burning state schools early this month.

That incident led to a military clampdown, which is fuelling resentment against the national government. Home to most of the six million Muslims in largely Buddhist Thailand, the south has never been integrated into the national culture.

But Ms Usara is optimistic about the economy despite these problems. She recalls how Thailand came through during the region's brush with Sars last year.

She said: 'Tourists avoided Thailand because they were generally avoiding the region, even though we were Sars-free. Still, the Thai economy did well.

'So far, it hasn't been proven that the bird flu can be transmitted between humans, so tourism won't be hit worse than last year. And the poultry industry contributes only 0.7 per cent to Thailand's GDP. Also, the government's decisive measures should go some way in retaining investor confidence.'