Economic Update
With adequate liquidity reserves and limited foreign exposure, Thailand has done better than its Asian peers in sustaining the full onslaught of the global financial crisis. But with demand for exports at historical lows, the newly appointed government has had to rush in with a fiscal plan of its own to save jobs and kick-start the flagging economy.

In contrast to large countries such as China and the US, Thailand has decided to largely focus its stimulus package on social spending, rather than on infrastructure and construction programmes that various other crisis-stricken countries in the region have adopted.

Under the proposed plan, low income groups that earn less than 14,000 ($400) per month will receive a one-off payment of 2000 baht ($57) to be disbursed through the Social Security Fund in April. There are, according to official estimates, around 9m people who fall within this income category, which means the total amount of spending is expected to reach 18bn baht ($514m).

Other projects include 9bn baht for senior citizens aged 60 and above; 6.9bn baht for retraining unemployed workers; 3bn baht for community-based public-health workers and 15bn baht for local enterprises.

Of the 17 projects included within the package, social spending constitutes the biggest item, estimated at around 52bn baht ($1.5bn). In other words, 45% of the entire spending package will be spent on putting money into people’s pocket.

The recently formed government led by Prime Minister Abhisit Vejjajiva hopes that this first in the series of planned fiscal stimuli will boost the weakening domestic demand as people spend their extra income on locally produced goods. Finance Minister Korn Chatikavanij recently told local media that the Keynesian programme will help stimulate economic growth in 2009, putting it close to 2% , compared to an estimated 3.9% in 2008 according to World Bank figures.

A number of local economists and business leaders have expressed doubts as to whether this particular kind of stimulus will have the desired effect. Sompop Manarungsan, an associate professor of economics at Chulalongkorn University in Bangok argues that “handouts do not guarantee that receivers will re-inject the money into the economy.”

Others, like Tanit Sorat, vice chairman of the Federation of Thai industries says the government should focus on long-term policies, because a quick spending programme would ‘go down the drain’.

Prime Minister Abhisit, himself an Oxford-educated economist, argues that this particular spending programme will reach people faster than some of the other programmes that suffer from a long lag time. He also told the local press, “Measures we are about to implement can be evaluated. We will see if domestic spending will increase or not.”

Some international economists such as the Nobel laureate Joseph Stiglitz, Professor of Columbia Business School, maintain that direct spending on social benefits have the largest multiplier effects. “Cash-strapped families spend every cent given – and meet vital social needs,” said Stiglitz in a recent article in the Financial Times.

If the 116bn baht ($3.31bn) allocated is indeed going to be spent on basic needs, the first fiscal stimulus package is likely to prove a good bang for buck, especially for people in agribusiness, given that the country is self-sufficient in important staples such as rice. Although Thailand has a diversified economy with a large manufacturing sector, some 40% of the labour force is employed in agriculture and the country is a major exporter of rice and agricultural commodities such as rubber, sugar, and processed foods.

Nonetheless, several commentators reckon that the new measures are largely motivated by political considerations and the need for the new government to consolidate its grip on power following months of political unrest.

Stabilising Thailand’s politics would certainly help to put the economy back on track as some feared that the political unrest combined with the global financial crisis was eroding consumer confidence.

Following the resolution of the political crisis, the consumer confidence index conducted in December did show a slight improvement, even as global economic challenges weighed on the overall spending levels.

The main drawback of the latest fiscal measure, critics say, is that is has no lasting effect and therefore not a long-term solution. The government is however launching other programmes to address some of the long-term issues, such as weakness in the real estate market and a lack of financing to small and medium-sizedenterprises (SMEs) and exporters.

Korbsak Sabhavasu, deputy prime minister in charge of economic affairs, recently announced that the government was planning to double the total amount of tax rebates on new home acquisitions. The government has also agreed to borrow 270bn baht ($7.71bn) from domestic banks to support 58 state enterprises that face liquidity issues.

As a result of the additional spending, the public debt is expected to rise from 36 to 42% to GDP – but this is still considered low by international standards. For instance, the Philippines government is expecting to reduce the country’s debt-to-GDP ratio from 56% in 2007 to 50% in 2008, while the ratio of debt to GDP in Pakistan touched 56.2% at the end of June 2008. Not to mention Italy, which currently has the world’s second-largest sovereign debt to GDP ratio at around 105%.

The larger issue however is that Thailand’s new government’s ability to stimulate the economy with cost subsidies (or any sort of fiscal policy) is certainly going to be limited, since the government’s budget has a relatively low weight in the economy, especially when compared to countries such as Indonesia which have a significant number of state-owned economic champions. Public investment accounts for 17% of GDP in Thailand, compared to 20% in countries like Malaysia, which limits borrowings and what the governement can do in the fiscal area.

For instance, the current social spending plan of 116bn baht ($3.31bn) translates to around 1% of the total GDP, making it in relative terms much smaller than the fiscal stimulus package announced by the Chinese government back in November 2008, which amounts to 15% of its GDP.

The memories of the 1997-98 Asian financial crisis dictate that the government should be very careful not to increase its level of external borrowing to avoid a collapse of its currency and total financial meltdown. The overall size of the fiscal stimulus to come is therefore determined largely by the government’s access to domestic liquidity and constrained by the underlying monetary and fiscal prudence that have helped Thailand to steer through rough waters so far.