Thailand: Balancing act

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The government of Thailand is struggling to maintain a balance between its efforts to lower the budget deficit and its policy of mitigating the impact of rising prices, with fiscal prudence coming into conflict with social responsibility and political expediency.

Though Thailand’s economy is expected to grow by around 4.5% this year, slower than the 7.8% increase in GDP in 2010, rising demand and higher costs for some essential products are expected to push up the inflation rate. In early March the central bank revised up its inflation forecast for 2011, saying that price increases would be in the 3-5% range this year. As of the end of February, year-on-year inflation was running slightly outside that bracket, at 2.87%, though analysts believe the rate has been kept down by price controls.

Bank of Thailand’s governor Prasarn Trairatvorakul warned on March 22 that rising inflation remained a concern, though it was hoped that several interest rate hikes would help to take some of the heat out of the economy. The bank raised its benchmark rate by 25 basis points on March 9 to 2.5%, a move aimed at easing consumer demand.

“Gradual normalisation of the policy rate remains appropriate for anchoring inflationary expectations and reducing the risk of financial imbalances in the economy,” the bank said in a statement announcing the increase.

Inflationary expectations may be of increasing interest as 2011 progresses, bringing Thailand’s general election ever closer. An exact date has not been set for the ballot, though Prime Minister Abhisit Vejjajiva has said he could dissolve parliament in May to bring on an early election, though the official election date is not until December.

One factor that he may take into consideration before calling the general election will be the progress in reining in inflation. Climbing costs for many staples, including basic foodstuffs, as well as higher fuel prices, have put consumers under pressure. In late March Abhisit said his government was looking at ways to lower prices and increase income, saying the objective was to “put money in people’s pockets so that they can cope with rising prices.”

A 25% increase in the minimum wage, which will be spread out over two years, has already been mandated, and a subsidies regime to take some of the heat out of food and fuel price rises has been enacted. In spite of these measures, inflation is still having an impact on lower- and middle-income households – the electoral heartland that Abhisit’s Democrat Party and its allies need to win over to strengthen its hold on power in the coming ballot.

While the government will be keen to hold down price rises, it will also be mindful of the need to keep the budget deficit in check. On March 28 the finance minister, Korn Chatikavanij, said the deficit should be reduced from 5% of GDP in 2010 to around 3% in 2011, though this would require the government to decrease the amount of money it allocates to fuel subsidies.

Having already spent heavily on oil price support schemes for this year, Korn said the fund would not be allowed to dip into the red. Given that the oil fund could run dry by July, the minister told delegates at an investors’ seminar in Bangkok that costs at the pump could increase.

“We will not let the oil fund sink into debt to the tune of $2.7bn-3bn like the past government,” Korn said. “The diesel subsidy will depend on the amount of money in the oil fund.”

The minister has already conceded that removing or reducing the fuel subsidy will have a flow-on effect for the economy, noting that the inflationary pressure it would add could pose problems. These difficulties could be exacerbated by the government’s plans to raise wages above the expected rate of GDP growth. Higher household incomes could result in further increases in consumer demand, which in turn could pump up inflation.

Though the destructive earthquake and subsequent tsunami that struck Japan in mid-March will undoubtedly affect Thailand, potentially cutting GDP by around 0.1- 0.2% this year, overall demand and continued high rates of capital inflow are expected to keep the local economy active, which will benefit the government electorally. However, the concern remains that economic activity could be accompanied by an upward spiral of inflation, which could erode the potential economic gains and the stock of credit the government has with the electorate.

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