A year ago only bold analysts would have been willing to predict that Yingluck Shinawatra would survive six months as the new premier of Thailand.
Yet despite her inexperience and her government’s woeful handling of the country’s floods in late 2011, the sister of ousted former prime minister Thaksin has come through a year of Thailand’s notoriously rough politics with flying colours.
A poll conducted in May gave Yingluck, whose Pheu Thai Party won last year’s general election in July, a public approval rating of 64%. That was more than double the rating of opposition leader Abhisit Vejjajiva, the former premier who heads up the Democrat Party.
“Yingluck is new to politics and this is a huge advantage,” says Kongkiat Opaswongkarn, chief executive of Asia Plus Securitie s. “She is polite and, unlike her brother, she does not make enemies. As a result the political crisis has calmed down, which is positive for the business environment.”
Now comes the hard part. Yingluck needs to deliver on the populist manifesto of her Pheu Thai Party while keeping the budget deficit in check and maintaining the country’s solid ‘Baa1’/‘BBB+’/‘BBB’ credit ratings.
It won’t be easy. In the first quarter of 2012, government spending jumped 33% year-on-year to THB685 billion (US$21.46 billion), largely thanks to expenditure on flood rehabilitation projects. For the new fiscal year beginning October 1, 2012 the Yingluck government plans to spend a record THB2.4 trillion.
The plan is to stimulate domestic consumption. But experts have their doubts.
“The government has a clear plan to rebalance Thailand’s economy away from exports by stimulating domestic demand and boosting rural income,” says Therapong Vachirapong, strategist at Phatra Securities. “It is a sensible policy. But it is difficult to make adjustments to an economic model that has been in place for so many years.”
Others go further, dismissing Yingluck’s spending plans as imprudent, populist and lacking an economic foundation.
“The government should be focusing on education and vital infrastructure like roads, shipping ports and airports rather than spending a lot of money building up the popular vote,” says Poe Lothongkam, chief executive of SVI, an electronic parts manufacturer based outside of Bangkok. “Big projects take a long time, but they don’t win votes.”
It’s not the first time that the business community has raised the red flag over policies that appear to prioritise voter satisfaction over economic improvement. Many economists predicted that the economic policies of Yingluck’s brother Thaksin – a set of rural-targeted policies dubbed ‘Thaksinomics’ – would bankrupt the country during his stint in power.
Instead Thaksin presided over a period of rapid growth; Thailand’s economy expanded by 5.3% in 2002, 7.1% in 2003 and 6.3% in 2004.
Can his sister do the same?
Ambitious agenda
By any standards, the Yingluck government’s list of election promises is a long one. It includes everything from a three-year debt moratorium for farmers to free computer tablets for primary school children, tax exemptions for first-home buyers, cuts in corporate income tax and increased incomes for civil servants and public employees.
The results so far have not been impressive.
Back in October, the government introduced a rice pledging scheme designed to prop up world rice prices and boost earnings for farmers. Under the programme, it agreed to pay farmers THB15,000 a tonne for white paddy rice.
The problem is that such high prices have made Thai rice uncompetitive on the world market, which has hurt export revenue. According to the Thailand Development Research Institute, the rice scheme could incur losses of up to THB70 billion, or US$2.2 billion.
Ironically the scheme may mean that Thailand forfeits its status as the world’s largest rice exporter. “The aim of this policy was to win votes,” says one analyst. “But it is not a good policy.”
Other populist programmes have also had mixed outcomes. In March, the cabinet gave the green light for the purchase of 400,000 tablet computers to be given free to primary children under the government’s ‘One Tablet PC Per Child Programme’. However the signing of the US$32.8 million contract had to be repeatedly delayed following disagreements with the Chinese supplier.
Such outcomes have led to cynicism over the capability of the politicians at the top. “The performance of this government is quite moderate compared with the high expectations,” says Poramet Tongbua, senior analyst at Bualuang Securities in Bangkok. “A lot of ministers are not qualified to do their job.”
The government’s most recent policy initiative has been its most populist, and most controversial. On April 1, it raised the minimum daily wage by 40% to THB300 a day.
The increase will initially apply to Bangkok and seven provinces. Starting next year, it will be implemented nationwide.
Coming so soon after last year’s devastating floods, the outcry from the private sector was entirely predictable. “The THB300 minimum daily wage will hit labour-intensive companies across the board,” says Poe of SVI. “I suspect that you will see companies migrate out of Thailand to other countries like Indonesia and Vietnam, which have lower labour costs.”
But while the higher minimum wage raises the cost of production, it also puts money in the hands of consumers and boosts domestic consumption. This is vital if Thailand is to move away from its reliance on exports.
Debt management
Despite the government’s ambitious spending plans, on paper at least it shouldn’t struggle to fund them.
According to the Public Debt Management Office, Thailand’s public debt at the end of February totalled THB4.3 trillion, or 40.57% of GDP. That’s a healthy figure compared to many neighbouring countries. Malaysia’s stood at 53.5% at the end of 2011, while the Philippines’ was at 50.9%.
Thailand’s public debt burden is projected to rise further, to 48.7% of GDP in fiscal 2012 and then to 53% in 2016, partly as a result of borrowings to fund water-management projects. Such levels are still well below the 98% average for the ailing eurozone.
“Thailand is in the fortunate position of being able to entertain quite a sizeable budget deficit for the next three to five years without facing any problems,” says Therapong. “Unlike Europe or the US the government still has ammunition to counter the economic slowdown by cutting interest rates or through fiscal and monetary stimulus.”
The Ministry of Finance, for its part, has imposed a cap on public debt amounting to 60% of GDP. The cap means in theory that government cannot burden the country with excessive debts.
Latest sovereign ratings are stable. Fitch Ratings affirmed Thailand’s long-term foreign and local-currency issuer default ratings at ‘BBB’ and ‘A-’, respectively.
“Thailand’s ratings and outlooks reflect its strong external financial position and signs of political stabilisation following the peaceful election in 2011,” notes Anna Thung, an associate director at Fitch’s Asia Pacific Sovereign Ratings team.
Fitch warned, however, of risks from fiscal transparency and policy management as well as off-balance-sheet expenditure.
The absence of a long-term financial master plan has raised eyebrows. The government ran a THB400 billion budget deficit in the 2012 fiscal year, a level that is projected to fall to THB350 billion for the 2013 fiscal year. Finance minister Kittiratt Na-Ranong has stated that he intends to balance the budget by 2016.
But it’s not clear exactly how he intends to achieve this. Aside from calling on state enterprises to increase efficiency and come up with clear business goals, he has produced little real evidence of how he intends to do so.
“This year and next year higher tax revenues can support the government’s stimulus programme,” says Pragrom Pathomboorn, an economist at KGI Securities in Bangkok. “But in the long term we would be concerned if the high spending were to continue.”
Strong economic growth
The good news for Thailand is that its economy is bouncing back fast following last year’s floods.
Kasikorn Research Centre estimates GDP growth of 4.5%-6% this year with double-digit growth in the fourth quarter on the back of high government spending, rebuilding and private consumption.
The sharp recovery follows a 9% slump in the final three months of 2011 as floods damaged factories and crops.
Andrew Stotz, managing director of international business at Kim Eng Maybank Securities (Thailand), is bullish about the economic outlook.
“Overall the economy is in good shape,” he says. “There are no massive financial risks out there. Government spending is a long way from posing a threat because the debt-to-GDP ratio is still low.”
Like many foreign analysts, Stotz believes that greater political stability combined with increased government spending augurs well for a recovery in investment.
“The toughest thing for Thailand is the 1% unemployment rate,” he says. “Thai companies are struggling to find workers. And this is a constraint on the Thai economy for the next three years.”
But renewed turmoil in the eurozone could yet darken the economy’s prospects, and that situation could be compounded by a hard landing in China, a country that accounts for 12% of Thailand’s total exports.
“The eurozone debt crisis is a major risk factor that could trim global and Thai economic growth,” says Pragrom at KGI Securities.
Inflationary pressure
Inflation is another issue threatening to rear its ugly head.
Latest government figures show that Thai consumer prices rose by 2.47% in April compared with a year earlier. Although lower than the 3.5% reported in March, many economists expect the figure to trend higher.
“Inflation is a big concern, which is why you are seeing the government impose price controls on a number of retail goods,” says Kampon Adireksombat, senior economist at Tisco Economic Strategy Unit in Bangkok. “In the third quarter we see inflation rising to 3.5%.”
In response to public discontent over high prices, the cabinet has announced that it will extend reductions in excise tax on diesel. The measure is expected to cost the country THB9 billion a month. The Transport Ministry has also called for delays in planned fare increases on minibuses, taxis and Bangkok’s subway.
But price controls only kick the can further down the road. The big question is whether interest rates need to rise in the longer term.
“For now, our view of stronger growth and higher inflation supports our forecast that the Bank of Thailand will keep rates on hold until the end of the second quarter, when we think it may start withdrawing monetary stimulus as the economy returns to normal,” notes Rahul Bajoria, regional economist at Barclays Capital. “If the recovery falters, rates may stay on hold for longer.”
Mega-projects
The biggest danger to the health of Thailand’s economy would be a repeat of last year’s floods.
The deluge inundated seven major industrial estates around Bangkok, affecting close to 1,000 manufacturing plants and 500,000 workers. That was on top of the more than 800 people killed and tens of thousands of homes destroyed all over the country.
Yingluck has pledged that there will be no repeat of the crisis. Yet the government’s recent track record on infrastructure does not inspire confidence. In the immediate aftermath of the floods, the cabinet allocated an initial THB120 billion to build dykes, reservoirs and other water management systems. But so far, less than half of the funding has been disbursed. Meanwhile, the majority of projects under construction are running behind schedule.
“I am quite concerned that if there are heavy rains like last year the country could face severe flooding once again,” says Pragrom. “The government has still not shown concrete progress on flood prevention measures.”
Infrastructure building to prevent further flooding is just part of an extensive infrastructure plan the Yingluck government has to support the country’s long-term economic growth.
Between now and 2018, the government is committed to investing THB1.64 trillion in 10 mass transit routes and logistics-related projects. A further THB1 trillion will be spent on air, water and rail transportation, including the expansion of Bangkok’s Suvarnabhumi Airport and the development of dual-track and high-speed trains.
The projects aim to decentralise economic activities away from the capital, which is home to 17% of the country’s population and produces 26% of GDP.
“We have started to see some progress on infrastructure projects and, in particular, on the high-speed rail project to connect Bangkok with Chiang Mai,” says Poramet at Bualuang Securities.
Yet talk of the so-called ‘mega projects’ is hardly new. In recent years, almost every government has proposed sweeping plans to modernise Thailand’s infrastructure. Few projects have got off the ground thanks to the drawn-out political crisis.
Yingluck and her allies need to speed up this process if infrastructure is to play a meaningful role in Thailand’s economic growth. As last year demonstrated, the consequences of not investing enough can be devastating.
Staying power
Another uncertainty Thailand faces is its political outlook. The country has had a busy few years, with coups and mass protests. Can the Yingluck government see out its four-year term in office, particularly given the prime minister’s ties to her controversial brother?
Stotz thinks so. He notes that parties linked to Thaksin Shinawatra have won four consecutive general elections despite the extraordinary efforts of the establishment to stop them. Furthermore, while Thaksin is still residing outside of Thailand to avoid a two-year jail sentence, his continued popularity makes it difficult and potentially risky for the military or any other institution to overturn the government.
Stotz believes that the most likely scenario is an early snap election, which the ruling Pheu Thai would probably win. “Expect three to five more years of the Pheu Thai government,” he says.
Yingluck herself might step down, paving the way for a more experienced leader better able to hold together the warring factions within the party. But Thaksinomics and populist policies may be here to stay.
The hope is that the global economic environment proves supportive and GDP growth remains high, enabling the government to fund its ambitious consumption-led spending spree.
But if the eurozone crisis deepens and the knock-on effects reverberate around the world, Thailand may find itself with a heavy price to pay.
“Nobody knows what will happen to Greece and to the eurozone,” says Kongkiat. “The challenge for this government is to make sure that Thailand can pull through without any problems.