How will post-election spending affect Thai fisca policy?

2011-07-05 08:13
Bangkok - Thailand's Puea Thai Party, which won a landslide election victory on Sunday, pledged a range of populist measures during its campaign, from wage increases to infrastructure projects to computers for school children.

That could fuel inflation and economists are revising up forecasts for interest rates as a result.

Here are some implications of Puea Thai policies for public debt, inflation, monetary policy and the markets.

Q: What do the promises mean for fiscal policy, funding?

A: Among its eye-catching promises, Puea Thai says it will give a tablet computer to about 800 000 schoolchildren each year, at a cost of about 5 000 baht ($162) each.

It has promised high-speed trains across the country and annual development funds of between 300 000 and two million baht for each of Thailand's 73 000 villages. .

These populist measures would require billions of dollars of spending and could stimulate Southeast Asia's second-largest economy.

But tax revenue is already low at 17% of GDP and Puea Thai is also promising to cut corporate tax to help companies cope with other of its proposals that will push up wages.

So the new government will probably oversee a bigger budget deficit than the 350 billion baht planned by its predecessor for the tax year starting October 1, pushing up public debt and adding to inflationary pressure.

Even before the election outcome, the Finance Ministry planned to sell about 450-500 billion baht ($14.8-$16.4bn) of government bonds in the fiscal year from October 1, up from about 410 billion baht this year, according to Chakkrit Parapuntakul, chief of the Public Debt Management Office.

Chakkrit told Reuters that, by law, public debt must not exceed 60% of gross domestic product but that it was only around 42% now, so the government had some leeway to push up borrowing.

Much will depend on whether all the policies are implemented, and how quickly.

"If they pursue some of this spending too aggressively, it could well cause some fiscal problems, and also put the Bank of Thailand in a difficult position," said economist David Cohen at Action Economics in Singapore.

The debt-to-GDP ratio was already expected to rise above 60% - generally regarded as the safe limit for developed economies - within six years, according to the central bank. Sudden expansionary policies could accelerate that trend.

The bond market could suffer from a jump in issuance if the government chooses to finance projects through borrowing.

Yields have already risen steadily this year, especially at the short end, with two-year yields up around 100 basis points and five-year yields up about 53 basis points, but the government has not had trouble finding buyers for its debt.

Q: What about interest rates, inflation?

A: Puea Thai has promised a daily minimum wage of 300 baht ($10), up 40% from the average around the country, and a 41% increase in the monthly wage for new graduates.

That would be good for consumption but bad for inflation.

The spending plans will add to the pressure. Bank of Thailand Governor Prasarn Trairatvorakul has warned the government should not go above the 350 billion baht deficit for 2011/12 because that would push up inflation and monetary policy might have to be tightened more than it otherwise would be.

Many economists believe the central bank will become more hawkish this year. In a post-election Reuters poll, the median forecast for the policy rate at the end of the year was 3.75%, up from 3.50% in a June poll.

"We see scope for a cumulative 100 bps in hikes here on as lower fuel prices, an extension of subsidies and optimism from the election results will underpin domestic demand in the coming months," said Forecast economist Radhika Rao in Sinagpore. She expects the policy rate to be 4.0% by the year-end rather than 3.50%.

KGI Securities said the rate could go as high as 4.25% next year.

Credit Suisse said it estimated that a 10% rise in wages added about 1 percentage point to core inflation. It has raised its end-2011 policy rate forecast to 3.75% from 3.50%.

The central bank aims to keep core inflation, which excludes energy and fresh food prices, in a range of 0.5-3.0%.

It hit 2.55% in June and the central bank has already said it could go above the target range at some point this year. Annual headline inflation dipped to 4.06% in June; government price controls and subsidies on fuel, public transport and some utilities have helped hold it down.

The Bank of Thailand is expected to raise its benchmark rate, the one-day repurchase rate , by a quarter of a point to 3.25% at its meeting on July 13, which would be the eighth increase since July last year. ($1=30.44 baht)
Read more on:    thailand

Join the conversation!

24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

We reserve editorial discretion to decide what will be published.
Read our comments policy for guidelines on contributions.
NEXT ON NEWS24X

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Comments have been closed for this article.

Inside News24

 
/Sport

Book flights

Compare, Book, Fly

Traffic Alerts
There are new stories on the homepage. Click here to see them.
 
English
Afrikaans
isiZulu

Hello 

Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.


Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire 24.com network.

Settings

Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.




Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.