Gore victory better for Thailand, says report

November 3, 2000

WERE Thailand able to choose between Al Gore and George W Bush for the next president of the United States, the former should win the vote.

That is the underlying conclusion of Bangkok Bank's research report, which has weighed the policy platforms of the two candidates to see how they might affect Thailand.

American voters will go to the polls on Tuesday to choose their new president.

Apart from scoring more favourably with his plan to pay down the federal debt by US$3.05 trillion (Bt134.4 trillion) over the next 10 years, Vice President Gore would also lead an economy that would be less threatened by higher inflation, the bank's report said. Cleaning up the financial house of the federal government will give more room for interest rates to fall, if necessary.

In effect, Gore will try to benefit from Bill Clinton's policy of balancing the budget while maintaining a favourable interest-rate environment to boost economic growth.

On the other hand, Bush's $1.3-trillion tax-cut plan might exacerbate the already overheating US economy. Tax cuts are a useful tool when the economy is in recession. But with a strong economy, further tax cuts to boost investment and spending might prompt the Federal Reserve Board to raise interest rates. Higher interest rates could push the economy into recession.

"The added growth to the already strong economy could force the Federal Reserve, already worried that the economy is overheating, to respond further by raising interest rates, hence, nullifying any positive economic effects that would result from big tax cuts and perhaps encouraging a recession," the report said.

"Therefore, the US economy, which is growing very rapidly, is likely to be hurt rather than helped by Bush's planned tax cuts."

A healthy US economy is in the interest of Thailand and other countries. The US has been a buyer of last resort, absorbing a sizeable amount of Thailand's exports.

"Thailand's exports to the US account for about 10 per cent of its GDP, hence, a downturn in the US economy could severely affect and undermine Thailand's nascent economic recovery," the report said.

"This is particularly worrisome as evidence suggests that import growth generally tends to fall more sharply than GDP."

A hard landing by the US economy would also trigger a sharp fall by the dollar against other currencies, particularly the yen and euro.

"The good news for Thailand is that its currency is still cheap compared to other emerging economies. A stronger yen would make Thailand's lower-end products more competitive,'' it said.

In the event of a US economic slowdown, capital flows to emerging markets, including Thailand, are likely to decelerate. Countries' high current-account deficits and high debt-service burdens would be hard hit by a US slowdown.

But how real are these threats and what are the odds of them happening?

"The threat of a potential interest rate hike by the Federal Reserve in response to the big fiscal stimulus plans of Bush and Gore may be somewhat exaggerated," the report said.

"Although the threat of a US recession to the Thai economy is very real, the effects of the next administration's economic policies on Thailand are likely to be minimal, at least in the short term.

"If Bush were elected president, it would probably take him quite a while to introduce his proposed tax cuts. Furthermore, Bush's main income-tax changes actually would not be fully phased in until 2006, while his estate tax repeal would not come into full effect until 2009. Therefore, the juiciest benefits of his planned tax cuts will not flow until years after he takes office. Hence, the immediate impact of his economic policy on the Thai economy is likely to be minimal and limited.

"As for Gore, parts of his tax plan [the $480 billion in targeted tax cuts] would take effect in 2005, but his big retirement savings programme would not come into full effect until 2009."

"Hence, it is only plausible to conclude that the Federal Reserve is very unlikely to adopt an immediate tougher stance concerning its monetary policies in the event that Bush wins the election and less likely should Gore win. Given the current strength of the US economy, it appears that the comfort level will be marginally higher if Gore wins.

"This is because if we must choose between the two policy platforms, the smaller scale of Gore's plan is to be preferred from a macroeconomic point of view, given the fact that added growth from a major tax cut can, at this stage, be counterproductive."

(The first part of this two-part series.)

BY THANONG KHANTHONG