Stability a key for next govt

October 28, 2000

THE next government will come under increasing pressure to manage both stability and growth, because the country's macroeconomic conditions have deteriorated under the weight of higher oil prices and a weaker currency.

"There won't be a new easy way out for the next government, because the country is facing an economic slow-down," said a report by the Thai Farmers Research Centre.

"The Thai economy is also faced with upward pressure of prices which are supply-led.

"This has created more complications in macroeconomic management," the report said.

Satit Wanasilapin, a manager at Capital Nomura Securities, agreed that a growing number of economists and academics had started to call for the government to become more cautious about stability problems which could affect the economy.

"The government is pursuing a strategy aimed at achieving economic growth rather than maintaining stability," he said.

"You can see that interest rates have been kept low to stimulate demand, investment and private consumption.

"But in turn this policy has produced capital outflow and a weakening of the baht, which might affect inflation," he said.

The latest Bank of Thailand report suggests that economic growth this year is on target at 4.5 to 5 per cent, but it admits that growth could be slowing because of higher oil prices.

By continuing to maintain a low-interest-rate policy, the central bank has signalled to the financial markets that it is willing to sacrifice the baht in favour of economic recovery.

The Thai currency this week broke the barrier of Bt43 to the US dollar for the first time since June 1998, dragged down partly by the Philippine peso's crisis. Several Thai officials have hinted that an exchange rate of Bt44 to the dollar is acceptable, but that if the baht breaches 44 to the greenback, it will create inflationary pressure. A group of US fund-managers visiting Bangkok two weeks ago expressed their concern about the baht's outlook, questioning the ability - and the resources - of the Thai authorities to defend the baht if it continued to plummet.

They suggested the authorities begin to consider managing stability, via both fiscal and monetary policies, to prevent macroeconomic imbalances getting out of control. "I think you might need to negotiate with the International Monetary Fund about the possibility of delaying loan repayments," said one US hedge-fund manager. "Otherwise I don't see you are going to handle [capital outflow]." The US fund-manager's suggestion was in line with a proposal by Dr Virabongsa Ramangkura, the Thai macroeconomist.

Virabongsa recently urged the authorities to become more cautious about managing stability, saying Thailand could not keep its real interest rates lower than those of the US for long without inducing a capital outflow.

Already the baht has been subject to speculation, both inside the country and on offshore markets.

On offshore markets, speculators have been borrowing low-interest baht to buy higher-interest dollars in the hope that when they sell the dollar they will get more baht to settle their positions.

"I was very concerned when I read a report about baht speculation in the offshore markets," Virabongsa said.

"This is a bad sign of trouble ahead," he said.

Were inflation to pick up because of the weaker exchange rates, the authorities would be forced to increase interest rates, which would disrupt the momentum of the economic recovery. The interest rates have been kept low to support debt-restructuring and help the banks enjoy a wide spread and rebuild their capital. The Thai Farmers Research Centre has outlined the Thai macroeconomic conditions, pointing out that exports and private consumption remain the driving force of the economy.

But the pressure on inflation is caused by the supply-side, which is the result of higher oil prices.

Inflation is not driven by the demand-side or by domestic consumption.

The dilemma facing the Thai economy is the slowdown of the economy in the third and fourth quarter.

This slowdown might continue until next year.

The trade surplus might also narrow, and couple with capital outflows, a weaker baht, and the continuing weakness of the financial system.

As for external factors, Thailand will continue to face a rough road ahead.

Higher oil prices might continue until next year.

The US economy is also experiencing a slowdown.

If the US rates go up, it will cause further shocks to global markets and affect the Thai baht.

The peso and Indonesian rupiah crises have also dragged down the Thai currency, because investors have grouped the three currencies together.

BY THANONG KHANTHONG