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TRT finally accepts economic reality

November 2, 2001

After eight months of trial and error, Deputy Prime Minister and Finance Minister Dr Somkid Jatusripitak has made a turnabout in his economic policy. Now he wants foreign money.

On Wednesday, he appointed Tawee Butsuntorn, the chairman of the Federation of Thai Industries, to head a joint public and private sector panel to study the possibility of attracting foreign investment from the US and Japan. Somkid believes that Thailand, due to its political, social and economic stability, is now the second most attractive country in the region to invest in, after China.

Until now foreign investment has never featured prominently on the agenda of the Thaksin government, which took power in February after an inwardlooking campaign. On the campaign trail, the Thai Rak Thai Party accused the previous Democratled government of selling the country cheap to foreigners. It also charged that the liberalisation measures of the Chuan government would lead to foreigners taking control of local businesses.

In a way, the TRT policy – Somkid being one of its architects – represents the antithesis of the Chuan government.

The previous administration was probusiness, proforeign investment, promarket and pro-liberalisation. After Thai Rak Thai came to power, it tried to undo the legacy of the Chuan government by setting forth to recreate through government activism a new social policy at the grassroots level.

TRT believed that after the 1997 crisis, foreign investment would not come back to Thailand or the region again. So why did it have to bother with foreigners?

Its political campaign struck a chord among Thai voters, who were wearied by the reform process which did not benefit them directly or immediately.

As a result, a reform agenda is absent in the Thaksin government. The key problems of the financial sector and corporate debt restructuring have not been taken up. Except for the Thai Asset Management Corporation, which is moving at snail’s pace, there are virtually no other efforts to address financial and corporate sector problems seriously enough.

Most Thai companies are still saddled with a high level of indebtedness, so they are not in a position to expand their businesses to keep the economy going.

The banks are still plagued by a high level of problem loans and inadequate capital. Fitch IBCA, an international credit rating agency, has estimated that some Bt150 billion in additional government money might be needed to shore up the Thai banking system.

Now all of these problems that have been postponed in the past are returning to haunt the country again.

Somkid has been working hard to remake social policy through massive government spending. He also aims to recreate an entrepreneurial class to run small and mediumscale enterprises through government financial and technical assistance. He believes that once the rural economy, made up of some 3040 million Thais, is stimulat?ed, it will lead to a systemwide economic recovery.

Yet this will never come to pass because the corporate sector still accounts for 90 per cent of the tax system.

The foundation of the SMEs and the rural economy cannot be created overnight, or quickly enough to supplant the corporate sector which is linked closely, as two sides of the same coin, with the financial sector. Somkid might have begun to realise that the government cannot keep on spending money to stimulate the economy since its debt is running close to 60 per cent of gross domestic product.

He cannot rely on exports either next year to boost the economy due to the global economic downturn.

Sooner or later, private investment – particularly foreign investment – should return to give the economy a new momentum of growth. Yet private investment won’t recover with a weak economy, a fragile banking system and a high level of corporate indebtedness. It is perhaps due to this underlying trend that Somkid has started to readjust his economic policy toward embracing foreign investment.

Foreign direct investment in Thailand averages about US$3 billion to US$5 billion (Bt132Bt220 billion) a year, compared to US$60 billion for China.

But foreign investment, if a level playing field is created, acts as a catalyst in developing the Thai economy and helping it to improve its efficiency and competitiveness in the long run.

This is the challenge facing Somkid and the Thaksin government in the next phase as it begins to shift away from a campaign mode to embrace economic reality. Foreign investment will be crucial to the Thai recovery, given the weakness in the banking and corporate sector and the capital market. Domestic savings, locked up in the banking system crisis, cannot be channelled into the real sector.

To get economic growth back to 45 per cent, Somkid will need foreigners to come to the rescue. He may do so by creating an environment or a regime conducive to foreign investment. Otherwise the Thai government will have to be content with a growth rate of 12 per cent. And a growth rate of 12 per cent for 2002 and 2003 would spell disaster for Thailand.

Thanong Khanthong



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