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Democrats ought to be aware of crying wolf

December 1, 2000

The Democrats have resorted to a "scare tactic" to win electoral votes. In a full-page advertisement in Matichon, they send an unequivocal message that if they don't make a political comeback, a second economic crisis might occur. This defensive strategy does not sound like a way to win the general election.

Yet against the political onslaught and money power from Thai Rak Thai, the Democrats are forced to limit the scope of their campaign to banking on history and past achievements. They have made a plea that Thailand was already bankrupt when they took power in late 1997 and that they have managed to push Thailand a step further back from the cliff edge. And now the country is undergoing a recovery - albeit a fragile one - in which GDP growth in 2001 should bounce back to the pre-crisis level.

The way to move forward, according to die-hard Democrats, is to stay the course by continuing to reform the financial sector, maintaining fiscal and monetary discipline, boosting exports, bringing down taxes and further liberalising the economy to benefit from competition. The Democrats have warned the public about a lack of fiscal discipline in Thai Rak Thai's spend-first-pay-later policy. They have also argued that Thai Rak Thai's pork-barrel spending could lead to more public debt, if not to more money printing that would end up with the dire consequences of hyper-inflation or a Latin American-style economic catastrophe. In short, the Democrats have aired a scary message that if Thai Rak Thai wins the next election, the country will certainly have to endure a second crisis.

But will the public buy this Democrat line of argument? The answer is that they won't. In fact, the public's patience with the Democrats is running out. They want to try something new.

Broadly speaking, there are three big elements working against the Democrats. First, they have spent too much money to bail out the financial institutions, yet the outcome remains a big disappointment. Public debt, incurred largely from the Financial Institution Development Fund's bailout of the banks, has shot up to Bt2.6 trillion, or about 54-55 per cent of GDP. The FIDF has a mandate to issue bonds worth Bt500 billion to pay for the damage from the 56 defunct finance companies. Another Bt700 billion will be needed to finance the costly bailout of other financial institutions.

Still, the financial system is facing a liquidity trap. Banks, saddled with a mountain of bad debts, are awash with liquidity. But they dare not lend for fear of creating more bad debts or of running short of a capital base to match their lending. Nobody knows how long this situation will drag on. In the meantime, Thai companies are mostly financially bankrupt, with debt loads twice the amount of their annual revenue. In effect, both banks and business are locked in a box.

Finance Minister Tarrin Nimmanahaeminda has bet his political career on his plan to reform the financial sector. He believes that without a stronger financial system of world-class standard, the Thai economy won't be able to recover its normal health. His approach is a mixture of government intervention and market-orientation to allow banks to get out of their quagmire. Nobody can know whether he is right or wrong because the reform process has not been allowed to run its full course. Unfortunately for Tarrin and the Democrats, time is not on their side due to the election being held smack in the middle of the reform process.

Second, Tarrin and the Democrats have failed to manage the public's expectations artfully enough. From the outset, they rushed to claim that the Thai economy would fully recover after completion of the IMF programme. They were confident that the financial sector and structural reforms would produce results, and that Thailand would be rewarded by a restoration of confidence and a return of foreign investment. This hasn't occurred.

The economy is still saddled by over-capacity, with factories and plants running at 50-60 per cent of their capability over the past two years. This means that unemployment should continue to remain high and reduce the purchasing power of the general public. Yet Thais have kept on spending, believing their pay checks will continue to come in at the end of every month or that they will get a pay rise. Again this hasn't worked out, so they have begun to question the merits of the government's efforts.

Third, skyrocketing oil prices and other external factors have been working against the Democrats. With oil prices doubling, the Thai public has found prices rising and their gas tanks half full. This has reinforced the negative sentiment that the government has failed to tackle the country's economic problems.

Add to that the fact that foreign investors are shying away from Thailand, and indeed the region, in favour of China, which is attracting all the big investment from multinational companies. A correction in US stock markets has also kept foreign money from flowing back to Southeast Asia, where the reform process is continuing at a lacklustre pace and where political instability looks even more inauspicious. A collapse of the peso has also helped to drag the baht down, bringing with it a sense of a mini-currency crisis.




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