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.
BY THANONG KHANTHONG
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