Published on May 13, 2005

Most foreign investors and economists I have spoken to over the past several weeks have expressed surprise at the “wobbly” nature of the Thaksin II government. They have not seen any of the strong leadership and determination on display during the premier’s first term.

To foreign investors and economists, Prime Minister Thaksin Shinawatra successfully implemented demand management in his first term of office, and as a result, Thailand was steered back towards a path of strong growth. But now they are now wondering whether Thaksin can still exercise the kind of leadership and vision necessary to lead Thailand to a more sustainable kind of growth. The economic cycle has changed, as Thailand now requires supply-side management, rather than demand-side management.

The key question is how investment can really be ignited to make it a genuine engine of economic growth.

Thaksin has not had a good start in his second term. The tsunami disaster, continuing unrest in the South, higher oil prices, higher domestic prices, rising interest rates and the global economic slowdown have weighed heavily on the economy in the first quarter. The trade and the current account are starting to run into deficit. The stock market has slid 8-9 per cent since the beginning of the year. Consumer confidence has hit a 30-month low. Consumer spending and investment have been deferred due to economic uncertainty. The budget is under constraint as tax revenue officials attempt to squeeze as much as tax as possible out of businesses to meet their revenue targets.

The higher oil prices must have taken the Thaksin II government by surprise. It has spent more than Bt80 billion subsidising the Oil Fund. Oil imports have drained most of the receipts from export earnings, which would have otherwise helped boost both domestic consumption and investment.

Almost all of a sudden, a high economic growth rate of 6-7 per cent can no longer be taken for granted. Now the consensus on the growth rate is around the 4-per-cent range.

With such wobbles on display, what has the Thaksin II government done so far? The policy response to date has been rather awkward. Previously investors were told about the government’s plan to invest Bt1.5 trillion over the next four years in mega-infrastructure projects to lead the charge in supply side management. This story made sense because the government had not invested seriously in infrastructure projects since the 1997 financial crisis, so many people swallowed it.

But as time passes, the mega-projects story has become more ambiguous. A regional economist told me that the government would not pour any fresh money into infrastructure projects until next year, because it has yet to budget for it.

Meanwhile, Dr Somkid Jatusripitak, the deputy prime minister and finance minister, has been scrambling around telling state officials to beat up the export target to 20 per cent growth, raise tourism revenue and bring in more foreign direct investment. The emphasis is on specific targets, yet the implementation is not clear.

A hedge fund manager from New York who oversees US$100 million (Bt3.94 billion) in Thai equities, expressed surprise at the lack of excitement or enthusiasm in the Thaksin II government despite its having been returned to power by a political landslide. He added that Thailand now faces only a cyclical downturn. Besides, Thai equities remain the cheapest in the regional market. He called on the Thai authorities to continue their lax monetary policy to support growth, while spending the fiscal budget wisely and efficiently. All in all, the Thaksin II government could make history if it can successfully implement supply side management to lead Thailand to a more sustainable growth path. But it has to get rid of its bad habit of intervention.

First, the Finance Ministry should not cut more taxes. In fact, the value-added tax should be raised from 7 per cent to 8 per cent to consolidate fiscal policy.

Second, the oil subsidy must be removed as soon as possible.

Third, the infrastructure projects must be spelt out clearly and realistically – in accordance with the government’s financial means.

Fourth, both the public and private sector should emphasise quality rather than quantity. It is no use chasing high growth figures without a credible plan to improve quality.

Fifth, liberalisation must continue in order to create real competition and bring in fresh investment. Some local industries, such as steel, should not be protected. We may need to protect some agricultural goods, but most industrial producers have to be able to withstand foreign competition. By the way, all auto companies in Thailand are already owned by foreign firms.

Sixth, rules and regulations must be streamlined, including the enforcement of laws.

Seventh, good governance in both the public and private sector must lead the way.

Eighth, the country’s human resources have to be improved with first-class education.

If the Thaksin II government follows these policy points in earnest, foreign direct investment will flow into Thailand en masse, leading the drive into the next phase of growth. Foreign visitors will flock to Thailand because they will want to stay in a country that is friendly, clean and has good infrastructure.

In effect, the government does not need to pick winners like automobiles, tourism or fashion. Let the market dictate the survival of each industry. Then Thailand will emerge as a stronger country, able to integrate with the global economy.

Thanong Khanthong

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