Published on June 13, 2005

Faced with such trying economic conditions, stability must take precedence

Hearing Finance Minister Somkid Jatusripitak emphasise the importance of macroeconomic stability to the government’s immediate plans for tackling the prevailing volatility and reversing the current economic slowdown was a welcome development.

It should be clear that the private sector could do with a lot more straight talk and a lot less political spin. The business world’s confidence in the government’s economic stewardship relies on what Dr Ammar Siamwalla has described as “the ability of the government to see emerging problems and to effectively deal with them”. Not its ability to paint rosy pictures of what the future holds.

The government has to move away from statements that are clearly politically motivated, such as Prime Minister Thaksin Shinawatra’s pledge to see the construction of one million cheap houses to give low-wage earners a chance to own a home, and start offering real signals on the shape of the economy so businesses have a chance to adapt. All economic pronouncements should be part of an overall macroeconomic policy, otherwise they will just raise concerns about the government’s fiscal prudence and about the real state of the economy and its management.

In times of strong economic growth, politicians can obscure a response to economic demand with exaggerated political pledges, and it will have little effect on business confidence. But faced with high oil prices, a slump in tourism because of the tsunami. and higher interest rates – which are just beginning to bite into growth – basic economic management becomes the overriding agenda.

So, what exactly is the current state of the Thai economy?

First, we should not fool ourselves into thinking that everything is fine, nor should we become excessively bearish. The economy is in a slow-down, not a slump.

Second, higher oil prices and rising interest rates are creating cost pressures, which will cause consumption to slow down. This situation should be left to take its natural course. What we don’t need is to continue stimulating consumption through artificial mechanisms like debt creation or unproductive government expenditures.

Once all the factors that have been causing volatility have been dealt with and stability returns, the government can proceed with investment and public spending and expect optimal results in terms of growth. Such a course may not be the most popular one, and it may carry some undesirable temporary political side effects, but over time, the public will become more assured and both the business world and consumers will start spending again.

And where are the key areas of uncertainty?

First, the government’s fiscal status is a key concern. Since 1997, the government’s fiscal situation has improved enormously, but the economic slowdown and the staggering cost of the oil-price subsidy regime has eroded the state’s improved fiscal position, including the government’s projections for tax collection. The government’s fiscal position will stabilise only after the subsidy for the price of oil is reduced to a manageable level. There is also a clear and pressing need to introduce a healthy dose of transparency to the government’s off-balance-sheet accounts.

Rising inflation and interest rates are the second major concern. As the oil subsidy is reduced and the cost of rising global oil prices is distributed throughout the economy, products and services become more expensive, as will the cost of money. Both inflation and interest rates will ease with lower consumption.

Once this has occurred, the government will be able to spend – so long as it maintains a manageable budget deficit – in areas that will help spur economic activity across the economy. The 5-per-cent-plus rate of economic growth that has been an obsession of this administration is still possible, though only with prudence and patience.

Such a path back to stable growth is simple, yes, but it is also based on a respect for the basic principles of any free market economy. The government should not trade short-term political gains for medium-term economic losses. It should make sure that the Bank of Thailand is allowed to direct its monetary policy towards the optimal results.

For its part, the Finance Ministry should work on strengthening the state’s fiscal position. This is no time for the ministry to be at loggerheads with the central bank.

The CEO prime minister’s main economic task is to make sure that the economy is nurtured back to a stable growth path. There are no short cuts – this is a game of patience, one with little room for personal whims or political spin.

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