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Published on November 7, 2007

Academics and business sector representatives believe political parties competing for seats in the upcoming general election have yet to display their policies to promote private investment, even though such investment will be crucial for economic growth next year.

With investment vital to an economy facing risks of higher inflation and the drying up of liquidity, experts have urged political parties to promote private investment.

At an economics seminar hosted by the Thammasat Economics Association yesterday, panellists also urged the next government to implement populist policies very carefully because they can waste taxpayers' money and create moral hazard among the public.

Phatra Securities managing director Supavud Saicheua said government investment would be limited by the weak fiscal position. The country therefore needs private investment.

"No political party has yet made it clear how it would support productive private investment," he said.

Supavud expressed concern that the continuing weakening of the US dollar would lead to high inflation worldwide. Thailand, by aggressively buying dollars, has imported inflation, he added. He also warned about the direction of the economy after the general election.

He said the Bank of Thailand was trying to curb the appreciation of the baht by intervention in the exchange-rate market, and had built up international reserves worth US$82 billion (Bt2.78 trillion).

However, he said the current government had spooked private investment, as it is seen as trying to limit investment from overseas.

He also blamed the Commerce Ministry's policy of not allowing private firms to raise the prices of their goods despite high oil prices having pushed their costs up. In the short term, the ministry can delay the adverse impact of high oil prices on consumers, but in the long run it will discourage private investment, he said. "Firms will consider that this policy creates more risks, and then will not invest more," said Supavud.

Stock Exchange of Thailand chairman Pakorn Malakul Na Ayudhya said that while liquidity in the domestic banking system is drying up, many industries needed fresh funds to expand their production capacity.

Petrochemi-cals, petroleum, carmaking and electronics and electrical-product manufacturing have almost fully utilised their capacity and now need new investment to expand, he said.

Meanwhile, the government also needs huge investment in infrastructure projects.

Pakorn does not believe local savings are adequate for incoming investment. Therefore, the country needs foreign funds to finance new investment. However, the Bank of Thailand's 30-per-cent reserve requirement has deterred capital inflows into the bond market, he added.

Foreign investors currently hold bonds worth only Bt5 billion, sharply down from Bt50 billion after the capital controls were put in place. The central bank should therefore abandon the reserve requirement on capital inflows, Pakorn suggested.

"Instead, an exit tax should replace the reserve requirement, that is, a tax levied on short-term or speculative funds," he said.

However, Pakorn said he did not want the new government to force the central bank to revoke the 30-per-cent measure. The central bank should remain independent and be allowed to take its own decisions.

Kasikornbank president Prasarn Trairatvorakul said timing was important in considering abandoning the reserve requirement. "It should be done at the end of next year, instead of early next year after the government forms," he said.

He fears that a quicker move by the new government could send the wrong signal to the market and cause a sharp appreciation of the baht, which would hurt the export sector.

"If the new government reverses the central bank policy quickly, the market may think that a stronger baht is accepted by the government - and then the baht could jump," he warned.

 Prasarn is concerned that unsettled debts of the Financial Institutions Development Fund (FIDF) due to a delay in of the amendment of the Currency Act would force the Finance Ministry to borrow more from the market. The

government already plans to raise funds via bonds worth up to Bt600 billion next year to finance the budget deficit and repay the debts of the FIDF.

"This would push up funding costs and crowd out private investment," he said.

The three experts also called for economic reform by the incoming government. They warned that public spending on populist projects to win voter popularity would create trouble in the long run.

Nipon Puapongsakorn, dean of the Economics Faculty of Thammasat University, said the downside of populist policies could also seen by the impact left by the previous government.

Prasarn added that some populist policies were good, but others might create a moral hazard among the public.

"They may just expect money from the government," he said. "The government has to move carefully because this can affect the fiscal affairs of the government."

 Wichit Chaitrong

 The Nation