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Published on April 5, 2008

The key problems in Thailand at the moment are inflation and politics, but let's focus on inflation, which is emerging as the biggest policy challenge facing the Samak government. From 2.1 per cent year-on-year in September of last year, inflation surged to 5.3 per cent in March. Food price inflation alone stood at 7.8 per cent. If authorities fail to manage inflationary pressure properly, it will spread out to hit the common people, who stand to be most affected by this round of price increases.

Although Thailand is a food-surplus country, it is also facing rising food prices. Increased energy prices, not to mention drought and other factors, are the underlying problems, for the most part, behind the pressure on prices. Feed producers are calling for price increases, as are fertiliser suppliers, while traders are hoarding consumer goods in anticipation of price increases or product shortages. Transport costs are also rising. The situation is one of great concern, as inflation has hit the supply and demand equilibrium.

Actually, inflationary risk is also hitting other Asian economies. The dangerous part of this is that if inflation is not put under control, it will erode the purchasing power of the poor. This could trigger demands for wage increases and other social disruptions.

In terms of food price inflation, Vietnam has been hit the hardest, with 30 per cent in February. This is followed by 23.3 per cent for China, 13.6 per cent for Indonesia, 12.6 per cent for Hong Kong, 9.8 per cent for Taiwan, 7 per cent for the Philippines, 7.8 per cent for Thailand, 6.7 per cent for Singapore and 4.4 per cent for Malaysia.

What the monetary authorities can do is maintain monetary discipline. When they meet next week to determine their interest-rate policy, we expect authorities to continue to keep the policy rate at the current level of 3.25 per cent.

In real terms, or adjusted for inflation, this is low enough to accommodate a new round of investment. Monetary authorities had earlier sent out mixed signals over growth and stability. They were about to abandon inflationary checks to focus more on spurring growth. But the latest figures should convince them that they should focus on reining inflation in until we are certain that prices are under control.

Investment will be the key driver of economic growth this year, provided that the Samak government can ensure political stability and also implement one of its mega-projects in a timely fashion. If any of the mega-projects were to be launched, it would kick in fresh private investment. The Thai economy is lagging behind the regional average at the moment, so it has room to expand to the 5-per cent range.

Since the Samak government was voted into power by the rural people, it has moved to stimulate the domestic economy by trying to hand out financial packages to the poor. First, it introduced the Bt43-billion stimulus package to help overall economic growth. Then it followed up with a stimulus package for the rural sector. There are some accounting tricks in the rural package, since some of its initiatives merely shift money around from current budgetary allocations or lending programmes.

The stimulus package will widen the budget deficit, but Thailand's fiscal position remains sound overall. However, politicians should not get carried away with easy money because with slower growth, government revenues might not be as forthcoming as targeted. So the key task is to revive confidence and investment, while at the same time the government will have to make use of all of its wisdom to bring inflation under control.

The Nation