prudent policies will hold key

Can we expect better economic management from the Finance Ministry and Bank of Thailand amid turbulence in the global markets, and local politics, too?

The two institutions have been under close scrutiny since the formation of the Samak Sundaravej government as they have been in conflict over how to address inflation caused by high oil and other commodities prices.

The central bank wants to curb rising prices by raising its policy rate while the Finance Ministry opposes the move for fear of negative impact on consumption and investment.

Oil prices, now, have come down sharply, reducing inflationary pressure. But the bad news is a full-blown financial crisis in the United States could drag down the world economy.

The world's major economies, US, Japan and Europe, have slowed down. Outlook for export growth is not rosy as previously expected. Export growth in August significantly decelerated.

Anticipating more bad news, new Prime Minister Somchai Wongswat last week met caretaker Finance Minister Surapong Suebwonglee and central bank governor Tarisa Watanagase.

A broad conclusion is that the country needs to boost domestic demand through public investment and consumption.

"Consumers should be aware that if they spend too much, they will not have money left to spend during a deeper downturn," Teerana Bhongmakapat, dean of Chulalongkorn University's Economics Faculty, argued.

Many are pessimistic about a quick recovery of the US economy though the US government, the Federal Reserve and other central banks have stepped in to stabilise the global financial markets.

Politicians may put more pressure on the central bank to implement monetary policy to promote growth in the short term at the expense of the medium and long term.

The Finance Ministry may want commercial banks to lend more and the central bank's rate cut. The ministry may also want to utilise foreign reserves of the central bank to finance public investment.

"These could lead to poor quality of lending and prolong inflationary pressure," warned Teerana.

If the government wants money for investment it should mobilise from the people or investors through government bonds rather than use foreign reserves from the central bank, Teerana suggested.

The lessons learned from 1997 financial crisis may insulate Thailand from such past mistakes, but the central bank could not be complacent about potential problems from weak financial institutions.

"I don't think measures like the recent setting up of the deposit insurance institution would be enough to prevent or address crisis in the future if we look at the US predicament," said Thawatchai Jittrapanun, an economist at Chulalongkorn University.

Lack of financial innovative products in the domestic market may save Thailand from direct impact of the US financial turmoil. Financial innovative products, such as collateral debt obligation (CDO) and credit default swap (CDS) in the US have played a significant part in the current crisis.

"The central bank, however, needs to reveal information about exposure of local banks to arcane financial products abroad," said Teerana.

Disclosure of crucial information would help the country improve its risk warning system as academics or investors could spot potential risks before it is too late.