Economists say pro-stability policies now vital

They were speaking yesterday at a seminar titled "Lehman Brothers Crisis: Impacts on global finances and Thailand".

The Kingdom's exports as well as property sector are likely to be adversely affected next year, participants were told. Baht movements, interest rates and commodity prices could all be volatile as a result of the so-called "burger" crisis.

Somphob Manarangsarn, an academic at Chulalongkorn University, said the government should build up economic and financial stability to minimise the chances of any unpredictable impacts from the US turmoil.

Baht volatility could be experienced as a result of changeable capital movements, as well as unsteady exports and imports. The US financial meltdown could also lead to fluctuations in interest rates and commodity prices.

He said exports would be hit hard by an economic slowdown in the five major developed markets of the US, Japan, the UK, France and Germany, whose gross domestic product accounts for more than 50 per cent of the global total, as well as in emerging economies.

The US economy is projected to grow only 1.4 per cent next year, while those of Japan and the euro zone are estimated to expand by just 0.9 per cent, according to the global consensus.

Somphob said the US meltdown would lead to property funds unloading their assets around the world. This could affect Thai developers-cum-debtors and would have an adverse effect on financial institutions' balance sheets.

He said the Thai economy could grow by 4 to 5 per cent without any further stimulus package. The government's overspending would cause fiscal constraints at a time when more spending was necessary.

The Bank of Thailand's international reserves would not be an effective tool at this difficult time, as the amount is minimal in the context of the astronomic financial market, said the economist.

"The government should prepare to use water to put out the fire. Welfare-related initiatives should no longer be implemented, because there is a more urgent matter that should be the top priority - that is, the country's economic stability," he said.

Somchai Jitsuchon, a director at the Thailand Development Research Institute, said the incoming government should act to restore confidence during the financial turmoil.

It should, he said, encourage domestic savings to reduce a liquidity shortage, although the central bank does not yet need to inject liquidity into the system.

The Federal Reserve's US$700-billion (Bt23.7 trillion) budget for the purchase of bad assets accounts for only 5 per cent of that country's GDP - against the Kingdom's burden for doing so 10 years ago, which accounted for 30 per cent of GDP.

The magnitude of the US problem could, however, be far greater than the current estimate and would have widespread impact throughout the world, he said.

The economists agreed that the Fed's assistance would not be a short-term measure and would bring about moral hazard in the US financial system.

Thitinan Pongsudhirak of Chulalongkorn University's Faculty of Political Science said the US financial turmoil would settle in the next 12 to 18 months, after which capital inflows would return to the region. The capital flows would not, however, head to Thailand if the political turmoil failed to be resolved in the interim.

Sukanda Lewis of the Faculty of Economics, Chulalongkorn University, said the Bank of Thailand would not be able to raise the key interest rate amid expansionary monetary policy around the world.