No honeymoon period for this government

Although the ongoing US financial crisis seemed to have a limited immediate impact on Thailand at this point, it is likely leave severe problem on Thai economy in the medium and long term. The Bank of Thailand on Tuesday announced that it would likely lower its economic growth project this month because of risks escalating from both internal and external factors. The collapse of Lehman Brothers, the US investment bank, would more or less have an impact on Thai property prices.

After all, Thai exports accounted for 70 per cent of its GDP. Although the proportion of the US market has been declining from one-fifth to some 10 per cent in the past ten years, the importing countries that bought Thai products such as China purchased Thai exports for re-production and re-exported to the US.

Santi Vilassakdanont, chairman of the Federation of Thai Industries, voiced concern that if the US failed to revive its ailing economy, the situation will have a 'domino effect' on economies of other countries, including Europe and Japan which will cause a global economic recession in the last quarter of this year, extending into next year. Since Thailand's three main export destinations are experiencing economic problems, he said, it is expected that forward purchase orders for products will decline. Fiercer competition is expected as exporters would likely cut their prices to maintain their shares in the US market.

This is the big challenge that the new government and Thai private sector has to face. Olarn Chaipravat, deputy prime minister in charge of economic affairs, admitted that he was concerned about the tight liquidation as a result of global credit squeeze. The central bank said that the US financial turmoils affect all economic indicators. Consumption, investment and exports have fallen from the previous month.

The new government thus will not have a honeymoon period. People Power Party or its predecessor Thai Rak Thai Party has been known to favour high economic growth. But this time around, the new government is unlikely to have time to promote its pro-growth policy. Instead, the new government would have to instead focus on crisis prevention to curb the contagion from the US economic turmoils.

Prime Minister Somchai Wongsawat would have to address the issue when he delivered the policy statement next week. Political pundits all expected that the government is unlikely to stay in office for long. However, like it or not, the government would at least have to deal with the US crisis.

Besides, the new government would have to consider a dilemma over how to weight the inflation risk and the economic growth in policy execution now that the risk from inflation has been recently reduced while the risk of the economic growth has risen over the past few weeks.

The current financial crisis would test the strength of Thai economy which has made a transition to become a middle income

country in the past 25 years, thanks largely to the dynamism in the private sector and export.

The Somchai government however didn't give us much hope. There was question about the government's ability to pursue good policies due to its weakening political clout.

Besides, judging from the statement made by some economic ministers, it seemed like the economic ministers have so far failed to grab the magnitude of the prospective problem. Worse still, Finance Minister Suchart Thadathamrongvech unnecessarily caused the panic to the market by saying that there were some financially ailing insurers only to recanting his statement later.

 Somchai government's economic policy was read like a cloning version of Samak government. The Cabinet members focused on how to pick up the projects with large investment that they left during the Samak government or the populism policies. Some had to put their energy to fix the problem caused by Samak's short term such as the rice pledging policy which Samak government set up unrealistically high prices, causing the market disruptions.

Next week, people expect to hear how the government plan to deal with the possible repercussions from the US financial meltdown and the anticipated economic vision of the government's economic team will show if the Somchai government passes the test.