New govt faces a momentous task

After the Monetary Policy Committee's decision to chop the policy rate by 1 percentage point last week, a number of commercial banks are expected to follow suit by cutting their rates to respond to the central bank's plan to use the monetary policy to stimulate the economy.

The rate cut alone is unlikely to boost the economic sentiment. But it was among the much-needed measures to boost the economy with a slowdown imminent. Economic expansion in the third quarter of this year was only 4 per cent, lower than the initial expectation. The import figure grew largely because of imports of gold, aircraft and satellites, not machinery or capital goods for investment.

The credit crunch has become a serious problem at the same time as earnings from tourism have dropped sharply. Thailand is likely to see a current account deficit to the tune of US$1.2 billion instead of a current account surplus of up to $4 billion as initially forecast.

Several think tanks are revising their economic expansion rate estimates. Compared to the initial forecast that the Thai economy might expand by 4 per cent, we will be lucky if the economy next year manages to grow beyond 3 per cent. The closure of the airports by the People's Alliance for Democracy is likely to dampen tourism arrivals for a long while. The confidence index in the industrial sector plunged to a record level since it began in 2000.

Outside factors do not help in the major world economies: the US, the European Union and Japan, are all facing recessions.

One of the immediate effects the country is likely to face is unemployment. The National Economic and Social Development Board forecasts that 900,000 people will become unemployed next year, compared to 500,000 on average. The worse news is that the NESDB made this estimate before the eight-day shutdown of Suvarnabhumi and Don Mueang airports. The closure of the airports is likely to have a massive impact on the economy, as it will affect several sectors including tourism, international trade, hotels, retail and airlines. Therefore, the actual unemployment rate next year could top 1 million, if the impact from the shutdown of the airports is also taken into account.

Based on this scenario, the government should go ahead with the special fiscal budget worth Bt100 billion as part of the economic stimulus package that had been earlier announced. Even then it will be able to create only an additional Bt280 billion in public debt to boost the economy. In short, the government does not have much room to use fiscal means. The situation could get worse if the government collects less revenue from tax, which is highly likely due to the worsening economy.

The Bank of Thailand's Governor Tarisa Watanagase said earlier that the monetary policy was unlikely to boost the economy amidst the financial crisis and an absence of consumer confidence. But the MPC decided to take the bold measure of cutting the rate by one percentage point. The MPC members have taken into consideration several factors before making such a bold move.

These are the problems that the new government - in whatever form it takes - will have to face. Thailand is experiencing its worst economic crisis in a decade. Even in the scenario that Thailand has a stable government, the new administration is likely to have little room to implement an effective economic stimulus policy.

The Public Debt Management Office of the Finance Ministry has warned that the new government will have to be cautious in managing the fiscal policy because the country has almost hit the debt ceiling requirement.

Thus, Thailand needs a capable coalition government that should be able to function effectively rather than one that is continuously on the back-foot because it has to defend its political stance.