• 
• 

The Bank of Thailand's Monetary Policy Committee (MPC) has stepped on the accelerator aggressively. Yesterday it cut the policy rate sharply by 75 basis points to 2 per cent. This measure is welcome. It is in line with most analysts' expectations of a sharp rate cut between 50 to 100 basis points. This rate cut follows the one full percentage point policy rate reduction in December.

Moreover, the monetary authorities have signalled there is room for the rates to fall even further as monetary easing is necessary to aid the contracting economy.

Economic indicators have been deteriorating fast and prices have also been falling sharply since November amid the global financial crisis and recession. The Thai central bank has no choice but to reduce the rates aggressively in the first quarter of this year.

DBS Global Research said in its report yesterday that the data for October and November imply at least a 6 per cent quarter to quarter contraction in the fourth quarter of 2008.

"GDP growth rates are likely to dip into negative territory in 2009 in year-on-year terms, further pressurising the authority into acting to cushion the economy and support prices," the DBS report said.

"The government recently extended the temporary package introduced in August 2008 to keep the cost of living down. It was due to expire by the end of January 2009. This includes free bus rides and third-class train rides and discounts for electricity, water usage, among others. The excise tax on diesel would, however, be restored. While this move is not surprising, it should further lower 2009 inflation. On the whole, it would not be surprising if the central bank lowers rates significantly this quarter."

Exports, which have been the engine of Thai economic growth, are slowing down markedly and might even register a minus growth rate of 3 per cent in 2009. Consumption is getting weaker, so is investment. If the government stands idle, the economy will go further downhill.

The central bank would like to accommodate the Abhisit government's attempt, through its massive economic stimulus programme, to jump-start the economy by agreeing to cut interest rates sharply until the downturn is arrested.

"The MPC considers that the monetary policy could be further relaxed to support the economic recovery ... [but] it would take some time before fiscal measures show their effectiveness," said Bank of Thailand Assistant Governor Duangmanee Wongprateep. She also noted that at 2 per cent, the policy rate could be cut further.

At present the Thai economy is projected to grow only by 0.5-2.5 per cent in 2009, the lowest growth rate in 10 years. This is compared to about 4 per cent in 2008. As demand is contracting, most economists believe that the growth rate might plunge into negative territory in the first and second quarter of this year before a slight rebound takes place in the second half of the year.

Rushing to arrest the contraction in demand, the Abhisit Cabinet on Tuesday moved quickly to push forward the first part of the stimulus package, worth around Bt116 billion. The package includes a monthly living allowance of Bt2,000 per person for about 9 million low-income earners nationwide, school subsidies, promotion of rural small enterprises, plus free electricity and tap-water for small households, among other measures.

The package aims to put money in the hands of Thais so that they spend quickly. Overall, this package might help lift economic growth by more than one percentage point. The whole stimulus package for fiscal 2009 might eventually reach Bt350 billion.

The Abhisit government's aim is to reduce the number of unemployed workers by as much as possible. More than one million people are expected to lose their jobs this year.

Most economists are not comfortable with the massive spending to boost consumption. But to be fair, there is no other quicker option to stop and reverse the downturn of the economy. To launch any investment projects will take time. Stimulating consumption is the quickest way to salvage the sagging economy in the short term, particularly if the money is injected into the system by the second quarter of this year.

But by going for deficit spending to stimulate the economy, the government will also face the risk of breaching fiscal discipline. The deficit could easily reach Bt500 billion, and the means of financing it has become a problem. The administration is handcuffed by regulations making it impossible to raise money locally to finance the deficit without breaching the ceiling. But it still has some room for borrowing from overseas. Fiscal prudence is of the utmost important if Thailand hopes to sustain itself into the future.