Deficit spending could become unsustainable

Abhisit insisted that the government could manage its cash flow. The fall in fiscal reserves was as expected, since the government has already projected that its tax collections would decline by 10 per cent, he said.

Finance Minister Korn Chatikavanij said earlier he would like to borrow US$2 billion (Bt70 billion) from the Asian Development Bank, World Bank and Japan International Cooperation Agency to finance government projects.

But Abhisit cut it short,

saying the government has

yet to reach a definite conclusion over its overseas borrowing.

"If we have to borrow the overseas loans to do projects, then we don't need to because we have enough money. We will only borrow offshore in case we need to do or manage additional projects. We still have ample international reserves, which we have not tapped. What we have done so far is to prevent deflation," the prime minister said.

From both Abhisit's and Korn's comments, it appears the government is still trying to fix problems in the old mode. Although the Abhisit government's spending is aimed at improving the social safety net of the underprivileged, it also hopes that injecting huge government money into the economy would help buoy economic growth.

"Thailand has been waiting for two measures from the government," said Thanomsri Fongarunrung, an economist at Phatra Securities in Bangkok, in an interview with Bloomberg. "One is to solve the problem of lending by commercial banks, and the other is to create long-term jobs through infrastructure projects."

But the global economy would not recover in the foreseeable future, given the magnitude of the financial crisis and the banking agony.

If this were to be the case, the Abhisit government would not be in a position to continue its deficit spending in this mode before the country's fiscal position becomes unsustainable. So it should be prepared for the worst.

Quietly, Korn has admitted that his job is to keep the economy humming and prevent it from passing out.

Looking ahead, there will be several thought-provoking challenges facing the Abhisit government.

First, the government must cut back its workforce by 50 per cent to salvage its fiscal position. Thailand did this in the 1930s during the Great Depression.

Second, Thai banks are beginning to feel distressed. They have lost money through their funds in the financial markets, making it unlikely for them to narrow the spread of around 4 per cent. They are going to be reluctant to lend money again.

Third, the baht exchange rate is working through a flawed international financial system. The US dollar should have collapsed along with the US financial strife. But competitive currency devaluation against the US dollar is rife among the emerging economies that want to keep their exports afloat. This foreign-exchange system has to be rectified.

Third, alternative energy, through palm-oil production, must be developed quickly to reduce the country's dependence on oil imports, which are costing the country Bt400 billion to Bt500 billion a year.

Fourth, agriculture and tourism should be placed high on the government agenda, as manufactured exports will be facing a global demand slump. These two sectors, including investment in alternative energy, should help absorb unemployment if the crisis were to drag on for several years to come.