Second stimulus package will be the real test

The government of Prime Minister Abhisit Vejjajiva is facing a daunting task in trying to push forward investment projects to accelerate the process of economic recovery. The next round of stimulus measures is necessary to prevent further severe impacts from the recession. The government plans to spend Bt1.43 trillion in the next three years. The package is to offset the slowdown in the export sector, which accounts for more than 70 per cent of GDP. Due to the global recession, Thai exporters are unlikely to enjoy the same level of growth they did in the past.

However, the extent to which the stimulus package will help boost the economy remains uncertain. The Thai economy might contract by 6 to 7 per cent in the first quarter of this year, following the fourth quarter last year, which contracted 4.3 per cent.

The business sector is now pinning hopes on the government to be able to execute infrastructure and other projects to boost job creation.

However, the question remains where the government will find the sum of Bt1.43 trillion. The government has planned to borrow Bt800 billion. So, the question whether the second stimulus package will be effective depends on whether the administration will get the money.

Bank of Thailand Governor Tarisa Watanagase said there is sufficient financial liquidity in the market, or more than Bt1 trillion. Thus, the government would not find it difficult to raise funds from the domestic market.

The government's plan to borrow more to finance its investment projects may push up the proportion of public debt to GDP to 60 per cent in 2012 and 2013. But the level is acceptable because the money is needed urgently to boost the economy.

Nevertheless, government borrowing should not affect the source of funding that private companies also expect. And many of these companies need money from the commercial banks as lifeline to continue their business until the economy begins to recover.

Although the government has tried to send signals to the private sector that the economy will recover soon, businesspeople are not certain whether the positive sentiment will be sustained in the medium to long run. Many are not sure how the economy will perform after the end of the stimulus package. This is a factor that both the public and private sectors will have to monitor.

The Abhisit government thus will have to execute the second stimulus package effectively. Time is not a luxury. If the second round is not effective, then it will send the obvious signal to the market that the recovery is unlikely - and this will further dampen economic prospects.