Govt stimuli: Right policies at the wrong time

Paul Gambles, managing partner and chief investment officer of MBMG Asset Management, a 19-year resident of Thailand, says it is really an interesting time for Thai stock investors.

"People have never been so confused, worried and yet so excited right now (as the Thai stock market index broke the 1,600 barrier, reaching a 18-year high)," he said.

"In the short term, stock investments are dominated by government policies - as we have seen very stimulating policies. The output is the direct result of the inputs. The mega projects (worth Bt2 trillion over seven years) have not really come through yet as it takes time.

"However, the rice-pledging scheme or the first-car buying scheme are among the major stimuli providing big incentives to farmers and consumers plus the corporate income tax cut (from 30 per cent to 23 per cent).

"Everything thing right now is very stimulating, which I think has come at the wrong time. These policies promote employment, growth and you need to do this when the economy is in bad shape.

"However, the Thai economy isn't in such a situation. I think we are creating economic bubbles whether they are the stock market bubble or the property market bubble, etc. Bubbles are not bad things for investors. That's when you want to invest, but the problem is that most bubbles when they get to a certain size they will end up bursting.

"This time I think it's probably different - before the bubbles get too big we would face problems imported into Thailand from overseas. The global economy is still in a pretty bad shape so that might be what bursts the bubbles in Thailand.

"Cyprus is a top topic but it's only a symptom not the disease of the eurozone crisis, which is all the way down the body or the economies of Europe. The fundamental problem is the totally messed-up or unnatural situation of tying up different countries (which are at different stages of development) together.

"The eurozone has created huge imbalances such as the one in Cyprus (where bank assets are seven times GDP). Fundamentally, Greece, Italy, Portugal, Spain, etc still face problems and one of these countries will be the first one to exit and the eurozone's floodgate will open and the rest will leave. That's absolute disaster."

Kirida Paopichit, senior economist of the World Bank's office in Thailand, says that overall, there are no widespread bubbles in the Thai economy at this stage.

"However, there are signs such as in the stock market where some listed firms, especially small ones, have seen stock prices rise sharply beyond their fundamental value," he said.

"This is due to an increase of speculative investments, but the bigger-cap stocks are still relatively OK in terms of price-earnings ratios. The Thai market's P/E ratio is about 14 times, which is still lower than the average of Asean stock markets, which is around 16 times.

"In the property sector, there are also some pockets of bubbles such as those in major provincial cities or those in the Northeast bordering Laos. Domestic interest rates are low so there is also real demand for houses and condos. Bank credit is another indicator of bubbles of the real estate sector.

"Regarding foreign capital inflows, money in the bond |market would not be much of a problem, but if it's in the stock market that's another matter. In general, foreign capital from quantitative easing in the US contains both hot money and long-term money or FDI or foreign direct investment.

"In the long run, as a development economist, I think the country has not invested significantly in mega-infrastructure projects for a long time since the Tom Yam Kung crisis in 1997 so it's a good time to do so under the Bt2-trillion mega projects being planned by the government.

"We have to weigh how much reserves we need for the rainy days and how much money we could invest for the future. External risks remain the eurozone crisis and the US recovery, which still relies on money printing, which cannot last forever."