Stimulus makes SET open to foreign shocks

Index could suffer 40% plunge: expert

The government's economic stimulus package has helped push share prices up into dangerous territory and any shocks from the West or China could send the SET Index diving 40 per cent, a foreign financial expert has warned.

"Our worry is that it's really not a necessary policy. Thailand's economy has been recovering quite nicely since the floods," said Paul Gambles, managing partner of Bangkok-based MBMG Group, a financial-service provider.

He said he was extremely worried about public debt. Thailand and Indonesia had started from the same level but now Thailand's sovereign debt is approaching 60 per cent of gross domestic product while Indonesia is more conservative and keeps its public debt at about 30 per cent of GDP.

Government initiatives like the rice pledging, credit-card subsidy and first-car tax-rebate schemes have revved up economic activity and also sucked in massive capital flows, he said in an interview with The Nation.

The projects have involved a lot of capital commitment but some of them are quite long-term. Without government stimulus, the fair value of the Stock Exchange of Thailand would be about 10 per cent lower, he said.

Any negative economic news from the West such as the collapse of the euro, bank failures in the United States and Europe or trouble in China's banking system could spark a sharp fall of the Thai and other Asian equity markets.

If the SET Index plummets from the current 1,500 points to 1,300 or below 1,000, Gambles would recommend investors to buy Thai stocks aggressively.

Bank of Thailand chairman Virabongsa Ramangkura has called for its Monetary Policy Committee to cut the policy rate from the current 2.75 per cent to stem large capital inflows. However, Gambles did not agree with this proposal for a rate cut, though he shares Virabongsa's concern about a market bubble. He said the government should drop the stimulus measures instead.

If the central bank does lower the interest rate, the upside is that it would help weaken the baht, as the strong currency is causing a major headache for exporters right now, Gambles said. "But I think if we have the growth rate that we have currently, we have stimulus going on right now and then we have a weaker baht and lower interest rate, inflation will be a real problem."

Many people he has talked to are very worried about the rises in the prices of food, rents and wages. Structural wage inflation could come to resemble a cancer that embeds itself in the economy. The minimum wage has started going up to an excessive level that could get inflation out of control, he claimed.

Inflation in January was 3.39 per cent year on year.

Lowering the interest rate is not the right solution because it would cause unintended consequences, he said. There should be other tools to tame the baht.

"The real answer would be that we fix a core fundamental policy issue if we take away a lot of stimulus. If we start to reduce government debt, that will deal with the strength of the baht," he said.

Interest rates should be higher right now. Cutting rates is exactly the wrong way, he said.

Joanne Baynham, MitonOptimal's head of international portfolio management, also cautioned against a rate cut.

Reducing rates would encourage people to take money out of the bank and spend it, as people don't get a return from lower interest rates but from high inflation rates.

"Ultimately, it'll lead to inflation. It's a very dangerous game. Be careful," she said.



Year to date capital inflows (US dollars)

India $7.134 billion

Taiwan $1.589 billion

Indonesia $957 million

Philippines $802 million

Thailand $192 million

Vietnam $170 million



Source: Deutsche Bank/Tisco Securities