Prime Minister Yingluck Shinawatra has gone against all odds to complete her first year as Thailand's first female prime minister.
Her premiership is a clear case of style over substance. In today’s world, style sells. But in the end, substance should prevail when reality strikes.
Yingluck is presiding over the country during a turbulent period marked by the end of the super cycle. External volatility will determine the course of Thai stability, politically and economically.
Financial capitalism, accentuated by public- and private-sector indebtedness, appears to have run its course. When a super cycle ends, we normally experience economic dislocations and geopolitical shifts, marred by regional conflicts and wars.
There are presently several fragile spots around the world. First, the European Union, particularly the euro zone, is facing a growing risk of disintegration. If the banking sector in Europe is bankrupt, it will hit the US banking sector to the tune of US $3 trillion. This amount represents 30 per cent of US banking assets. So the US will also be pulled down. Although Thailand exports about 10 per cent of its total exports to the European Union, it will stand to take a hit from other indirect impacts, such as global recession. Already the export machines of most Asian countries are slowing down due to the euro-zone crisis.
Second, Syria is entering a period of sustained instability, with potential chaos and a possible downfall similar to Libya. If the US and its allies were to take on Iran after Syria, we might see a spillover of the regional conflict into other parts of the world, including Southeast Asia.
Thirdly, the US is encircling China and is now wooing Thailand as one of its key allies in the region, apart from Vietnam, the Philippines, Singapore and other countries.
Finally, the Asean Economic Community is taking shape, with more openness seen in Myanmar.
It seems that Yingluck lacks a clear strategy to deal with these external factors that will shape the course for Thailand, whose exports account for 70 per cent of gross domestic product. Her government is focusing on short-term populist policies to fulfill campaign pledges. Over the past year, clashes between the red shirts and yellow shirts have been avoided. But a political drive to bring home the prime minister’s fugitive brother, Thaksin Shinawatra, has complicated the political scene. Other domestic political conflicts that have been kept alive by the prime minsiter’s allies include campaigns to remove the lese majeste law, introduce amnesty legislation and to rewrite the Constitution.
The border conflict with Cambodia over the Preah Vihear Temple, the emergence of “red-shirt villages” and the insurgency in the deep South have become Achilles’ heels of the country. Again, it is not clear whether Yingluck is part of these problems or part of their solution.
The government’s economic policy is most prominent though it is not praiseworthy. The government continues to run a massive budget deficit of Bt300-Bt400 billion a year. The populist economic programmes will drain the national coffers. The rice price pledging scheme, marred by corruption and lack of transparency, will create damage of at least Bt100 billion. The minimum wage of Bt300 per day has created upward price pressure. The first car and first home programmes have created disparity between the middle class, who are in a position to participate in these two programmes, and the rural poor.
The prime minister has touted Thailand as a hub of the AEC by banking on her government’s plan to invest Bt2.2 trillion over the next four to five years to upgrade infrastructure projects. This will raise the country’s public debt from Bt4.6 trillion to Bt6.8 trillion, or 60 per cent of GDP.
On the monetary and foreign exchange policy, the government wants to promote a weak baht to prop up the export sector. At the same time it wants the Bank of Thailand to focus on growth and employment rather than on price stability. The BOT’s policy rate, according to Kittiratt Na Ranong, the deputy prime minister, should be slashed from 3.0 to 2.50 per cent to boost investment and domestic spending.
All in all, the Yingluck government is running an ultra-loose fiscal and monetary policy. This is worrisome, given the external instability and volatility. She should start to put these policies under review, with the key aim of managing the downturn to achieve a soft landing. In this way, Thailand’s reserves can be preserved, or its debt level is capped, so that we have more ammunition to cope with the harder times ahead at the end of the global super cycle.