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Published on September 18, 2007

The next government will face limitations in fiscal-policy management and a highly uncertain world economy, experts told a seminar entitled "Fiscal and Monetary Policies during the Transition Period", hosted by the Fiscal Policy Office.

Finance Minister Chalongphob Sussangkarn conceded that fiscal policy would be less effective in boosting the economy under the floating exchange-rate regime. More government spending would lead to higher interest rates, then capital inflows, leading to baht appreciation, which would in turn negatively affect exports.

He also warned that the new Constitution required more financial aid from the government to the public in social-welfare and education expenditures and that this would be even more of a burden on the government.

Thus, the problem will be "where to get the money from", he said.

Phatra Securities managing director Supavud Saicheua agreed, saying that under the floating exchange rate, monetary policy would better boost growth by keeping interest rates low. There must be closer cooperation between fiscal and monetary policy-makers, he said.

Supavud said the next government needed to monitor the US sub-prime mortgage crisis closely and determine whether it would escalate. If sub-prime mortgage credit becomes a more serious issue, it may cause a lack of liquidity in the world market, he warned. The sub-prime issue in the US and a recent bank run on Northern Rock in England indicates the global market is starting to correct its imbalance, he said.

That imbalance has been caused by low savings in the US resulting in a wider current-account deficit. The rest of world - including Asia and especially the Middle East and Russia - with its high savings rate, has been willing to finance the US deficit, resulting in lower interest rates and a flood of liquidity.

After the sub-prime issue, the rest of world may no longer want to finance the US deficit, so the US will have to save more, which means its economy will slow down. US consumers reducing consumption would negatively affect Asian exports.

"How do we in Thailand prepare for such a scenario?" asked Supavud.

Taking into account Thailand's current-account surplus and the diminishing attraction of US financial assets, large capital inflows would strengthen the baht, which would in turn cause exporters to become afraid of losing markets, he said. The Democrat Party's statement that it would cancel capital controls - the 30 per cent reserve required by the central bank - would also add to the momentum of the stronger baht.

One solution is to speed up the import of capital goods, in order to lessen the appreciation of the baht, he said. The government must also invest more in infrastructure projects.

Former deputy finance minister Pisit Lee-ahtam suggested the new government list potential state enterprises on the stock exchange, in order to create investment opportunities for institutional and local investors.

He said the Government Pension Fund, the Social Security Fund and provident funds had a combined worth of about Bt1 trillion but that they could not find attractive investment. Commercial banks do not want more savings, resulting in a low rate of return for savings accounts. The stock market has too few supplies of good stocks. The Government Pension Fund has been successful in investing in foreign stock markets, and the Bank of Thailand (BOT) recently encouraged institutional investors to invest abroad. Pisit, however, said greater investment in the local bourse would be much better for the economy.

Undeveloped capital markets and an unclear policy of privatisation have also created a burden for both the Finance Ministry and the BOT, because they must issue bonds to provide investment opportunities for investors, he said. He urged joint ventures or multinationals like car manufacturers to list with the Thai stock exchange.

Fiscal Policy Office director-general Pannee Sathavarodom said his office was currently studying several issues, including tax reform (possibly for introducing an environmental tax), a national savings scheme for the elderly and bonds for financing infrastructure projects.

Meanwhile, Finance Ministry spokesman Somchai Sujjapongse said the government ran a cash-flow deficit of Bt230.77 billion in the first 11 months of this fiscal year. This was in line with the government's policy of maintaining economic growth at a level of at least 4 per cent, he said. The government ran a budget deficit of Bt172 billion and off-budget deficits of Bt58.44 billion. The fiscal year ends on September 30, and the government expects a fiscal deficit of Bt146 billion.

Wichit Chaitrong

 The Nation