Political Risks could put pressure on the economy and delay fiscal spending

The new administration will be fighting for political survival while ensuring that demand does not deteriorate and court a recession, CitiGroup said yesterday in its paper on

"Asia Economic Prospects - Surviving the 2009 Crisis".

"A sustained accommodative fiscal and monetary bias would be crucial for nurturing domestic demand while

the contribution of net exports to gross domestic product

falls sharply starting in fourth quarter 2008," it said.

"Unless political stability is restored, we assign negligible probability to a revival of private investment. A recovery in 2010 may replicate GDP growth in 2008 at best, but with the key stimulus coming from improving external demand."

External trade figures for October confirmed that exports and imports would not be spared from the global recession, which heightens the risk of a severe drag from net exports.

"We expect net exports in real terms to decline by 7.5 per cent year on year in 2009 after estimated growth of 3 per cent year on year in 2008. In 2001 when the United States fell into a benign recession as the dotcom bubble burst combined with 9/11 event risk, net exports barely grew in Thailand," CitiGroup said.

The export slack would directly impact manufacturing and result in lower capacity utilisation rates, higher unemployment and lower GDP contribution. Utilisation rates would hit 55-60 per cent, lower than in 2001. Since then, more manufacturing capacity has been introduced with a larger contribution from Japanese car manufacturers.

Amid the unstable political situation, with the government being challenged by opposition groups, the new administration would be very effective in pursuing aggressive fiscal spending, CitiGroup said. The government has raised its fiscal 2009 budget by Bt100 billion to boost its fiscal deficit target to 3.5 per cent of GDP from the pre-crisis ratio of 2.5 per cent.

A fresh mandate for any ruling administration may be needed. While new elections would not dislodge the ruling coalition from their majority status, the recent legal defeats of Thaksin Shinawatra and key associates would allow the minority opposition to campaign more effectively, gain more seats in Parliament and, therefore, effectively increase their ability to perform duties as the opposition.

There is also a worry of a repeat of a marginal fiscal deficit in fiscal 2008 during a period in which the global recession would heighten. For fiscal 2008, IMF figures indicate a budget deficit of less than Bt40 billion, or about 0.4 per cent of GDP, when the government promised a fiscal deficit of about 2 per cent of GDP.

"We think fiscal spending would be more robust in the second half of fiscal 2009 if the political situation stabilises, allowing government consumption to rise by 3-6 per cent year on year and help fuel a recovery. Without the fiscal agent, GDP's drift lower will not be arrested," CitiGroup said.

Implementation of infrastructure projects would be crucial to help soak up surplus labour coming from the export sector. The upside to increased fiscal spending is that fiscal revenues capture the income multiplier effects that support increased consumption.

With the automatic tax stabiliser at work, the actual deficit may be much less than the government's deficit target ratio of 3.5 per cent of GDP.