ECR - Hey Big Spender: How Yingluck intends to splash Thai cash

A quick look through Puea Thai’s pre-election pledges reveals why investors are so concerned about the party’s landslide election victory in Thailand last weekend.

In one of her first statements as prime minister, Yingluck Shinawatra, sister of exiled former premier Thaksin Shinawatra, announced the scrapping of a state levy on the retail price of diesel and other fuels. This was a policy in keeping with PT’s principles of improving the life of Thailand’s poorest citizens, defensible perhaps in the context of the impact of rising inflation on low income voters. But this is just the first of an astonishing list of giveaways planned under PT’s term of office, some of which might make Hugo Chavez blush.

Promises

Before the election, PT’s promises included a 40% increase in the minimum wage to B300 ($10) per day; raising public-sector pay from B9,000 per month to B15,000; and the piece de resistance, a three-year debt amnesty for all personal debts under B500,000, with interest payments to be subsidised by the state. Finally, in a move intended to reassure investor concerns that it might be anti-business, PT proposed a cut in the rate of corporation tax, from 30% to 20% over the next two fiscal years. The measures, whose timeframe will be announced when parliament convenes again on August 2, represent a stark change from the fiscal conservatism that has marked successive Thai governments since the Asian crisis destroyed the country’s finances in 1997.

Of course, not all of these policies will be implemented immediately – rules limit the size of the Thai government’s budget deficit to 20% of total expenditures, and the government has a nominal debt ceiling of 50% of GDP – and some of the proposals are likely to disappear without trace over the course of PT’s term. But the populist intentions of PT – and the likelihood of increased public spending and expanded government deficits while in office – could not have been made clearer.

Government debt

A commensurate increase in government debt is also likely, taking it above its present level of 41% of GDP. To put the impact of the signalled splurge into context, Nomura estimates that an average government deficit of just 2% (a figure far beneath any credible estimate of what the proposed measures would cost) over the next five years would increase Thailand’s government debt to 51%. "Implementing many of these policies without having proper appropriation of the revenues would adversely affect the country's fiscal position," warns Takahira Ogawa of Standard & Poor’s, in a classic example of a rating agency official stating the obvious.

Of course, the planned programme of expansionary fiscal policy is also likely to markedly stimulate inflation, with implications for Thailand’s currency. Although the consumer price index (CPI) fell to 4.1% in June, the Thai central bank predicted in its last meeting on June 1 that core inflation is likely to rise above target by the end of the year. With inflation expectations likely to rise over the same period, Nucharin Panorode, an analyst at Nomura, says: “The programme of fiscal stimulus planned by PT will increase inflationary pressures, pointing to a weaker baht in the medium term.”

With the economy delicately balanced (Deloitte recently lowered its full-year growth forecast to a 4.2%-8% range, from 5% previously) the newly elected PT party and the opposition parties have taken a conciliatory line in the days following the election. Both sides know how much is at stake. A repeat of last year’s violent protests, when red-shirted supporters of Thaksin Shinawatra took to the streets, could be costly to the economy and prompt already nervous investors to flee the country.

Landslide victory

The size of PT’s election victory has divided opinion. Eurasia Group, a political risk consultancy, hailed the clear PT majority as the best possible result for stability in Thailand, while equity markets have responded with muted enthusiasm, with Bangkok’s SET Index since rising by 3%, as of July 6. But many fear that PT’s victory will hasten the return of Thaksin Shinawatra from exile in Dubai. Hated by the establishment for his populist policies and perceived autocratic style of governance, Shinawatra fled to avoid outstanding charges of breaching conflict-of-interest laws. His possible return remains a potential flashpoint for violent clashes between Thailand’s multi-coloured political protest movements.

Shinawatra has made clear through his sister that he will not press for an immediate return, but his exile appears only to have strengthened his appeal to Red Shirt supporters. Wichai Turongpun, professor of economics at Kasetsart University in Bangkok, says: “Bringing Thaksin back to Thailand is the PT’s primary mandate. Its secondary mandate is to address the accumulated grievances of the red-shirt support base over the past four years of conservative government, including the deaths of its supporters in last year’s riots.”

A version of this article first appeared in Euromoney Country Risk. Euromoney Country Risk is an online service from Euromoney dedicated to sovereign and country risk.