Fiscal expansion seen as key

The Nation (29 November 2007)

Focus on domestic demand in light of sub-prime effects, seminar hears

A seminar on the economy yesterday was dominated by advice to the new government - one month before it is elected - on how it should prepare to offset the effects of the US sub-prime crisis.

BankThai executive Banluesak Pussarangsee said the new government should implement fiscal expansion to stimulate domestic consumption. This, he said, would offset the expected decline in overseas demand because of ongoing problems in the US security-mortgage market.

Speaking at a seminar entitled "The Thai economy after the general election", he said the new government should focus on domestic demand because the world economy was likely to be affected by the US sub-prime problem and the possibility of a bubble-burst in China.

Thailand is unlikely to continue enjoying high export growth next year, he said.

While some economists believe that the economy will not be affected by the sub-prime problem in the US, Banluesak said he did not believe in the "degrouping" theory.

US sub-prime problems aside, he said the economy might be affected by a bubble-burst in China, which could happen in a couple of years.

He said monetary policy would not help much to stimulate the economy because people would become more cautious in seeking loans.

Banluesak said the world economy was likely to be affected by various factors: the European Union's economy could be affected by the continuing appreciation of the euro against the dollar, while the Japanese economy might not perform as well as expected.

The sub-prime crisis in the US could lead to the foreclosure of two million home mortgages in the US early next year, he said. If this is the case, around US$600 billion to $700 billion (Bt20.31 trillion to Bt23.7 trillion) that these people have borrowed to finance their homes will disappear from the market, and this will affect exports to the US.

SCB Securities chief economist Sethaput Suthiwart-Narueput said the sub-prime crisis and a US economic slowdown would affect the economy for at least two years, while positive sentiment generated by next month's general election would also be affected in terms of its ability to boost the economy.

Sethaput said exporters sold 13 per cent of their goods directly to the US, while another 14 per cent are exported to the US via other markets. Therefore, exports will be affected by the sub-prime issue.

The sub-prime crisis, combined with the US economic slowdown, will also push the baht up and, when investors turn again to Asian markets, this will force the baht to rise even further, he said.
Sethaput said the sub-prime problem was yet to hit the bottom, because interest rates on sub-prime housing loans in the US will not peak until March next year. However, it will have had an adverse effect by then because the US housing market already has a stock of unsold houses equivalent to 10 months' supply.

Siam Commercial Bank executive Pakorn Pisatwatchai said the rising baht had diminished exporters' incomes. Although exports had risen by 12 per cent in dollar terms, they had grown by only 3 per cent in baht terms. Therefore, the Bank of Thailand was unlikely to adjust its policy interest rate at a meeting scheduled for December 11. The interest rate is unlikely to change until the second quarter of next year, he said.

Pakorn said the baht should be about 32.30 to the US dollar late next year, compared with 33.82 late this year.

One voice of optimism at the seminar came from rice traders' representative, Wichai Sriprasert, who said rice exporters might enjoy an increase in exports next year.

He said rice prices should also reach $1,000 per tonne, up from the present $300, because agricultural land was being converted to crops for making biodiesel, compounding the state of world rice stocks, which had fallen over the past three or four years because consumption had exceeded production.

Thai exporters had also gained an advantage over Vietnam - a major exporting rival - because that country's crop had been hit by typhoons.

However, Wichai warned the new government not to implement populist policies and, by doing so, ignore the market economy. This would mean the economy was unlikely to recover in a sustainable manner.

Chulalongkorn University economist Narong Petprasert said that although the agricultural sector had better prospects, no political parties had any clear policies on the agricultural and food industries.

Farmers should seize the opportunities arising from limitations on world cropping land because of large areas being allocated to growing alternative crops for energy. A limited supply of agricultural products would force food prices to rise at the expense of ordinary consumers.

Another Chulalongkorn University economist, Sompop Manasangsun, said the public should not expect the new government's term to be limited to only a year because it would make it even more difficult for it to manage economic policy.

If the new government is formed by a coalition of more than three parties, it will have difficulty running economic policy, he said. The new government's credibility will also depend on whether the new prime minister is accepted by international and domestic investors.