GLOBAL FINANCIAL STORM

GLOBAL FINANCIAL STORM

Govt urged to be prepared
The growing likelihood that the global economy will tip into a double-dip recession threatens Thailand's economic strength, so the new government should ensure a clear implementation plan for its policies and prepare to respond to rising risks, experts warned last week.
"A negative factor is the risk of a double-dip recession in the West - Europe and the United States," Usara Wilaipich, an economist at Standard Chartered Bank, told a seminar hosted by Nation Multimedia Group.
The market turmoil in recent weeks was part of the continuing fallout from the global financial crisis of 2008, she said.
Investors have dumped shares worldwide after economic data suggested weaker growth in the US, Germany, France and in other large economies in Europe, while many countries suffer sovereign debt crises.
Investors are worried that the US economy may plunge into a double-dip recession due to contagion from the debt crisis in Europe.
The risk of a default by Italy, the third-largest European economy, has increased. The spread of the debt crisis from smaller economies like Greece to larger ones now threatens to pull down Europe's largest economies, Germany and France, together, Usara said.
"The chance of a double-dip is over 50 per cent," said Sethaput Suthiwart-Narueput, an independent economist.
Banks in Europe may start to doubt the financial health of their counterparties and become reluctant to lend funds to each other, a situation similar to what happened in 2008, he said.
"Investors are also worried that policymakers might be running out of bullets," he said.
After rebounding from the 2008 financial crisis partly because of |economic stimulus packages, China and the rest of Asia could be ad-versely affected if the Western economies slow down. China launched the largest package, |worth 4 trillion yuan (Bt17.4 trillion), in early 2009, and now bad debts |in local governments have ballooned.
Since Chinese authorities have implemented policies to tighten bank lending, this could also cause the economy to slow down sharply, Sethaput added.
Dej Patanasethpong, managing director of Thong Thai Textile, was optimistic about Thai exports to the West, saying exports would not be adversely affected in the next two years due partly to the nature of the demand for Thai products in that market.
The financial crisis has changed consumption patterns in the West, and that benefits Thai exports, Dej said.
"Consumers cannot spend on big-ticket items like cars or homes, so they, besides buying smart phones, spend on small items - nice apparel, food and lifestyle products, which are our products," he said.
"Even if these economies slip into recession, consumers will still spend on food and other basic necessities," he said.
Local companies are also exporting more to the Asian market, resulting in less dependence on the US and Europe, he added.
Songtham Pinto, director for |the macroeconomy at the Bank of Thailand, said it would take time |for Europe and the US to address their problems.
Their overconfidence led to excessive borrowing, while the productivity of unskilled labour in the US has dropped. It is only the productivity of skilled workers that is rising, Songtham said.
The US lost its top "AAA" credit rating because rating agency Standard and Poor's lost faith in the competency of American politicians, he said.
"I don't know where the end game is," he said, referring to the deepening economic troubles in the West.
However, the central bank has |not yet seen any impact on Thai exports, as rubber and other farm products are benefiting from rising prices, he added. Sirikamon Udompol, economist at the Finance Ministry, said the economies in the West may slow down or enter a double-dip recession in the second half of this year.
"China may achieve a soft landing, or a full-year growth rate of 9.2 per cent compared with 9.6 per cent in the first half of the year," she said.
Japan has also recovered faster than expected from the devastating tsunami in March, and its efforts to rebuild affected areas would be a positive factor for Thai exports, she said.
Investors are waiting to see a clear-cut plan for how the government is going to execute its economic policies, Sirikamon said.
"There must be a timeline - when each project will be implemented and how to finance it," she said.
The new government has made several pledges including wage hikes, debt suspensions, easy loans, tax cuts and infrastructure investment, which require huge financing beyond tax revenue.
"The government may issue dollar-denominated bonds to raise funds from overseas due to the lower cost," she said.
The government should not borrow from the domestic market, she said, because it would compete for funds with the private sector.
The central bank may slow down rate hikes, as the inflation threat has subsided. Capital is expected to continue flowing into Thailand and Asia, she added.
While spending has continued to rise, Sethaput said, government revenue has not.
Workers' low wages restrict domestic consumption, but wage hikes should come in tandem |with productivity improvements, he said.
Thailand is lagging other countries in terms of investment, which is still only at about 70 per cent of the level seen before the Asian financial crisis in 1997, Sethaput said.
Thai governments have little money to invest in infrastructure due to rising current spending - such as officials' salaries and healthcare expenses - and populist policies, he added.
Dej said investors would wait and see how the government will act on its populist policies.
"The biggest concern is that |the government has become a |market player instead of acting as |a facilitator," he said. "The government must compensate workers if manufacturers close their plants due to the wage hike," he said.
Songtham also expressed concern over public debt and the low tax-revenue base.
"Although our debt is only 42 per cent of GDP, compared with Italy's debt at 120 per cent of GDP, our debt is about 250 per cent of tax revenue, close to Italy's debt to revenue of 260 per cent," he warned.
Sirikamon gave his assurance that the Finance Ministry will first look at revenue before planning spending, to ensure fiscal discipline.