Thai central banker warns on subsidies largesse

September 27, 2013 10:00 am

Thai central banker warns on subsidies largesse

By Michael Peel in Bangkok

Thailand’s central bank chief on Friday fired a broadside against populist government policies, echoing wider fears that climbing consumer debt levels and more spending on commodity subsidies are underminingsoutheast Asia’s second-largest economy. Prasarn Trairatvorakul, governor, warned that Thai households could become “undisciplined” and “addicted to easy money”, amid a succession of handouts by government ranging from subsidies to rice farmers to tax breaks on first-time car buys. Thai household debt has risen to about 80 per cent of gross domestic product, from 55 per cent in 2008. Much of that growth has come from lending to subprime lenders, according to Fitch, the rating agency – a practice that helped unravel the US economy.Like other emerging markets, albeit to a lesser extent than India and Indonesia, domestic economic faultlinesand the impending tapering of quantitative easing in the US, make Thailand vulnerable to outflows of capital – exacerbating homespun weaknesses.

Mr Trairatvorakul said simply pursuing policies of stimulating consumer demand without making the economy more competitive were “akin to stepping on the gas pedal without upgrading or modifying the car we drive”.

The former finance executive and financial market regulator said “policy distortion” such as programmes to subsidise rice and other commodities needed to be “corrected” and “kept to a minimum”.

The government is also facing criticism from opposition politicians and many independent observers for spending almost 700bn baht on a two-year rice-buying programme that has led to the build-up of huge stockpiles and big losses because some of the stored food will spoil and other parts be resold at a lower price. Officials have said the government lost about 137bn baht on the programme in 2011-12.

The governor – in common with many other observers – insisted the Thai economy was fundamentally sound and in a much stronger position than in the run-up to its 1997 financial crisis. Economic growth is slowing but is still expected to reach 4 per cent this year, while exports rose in August at their fastest pace for five months.

But the governor acknowledged Thailand was suffering from wider fears that the end of the US government’s longstanding bond-buying programme could lead to a sharp drop in investment flows to Asian emerging markets.

Uncertainty over future US monetary policy was a “stress test for emerging market economies” that should make them “re-examine the robustness of their growth strategy in the face of global headwinds and fickleness”, Mr Trairatvorakul said.

Pursuing policies of stimulating consumer demand without making the economy more competitive were akin to stepping on the gas pedal without upgrading or modifying the car we drive

– Prasarn Trairatvorakul

Bangkok’s economic strategy, and particularly the government’s expanding spending programme, has become the focus of an increasingly bitter political battle between the ruling Puea Thai party and the opposition Democrats supported by much of the traditional business and military elite. The Democrats this week stepped up their opposition to a $70bn government infrastructure investment plan by issuing a rival proposal to show, as one adviser put it, “how much can be done with good planning and no corruption”.

Boontuck Wungcharoen, chief executive of Thailand’s TMB Bank, said some of the rise in lending was due to heavier consumer spending, which has been fuelled by the tax breaks on car buying and may be further lifted by a proposed sharp cut in the duty levied on imported luxury goods. But Mr Boontuck added that some of the credit was in fact business-related lending taken out by entrepreneurs who were sole traders and didn’t operate through a corporate structure.

“Eighty per cent of these smaller enterprises are owner-operators, so they borrow under the names of individuals,” he said.