The Vongthip Letter Feb 09

Mission possible! Contrary to early cynical expectations of many, PM Abhisit has proved to be not only a very knowledgeable and hard working PM but also an effective team-leader with clear mission, goals, priorities and work plans. Against so much political odds and economic obstacles, the young PM has somehow managed to move the country forward in 5 weeks so much so that people have started to forget how close Thailand was to a civil war during 4Q ’08!

Notwithstanding continued “political harassments” in all shapes and forms, from the inexperienced Opposition Party in the parliament and from the Red Shirts wherever he went, PM Abhisit was able to keep his cool and went on quietly and calmly with his difficult tasks. At last, voters’ attention has been shifted from the destructive political squabbles to the intensifying economic threats.

Communication, communication: PM Abhisit has also made an all-out effort to participate in many high profiled seminars and conferences to exchange views with people in both the public and the private sector, at home and abroad. After three years of political crisis, there was an urgent need to unify the country, build up the morale of the people, and, restore the confidence of the international investors (who saw Thailand’s image dragged through mud in the last three years).

By Vongthip Chumpani*

On the parliamentary front, PM Abhisit has been able to get some 48 bills on Asean related agreements and contracts, as well as the Budget Bill and the Stimulus Package, passed through the parliament. When the rotten-canned-fish scandal broke, (Democrat) Minister of Social Development and Human Security, promptly resigned to comply with PM Abhisit’s 9 Codes of Conduct and thereby setting up a remarkably high ethical benchmark for other cabinet ministers to follow.

Back in the ring again

It did not take long for Thaksin & Co. to regroup their newly setup PTP-Puea Thai Party as a “highly effective deterrent” Opposition Party of 185 MPs, who were rarely in the debate chamber to make up the necessary quorum for the parliament to vote. Outside, the Red Shirts demonstrators have split into various “guerrilla factions” to trail and attack cabinet members wherever they went. The Red Shirts shared their goal with the PTP parliamentarians i.e. “to bring Thaksin home asap.”

Their other demands were parliament dissolution, immediate removal of Foreign Minister Kasit, strong persecution of the PAD and even a blanket amnesty law to free all political wrongdoers from court persecution, retroactively from 19/9/06. In the meantime, Thaksin continued to phone-in regularly to lament his cruel fate, pep-talk his supporters and assure them of his full (financial) support in the next election. Recently, pro-Thaksins academics too have started to join in the chorus against the Abhisit government and their stimulus packages.

Depressing data

The 12/08 economic figures were as dismal as expected, considering the continued global economic freefall. Manufacturing production was down by 18.8% and industrial capacity utilization shrank to 58.9%. Both private consumption and private investment were in the red. Core inflation was 1.8% and CPI plunged to 0.4% (-0.4% in1/09). Export and Import were both down by 15.7% to USD 11,515 million, and by 8.8% to USD 11,019 million respectively. Trade Balance and Current Account Balance, however, recorded small surpluses of USD 496 million and USD 91 million respectively.

Balance of Payments was plus USD 1,944 million. Official foreign reserves went up to USD 111 billion. The Baht ended the month around THB 35 to US, THB 39 to Yen 100, THB 45 to Euro, and THB 50 to Sterling. The SET went up and down, in line with the regional market, to end the month at 437. Gold prices were shooting up again to the USD 900 level. Their volatility prompted gold shops in China Town to close during the two days Chinese New Year holidays.

Abhisit’s spending sprees

Notwithstanding criticism and complaints coming from every direction, the Abhisit Administration went ahead to obtain on 13/1/09, parliamentary approval for a series of short-term spending programs to put THB 116 billion cash into the pockets of various citizens by 3/09. The government has deemed it vital to keep domestic consumption going, as orders and revenues from exports continued to plunge dramatically. The 12/09 manufacturing index shrank by 20% (highest in 7 years), and unemployment has started to rear its ugly head (0.5-1 million estimated for ’09).

Foreign owned manufacturers (electrical, electronics and automotive) had to cut their production by 20%-30% and they were laying-off their workers by the thousands. Because the situation was likely to worsen rather than improve, medium and long term plans were also being worked out by Finance Minister Korn and his team to provide more tax incentives and to increase fiscal spending in big ticket items infrastructure projects.

Now that the country’s public debts have already reached 37% of GDP and tax revenue was likely go down by 10% (THB 130 billion) this year, Thailand would have to raise offshore loans again, especially from Japan and China who reportedly have set aside special funds to assist Asian countries to keep their economies humming.

Walking the tight rope

As more bad news kept pouring in from all over the world, Thailand’s ’09 GDP forecasts have been revised down by both the government and the private sector, to anything from +2% to -4%. Conservative and progressive economists were arguing back and forth as to how bad the domestic economy would be this year and what should be the best remedies in the short and the long term. Meanwhile, government’s deficit spending has been commended for their timeliness as well as criticized for being either too little or too much, too diluted or too restricted.

On 3/2/09, the cabinet approved a USD 2 billion (THB 70 billion) offshore borrowing limit (from World Bank, ADB, Jaica) and a THB 200 billion standby government guarantee limit (for local banks’ short term loans to be granted to state enterprises facing cash-flow problems in 09). This has brought government’s guarantee limit to 16.9% of annual expenditure budget (against the statutory limit of 20%).

Bankers’ nightmares

With central banks of most developed countries moving now toward 0% interest rate, Thailand still has room for further reduction. The contention, however, has shifted to interest margins that banks need to charge to cover their credit risk. The Governor of the Bank of Thailand has come out to defend Thai banks’ interest margins as being reasonably low, compared to those now being charged nowadays by international banks abroad.

Thailand has been most fortunate not to be hit (yet?) by severe liquidity and credit crunch that most developed countries and our neighbors have been experiencing since the global financial collapse in 10/08. Compared to their counterparts worldwide, Thai banks have remained healthy and adequately capitalized up to now. They continued, however, to be most cautious and prudent, haunted still by the NPL avalanche during the ’97 Asian Crisis.

With additional government’s tax incentives and standby guarantees, let’s hope that Thai banks would be in a better position to consider extending new credits to government enterprises as well as the private sector in dire need of special financial assistance e.g. housing, automotive, tourism, commodity and food industries as well as SMEs.

Tourists are back (but not investors)

The average hotel occupancy rate has moved to over 50% in mid 1/09 and has continued to increase now that more European and Asian tourists have started to return to Thailand. The estimated number of tourist arrivals for ’09 has now been revised to 14 million, encouraged perhaps by the 30 days free visa and 90 days for THB 1,900. Hotels and airlines have been putting their heads together to come up with attractive incentives and substantial discounts.

New promotional campaigns were being launched, in conjunction with PM Abhisit’s “roadshows” to meet with the world’s “who is who” and to assure them that Thailand was back in business and a safe place again for tourists and investors. In the meantime a bill has been drafted to make airport seizure a crime and to further empower airport security guards.

Due to the great global recession, however, business travels and MICE would remain depressed for some time. To encourage domestic travels, government officials have been given incentives to hold their seminars and conferences at tourist spots. The high profiled ASEAN Summit Meeting in Hua Hin at the end of 2/09 would go a long way to boost tourist arrivals in Thailand this year.

What now?

The challenge for Thailand has been to survive and engineer an economic recovery without jeopardizing our fiscal sustainability and economic growth. Now that manufacturing has taken a heavy beating, we would have to focus more on local value-added products like food, commodities and tourism. Like the rest of the world, Thailand too would have to live with the new threats and severe impacts of global warming.

The irony was that climate change would make it much harder for us to grow high quality crops in abundance for export and for alternative energy, now that we would have to depend on agriculture to make up for the shortfalls from our export of manufactured goods and import of oil at high prices!

* Vongthip Chumpani is an advisor to and former president of Bangkok Bank and a former advisor to the Senate Foreign Relations Committee. All views and opinions expressed herein are entirely from her own personal observations.