Bloomberg News

Thai Vote May Spur Prices, Baht in Exports ‘Double Whammy’

July 05, 2011

(Updates with market reaction in sixth paragraph.)

July 5 (Bloomberg) -- Efforts by Thailand’s incoming government to boost growth and lift incomes may accelerate inflation, forcing interest rates higher and increasing business costs even as a strengthening currency threatens exports.

The Bank of Thailand is assessing the economic effect of policies that may be implemented by the Pheu Thai party after it won the July 3 election, Director Mathee Supapongse said. Pheu Thai, which is assembling a five-party coalition that would hold 299 seats in the 500-member parliament, campaigned on pledges to raise the minimum wage and guarantee rice prices for farmers.

Pheu Thai, led by exiled former leader Thaksin Shinawatra’s sister Yingluck, hasn’t specified how it aims to fund the pledges, risking an increase in borrowing needs that may cause bond yields to rise. Higher yields and central bank rates would offer support for the baht, which rallied yesterday, bringing its gain to 6.5 percent against the dollar in the past year.

“The plans to raise the minimum wages and spending is likely to support growth, but stoke inflation as well,” said Rahul Bajoria, an economist in Singapore at Barclays Plc who expects the Bank of Thailand to raise its benchmark rate at the next meeting. “It is likely to have a significant impact.”

Thailand’s baht rose by the most since February 2008 and shares climbed after Pheu Thai’s victory over Prime Minister Abhisit Vejjajiva’s Democrats, a win that may ease concern about political strife after Thaksin’s opponents overturned the last three election results.

The benchmark SET Index, which rose 4.7 percent yesterday, was down 0.1 percent at 1,088.87 as of 10:42 a.m. local time. The baht traded 0.1 percent lower at 30.51 per dollar.

Exports Risk

Still, manufacturers including Hana Microelectronics Pcl are bracing for higher borrowing and wage costs, which may combine with a stronger currency to hurt overseas sales.

“The double whammy will be a rising stronger Thai baht and wage-inflation spiral,” Richard Han, Chief Executive Officer at Hana Microelectronics, said in a Bloomberg Television interview yesterday. “That will be negative for exports.”

DBS Group Holdings Ltd. predicts Thailand’s currency will strengthen 5.8 percent to 28.80 per dollar by year-end. It jumped 1.1 percent to 30.47 yesterday in Bangkok. The benchmark stock index climbed 4.7 percent.

Pheu Thai hasn’t said who will be its finance minister to replace the outgoing Korn Chatikavanij, the Oxford-trained former chairman of JPMorgan Chase & Co.’s Thai unit. The incoming government also won’t have the power to directly affect the leadership of the central bank under Thai law.

Korn’s Replacement

Kittiratt Na-Ranong, a former president of Thailand’s stock exchange, is the top candidate for finance minister, the Thai- language Kao Hoon newspaper reported today, without saying where it obtained the information. Other candidates include Olarn Chaipravat, former president of Siam Commercial Bank Pcl, and Suchart Thadathamrongvej, an ex-finance minister, it said.

Standard Chartered Plc said in a note yesterday it was maintaining an “underweight” stance on Thai bonds, saying an “expansionary fiscal policy may raise concerns over fiscal discipline and heighten inflation expectations.”

Thaksin, premier from 2001 to 2006, introduced a debt moratorium for farmers and fuel and electricity subsidies as part of a set of populist policies dubbed “Thaksinomics” at the time. In April, he pledged to build dams and railways and raise minimum rice prices if the Pheu Thai party won elections.

Yingluck, who is set to be the first female Thai premier, had also promised tablet PCs, rice-price guarantee schemes, high-speed trains, dams, and a new city before the election.

Stability Versus Growth

“It seems likely that they will be more pro-growth, pro- consumption and pro-fiscal spending so that would not go down so well with the Bank of Thailand,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG. “The Bank of Thailand may have to hike to balance out and slow down the economy a bit to achieve stability as well as growth. There may be potential tensions between the two sides.”

The central bank, which will decide on rates on July 13, raised its one-day bond repurchase rate by a quarter of a percentage point to 3 percent on June 1, the fourth increase this year. The new government’s policies to stimulate consumption may force Governor Prasarn Trairatvorakul to take more aggressive steps to tame inflation that’s near a 32-month high. Consumer prices climbed 4.06 percent last month from a year earlier, after rising 4.19 percent in May.

‘Populist Policies’

“We are quite concerned about the populist policies and we want them to implement gradually if they can, but it looks like they want to do it quick,” said Somprawin Manprasert, an economist at Tisco Securities Co. in Bangkok. “If the fiscal side is loosening a lot, the monetary policy may be tightened quicker than what the market expected.”

Tisco Securities estimates the benchmark rate may rise to 3.5 percent by the end of the year, with an “upside bias” for the rate to reach 3.75 percent or 4 percent, Somprawin said. Public debt, predicted in a central bank study to rise to 60 percent of gross domestic product in 2017 from about 40 percent, may expand faster if Pheu Thai implements its policies quickly, he said.

“It’s not clear how they will generate money to finance that,” the economist said. “It’s better for them to implement policies gradually than just do it all because if they go in the wrong direction, there will be big damage to the country, which will be difficult to get fixed.”

Abhisit’s government had already capped diesel tariffs and applied price controls to items such as eggs and cooking oil to shield Thailand’s 67 million people from the impact of inflation in Southeast Asia’s second-largest economy.

Ruling Elite

Thaksin was ousted in a 2006 coup and has lived overseas since fleeing a jail sentence for abuse of power. Parties linked to him have won the past four national elections on support in northern areas for cheap health care plans and microcredit policies.

Political uncertainty in Thailand will affect growth prospects and economic stability in “the medium to long term,” Standard & Poor’s Ratings Services said in a statement today.

“The pace and the degree of restoration of political stability will have significant implications for our sovereign ratings on Thailand,” S&P credit analyst Takahira Ogawa said. “Given the depth of the political divide, complete reconciliation of the country in the near future may be difficult.”

This month’s election result marks a repudiation of the country’s ruling elite, which views Thaksin as a threat to the monarchy, and an endorsement of the man at the center of a feud that has divided Thailand for the past decade.

“There were political uncertainties up until now because we didn’t know who will become the government; now that’s out of the way,” said Han of Hana Microelectronics. “The next level of political uncertainty is can the government now implement policies without causing lots of economic issues later on like inflation and productivity.”

--With assistance from Yumi Teso in Bangkok, Rishaad Salamat and Hope Ngo in Hong Kong, Shamim Adam in Singapore. Editors: Stephanie Phang, Tony Jordan

To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net

To contact the editors responsible for this story: Tony Jordan at tjordan3@bloomberg.net; Stephanie Phang at sphang@bloomberg.net


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