As dollar sinks, Thais struggle to keep economy afloat

Thailand boomed on exports to the US. Now it's looking at populist incentives to stimulate growth.

Frozen shrimp, computer parts, cosmetics, and cheap plastic goods are just a few of this country's exports to America that have helped fuel an economic boom here. But the threat of a recession in the United States – its No. 1 customer – has the government scrambling to find other ways to stimulate the domestic economy.

High oil prices and the falling dollar are likely to slow exports throughout Asia and especially in Thailand, Southeast Asia's second-largest economy. Here, export growth could sink to the single digits for the first time since 2002.

Now, this looming downturn has effectively sidelined a long-running internal debate here over the populist policies first espoused by former Prime Minister Thaksin Shinawatra, who was ousted in a 2006 coup by generals claiming his economic measures were fiscally irresponsible.

Now most economists and political parties have expressed support for those policies, which include cheap village loans and a debt moratorium for farmers, to keep the economy afloat.

"In this environment, when external demand is likely to go down, what Thailand and other Asian countries are going to do is look to stimulate domestic demand to offset any slowdown in external demand," says Ussara Wiraipitch, a senior economist at Standard Chartered Bank. "Fiscal stimulus and monetary policy will be key for Thailand to help manage the country's economic growth and offset any drop in US demand."

Earlier this month, the government passed tax cuts worth 40 billion baht ($1.26 billion), or 0.45 percent of Thailand's gross domestic product (GDP), to stimulate the property sector and boost consumption.

Also, in light of soaring oil costs and another round of fears that the US is headed for a recession following the near collapse of one of the top US investment firms, Bear Stearns, Prime Minister Samak Sundaravej this week ordered government agencies to find new ways to shield the public from rising costs. The commerce minister has already tried to cap prices of consumer goods and certain foods, such as pork, and the energy minister is considering fuel subsidies.

The finance ministry is also drafting more measures to provide cheap money to rural areas through state-run banks. Though critics of these policies claim they encourage wasteful spending on things like cars and mobile phones, proponents say they allow villagers to avoid the usurious rates of loan sharks.

"The government's goal is to fill pockets with extra cash," says Kongkiat Opaswongkarn, chief executive officer of Asia Plus Securities, Thailand's second-largest brokerage firm. "People up-country are dying; they need access to money."

Exporters are also feeling the squeeze. Complaints about the baht's sharp rise of nearly 20 percent against the US dollar in 2005 prompted the government to implement capital controls in 2006, a move that soured the investment climate.

Thailand's central bank removed the controls last month, causing the baht to strengthen to more than 31.2 per dollar. The currency has climbed 8 percent against the dollar since January to its highest level since August 1997, making it the top performer this year among Asia's most traded currencies.

"We are a bit worried," says Pongsak Assakul, vice chairman of the Thai Chamber of Commerce, which represents many exporters. "There is nothing much we can do about the baht. We don't mind inflows for foreign direct investment or for condos, as that helps the economy. Just don't park it here to speculate on the baht. That money is useless to us and throws off the economy."

Economists are now waiting to see if Thailand's central bank will follow the US Federal Reserve with a major interest rate cut. A rate cut would ease pressure on the baht but it would also boost inflation, which surged 5.4 percent in February, the fastest in 20 months. Thailand's benchmark rate is now 3.25 percent, a full percentage point above the Fed Funds rate.

"This is a hard time for the central bank," says Thanawat Polvichai, who heads an economic think tank at the University of the Thai Chamber of Commerce. "A rate cut would boost economic growth, but rural people may be hurt by a higher cost of living."

Besides domestic consumption, the government is also hoping to boost private investment. Political instability over the past two years has caused firms to delay investment plans, causing industrial capacity utilization to reach its highest level since just prior to the 1997 financial crash, when firms over-expanded and the baht was overvalued.

To remedy that, the government plans to spend 1.5 trillion baht ($47.7 billion) investing in mass transit and infrastructure projects over three years or so, including nine subway routes in Bangkok. While many expect the projects to be delayed, analysts say breaking ground in the second half of this year would help increase confidence and boost the economy.

"The government should take the leading role in investing in rural and urban areas," says Sompob Manarangsun, an economist at Chulalongkorn University. "If the government invests, the private sector will also invest."