Stable coalition key to healthy economy

ELECTION 2007

Stable coalition key to healthy economy

New infighting could dampen confidence

POST REPORTERS

Political stability and the new government's ability to implement campaign promises will help determine the direction of Thailand's economy in 2008, according to local economists.

Any resumption of the political and social conflicts that dominated the country in 2006 would serve as a drag on business and consumer sentiment and hamper growth, they said.

Ekniti Nitithanprapas, a director of the Finance Ministry's Fiscal Policy Office, said the ability of the new government to promote private investment was critical for growth. Both the People Power Party and the Democrat Party had promoted economic agendas that included large-scale public investment and grassroots development policies.

But the business community remained sceptical about whether the new government could implement its policies and maintain stability.

Dr Ekniti noted that private investment grew just 0.3% year-on-year for the first nine months of the year, even though industrial capacity utilisation stood at a relatively high 78%.

Domestic consumption rose just 1% over the first nine months compared with the same period last year, well below the 5% growth rate seen in past years.

''Industrial capacity utilisation is running nearly full. Decision-making [for new investment] will accelerate if the uncertainties clear up,'' Dr Ekniti said.

A re-emergence of street protests or signs of a fractious coalition would be negative for domestic demand, he said.

Whichever party formed the new government also needed to consider how to alleviate the problems of rising inflation and costs. Dr Ekniti suggested that inflation be addressed by allowing the baht to appreciate, reducing the cost of exports while boosting fiscal spending.

Most economists project economic growth next year to pick up to more than 5% from a projected 4.5% this year, based on an assumption of higher domestic consumption and investment.

Thanavath Phonvichai, director of the Centre for Economic and Business Forecasting at the University of the Thai Chamber of Commerce, said a PPP-led government would raise several uncertainties for political stability.

''I don't think we will see confidence recover until after the first quarter. But if no confrontations occur, then consumer spending and investment should pick up,'' he said.

PPP's pledge to press for an amnesty for the 111 Thai Rak Thai politicians sentenced to a five-year ban earlier this year by the military-appointed Constitutional Tribunal raises the prospect of further political and social uncertainties, Mr Thanavath said.

He said uncertainties about PPP's economic team would also affect confidence.

A Democrat-led government would likely lead to investor confidence, both at home and abroad, rebounding more quickly. ''But a Democrat government would face potentially greater pressure in terms of political stability, both from within the coalition as well as from PPP,'' Mr Thanavath said.

Somphob Manarungsan, an economist at Chulalongkorn University, agreed that populist policies were inevitable with the new government.

''Each party tried to take credit for how much they would give to the people. I think the new government will spend quickly, since they know that their term is unlikely to last over a year,'' he said.

Both the PPP and Democrat parties have agreed that the 2007 constitution needed changes. After the reforms, it is likely that a new election would be called.

The fragility of a coalition government and the fact that MPs now are no longer constrained to abide by their party line was also likely to increase back-room dealings within Parliament and lead to greater compromise in policymaking.

The US ratings agency Standard & Poor's agreed that while the vote was a ''key step'' toward repairing Thailand's credit fundamentals, social stability remained a key question going forward.

S&P, which has assigned Thailand a foreign-currency rating of BBB+, said it was critical that ''key constituents'' support the new elected government.

''The continuation of sharp political divisions will prolong the economic weakness and further undermine sovereign credit fundamentals,'' the agency said. ''If such divisions result in another unconstitutional replacement of the government or violent social unrest, then the political and economic consequences will be much more negative than experienced so far.''