June 4 (Bloomberg) -- Thailand’s economy is over the worst of its first recession in a decade and government spending on “shovel-ready” projects will help spur demand and create jobs, Finance Minister Korn Chatikavanij said.

“We’re not out of the woods,” Korn said in an interview in Bangkok today. “But I’m confident we’ve seen the worst. The government is functioning, we’re ready to implement the second stimulus package, everything is moving progressively in the right direction.”

Thailand’s government began pumping cash into the economy with handouts to the nation’s poorest in April after the global recession led to a collapse in exports, and violent political protests sapped domestic confidence. While the economy isn’t likely to return to growth until the fourth quarter, the central bank has said there are signs the worst is over.

Gross domestic product shrank 7.1 percent in the first quarter, pushing Thailand into a recession. The economy’s showing a more “moderate contraction,” the Bank of Thailand said May 20 when it kept borrowing costs at a five-year low of 1.25 percent, ending its most aggressive string of interest-rate cuts ever.

“It should be the end of the easing cycle,” said Julia Goh, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur. “The central bank still has room to cut the rate if there is a strong need to do so, like if fiscal spending fails to come through.”

Spending Challenge

Prime Minister Abhisit Vejjajiva’s government on May 6 unveiled a 1.4 trillion-baht ($41 billion) investment plan that it plans to implement by the end of 2012. His seven-party coalition government is strong enough to pass a borrowing plan and next year’s 1.7 trillion-baht budget, Abhisit said May 20.

“The main challenge for the government actually is implementing the investment programs,” Korn said today, adding spending may top 1.56 trillion baht. “We will give special attention to make sure the money can be spent.”

The government may borrow about 800 billion baht locally by 2011 to finance the projects, Korn said. A court ruling yesterday eased the way for an initial tranche of 400 billion baht to be raised without legislative approval.

“The borrowing plan will help boost investment in the country as companies slow their spending,” Prasarn Trairatvorakul, president of Kasikornbank Pcl, the nation’s third-biggest lender by assets, said today. “This marks an attempt to keep investment from drying up.”

Investors Return

Thailand’s benchmark SET Index of stocks reversed earlier losses after Korn’s comments, rising 2 percent. The gauge has climbed 38 percent this quarter, poised for its best performance since the same period in 1999. The baht added 0.3 percent to 34.14 per dollar. The currency has advanced 3.7 percent since the end of March, on course to snap its longest stretch of quarterly losses since mid-2001.

“Overseas investors are returning,” Kongkiat Opaswongkarn, chief executive officer at Asia Plus Securities Pcl, Thailand’s second-largest brokerage by trading volume, said today. Still, “investors are concerned about the government’s increased borrowing.”

Public debt may rise to 60 percent of GDP from 40 percent as more public funds are raised for spending. Moody’s Investors Service said May 27 that the Thai government’s capacity to support local banks may be constrained by its own borrowing limits, and placed 11 local banks’ debt and deposit ratings on review for a possible downgrade.

Beware of Burden

“The government should take a lead to stimulate the economy at a time when private investors aren’t able to,” said Kosit Panpiemras, chairman at Bangkok Bank Pcl, Thailand’s largest lender. “But the amount of economic stimulus shouldn’t create a burden for future governments.”

Industrial output declined the least in five months in April as exporters resumed filling orders from customers seeking to restock depleted inventory, the central bank said on May 29.

KCE Electronics Pcl, the country’s biggest publicly traded printed-circuit-board maker, said June 2 it’s increasing production. Hana Microelectronics Pcl, a semiconductor packager, said last month orders have rebounded. Tipco Asphalt Pcl, a maker of paving material, said yesterday it expects Thai government sales will help it return to profit this year.

Anti-government protesters calling for Abhisit’s resignation say his rule is illegitimate because he came to office after a court dissolved the former ruling party. Abhisit has pledged to call elections once stability is restored in the nation of 66 million people.

Shifting Power

Power in Thailand has shifted between parties allied to former Prime Minister Thaksin Shinawatra and his opponents since the 2006 coup that ousted him, hurting the government’s ability to implement spending plans to revive the economy.

“It’s imperative that we retain government stability at least so the bulk of this program can be implemented,” Korn said. “That means at least until the end of this calendar year.”

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net; Bernard Lo in Hong Kong at blo2@bloomberg.net

Last Updated: June 4, 2009 06:14 EDT