June 2 (Bloomberg) -- Thailand’s election may force the central bank to add to seven interest-rate increases in the past year, as promises of higher wages and handouts by politicians threaten to spur inflation.
Prime Minister Abhisit Vejjajiva has pledged to raise the minimum wage by 25 percent, give cash to the elderly and guarantee farmers’ incomes to appeal to voters loyal to exiled former premier Thaksin Shinawatra. The opposition Pheu Thai party, led by Thaksin’s sister, has promised tablet PCs, rice-price guarantee schemes, high-speed trains, dams, and a new city.
The policies promoted by both the government and opposition would put the onus on the Bank of Thailand to contain inflation that’s accelerated to a 32-month high. Governor Prasarn Trairatvorakul raised the benchmark rate to 3 percent yesterday and the bank said it “stands ready to take necessary action” against inflationary pressures.
“With the economy on a strong footing over the background of high commodity prices, we already have inflation concerns for Thailand,” said Wellian Wiranto, a Singapore-based economist at HSBC Holdings Plc. “The ramp-up in government spending overall will not help the situation.”
Thailand’s benchmark stock index has risen 2.6 percent this year, outperforming those in Hong Kong, Japan, Shanghai, Taiwan, Singapore, and Malaysia, as companies including meat producer Charoen Pokphand Foods Pcl benefited from economic growth. The one-year onshore interest-rate swap, the fixed cost needed to receive a floating payment, added six basis points to 3.22 percent after yesterday’s rate increase.
Rates Still Low
Borrowing costs remain “low” and “supportive of economic growth,” while the pace of rate increases is “still appropriate,” Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said yesterday. The central bank is concerned that policies that focus on spending in the election will affect inflation and growth, he said.
“It’s a good thing to help low-income earners, but we need to increase productivity at the same time,” Prasarn told reporters in Bangkok today. “We need to do both. If we only raise the wage, it will hurt our competitiveness.”
The July 3 election in Southeast Asia’s second-largest economy will pit Abhisit’s Democrat party against allies of Thaksin, who was ousted in a 2006 coup and has lived overseas since fleeing a jail sentence for abuse of power. About 100 people have been killed following disputes over the last election in 2007.
Pheu Thai, led by Yingluck Shinawatra, blames Abhisit for rising costs, and has pledged a larger increase in the minimum wage than the ruling Democrat party.
Thaksin, premier from 2001 to 2006, introduced a debt moratorium for farmers, 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 wins elections.
Abhisit’s government has 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, which surged to 4.19 percent in May. The current leader has mimicked Thaksin policies by offering free electricity, crop-price guarantees and minimum-wage increases.
“Thailand has come to a point where it is no longer possible for policy makers to ignore grassroots and the poor,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG. “Regardless of who becomes the government, policy makers will be forced to essentially move towards a more welfare-state style of economic system with many of the election promises being followed through on.”
The struggle to secure a mandate in a country that has had nine coups and more than 20 prime ministers since King Bhumibol Adulyadej took the throne in 1946 may herald a shift toward more populist policies, putting pressure on monetary policy as well as government finances.
“Such populist policies will become addictive and will be difficult to reverse as it becomes the norm,” said Kobsidthi Silpachai, head of capital markets research at Kasikornbank Pcl in Bangkok. “It will strain the budget” while the subsidies and handouts will encourage excessive consumption, boosting imports, weakening the baht and pushing up inflation, he said.
Thaksin-linked parties have won the past four national elections on support in northern areas for cheap health care plans and microcredit policies.
The ruling Democrat party is “confident” it will win more votes in the northeastern bastion of ex-leader Thaksin because of the government’s policies to deal with rising prices, Prime Minister Abhisit said in a May 28 interview. The Democrat party won 20 of 208 seats allotted for individual candidates in the north and northeast regions in the 2007 election.
Efforts to boost pay and increase spending on health and education will change Thailand’s economic growth strategy from an export-led model to one that relies more on domestic demand, Santitarn said. That means monetary policy will gain importance as it controls domestic demand, he said.
“The central bank is now in a vigilant mode,” said Thanomsri Fongarunrung, an economist at Phatra Securities Pcl, who forecasts the key rate will rise to 3.5 percent by end-2011. “They are acting preemptively on rising inflation pressure. They are quite concerned about rising wages.”
To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at email@example.com