Asia Inflation Risk to Rise on Thai Plan to Boost Rice Price

Asia Inflation Risk May Rise With Thai Plan to Boost Rice
A farmer collects bundles of harvested rice in a paddy field in Mae Klang Luang, Chiang Mai province, Thailand. Photographer: Dario Pignatelli/Bloomberg

Yingluck Shinawatra became Thailand’s first female prime minister by pledging to lift rural incomes through higher rice prices. The rest of Asia may now have to pay for her campaign promise.

Yingluck has said the government will buy unmilled grain from farmers at 15,000 baht ($502) a ton at harvest in November, above current market rates of 9,900 baht. With Thailand the world’s biggest exporter, that may raise rice prices across a region that accounts for 87 percent of global consumption. The leader presented her economic policies to Cabinet yesterday and is scheduled to announce them publicly by Aug. 24.

“High rice prices will translate into higher inflation pressures in Asia, at a time when most inflation readings are flirting near the higher end of central-bank target or forecast ranges,” said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. “Once the global backdrop stabilizes, inflation could come back strongly.”

The acceleration of policies to boost consumption in Thailand risks complicating monetary policy across Asia, as soaring food costs add pressure for higher interest rates while the region braces for a growth slowdown. South Korea, Malaysia, and the Philippines have left borrowing costs unchanged in recent weeks, while China, India and Thailand raised rates in July to tame inflation.

Food makes up more than 30 percent of inflation indexes on average in Asia, according to Rabobank Groep NV. The weighting of rice in consumer-price indexes varies from 9.4 percent in the Philippines, 4.7 percent in Indonesia and 2.9 percent in Thailand, according to Bank of America.

Onions, Chilies

The fondness for certain foods in Asian cuisine -- from pork in China to onions in India and chilies in Indonesia -- has left some of the region’s central banks grappling with the challenge of responding to surges in the cost of staples. A more varied diet and greater purchasing power for non-food items leave wealthier nations less vulnerable to food-cost gains.

Inflation in at least 10 Asian economies has risen above 10-year averages and has either breached or approached the upper end of official targets. Asian central banks have raised interest rates 44 times since March 2010 to contain inflation and the global uncertainty may keep them on hold “for a month or so,” according to DBS Group Holdings Ltd.

“When the European debt crisis first flared up in May, they stopped dead in their tracks” except for Malaysia, said David Carbon, head of economic and currency research at DBS in Singapore. “We do not envision a double dip in the U.S. and we suspect that Asia will be back in tightening mode by October.”

Volatile Prices

The Bank of Thailand’s policy makers will gather on Aug. 24 for their next rate decision, after eight increases over the past 13 months. Sri Lanka’s central bank will announce its policy decision on Aug. 19. Bank Negara Malaysia raised borrowing costs in May for the first time this year after three increases in 2010.

Rice, the staple food for about half of the global population, has surged about 55 percent in the past year according to futures traded on the Chicago Board of Trade. Global food prices remain close to the peak of 2008 and expected volatility in some commodity prices, such as oil, may boost prices in coming months, the World Bank said Aug. 15.

The export price of rice from Thailand has jumped 22 percent in the past year to $582 per ton, the highest since February 2010, according to the Thai Rice Exporters Association. That may rise to $700 by the end of December, according to the median estimate in a Bloomberg survey.

Food Riots

The Thai government also paid above-market rates for rice in 2008 to boost incomes and bought 5.4 million tons of the grain from about 700,000 farmers, according to the Internal Trade Department. Local prices rose to a record 17,000 baht per ton in April that year and export rates reached an unprecedented $1,038 per ton the following month after India, China and Vietnam curbed shipments, spurring unrest from Haiti to Egypt.

Thailand will pay 15,000 baht per ton for unmilled rice and 20,000 baht for jasmine rice, Deputy Prime Minister and Commerce Minister Kittiratt Na-Ranong said today.

The government has no set target for how much rice may be bought, and purchases may stop once prices rise “close to or above” the guaranteed level, he said. Stockpiled rice will be sold gradually on a government-to-government basis, he said.

Tax Cuts

Yingluck’s Pheu Thai Party won 264 seats in the 500-member Parliament in the July 3 vote and formed a coalition that selected her as leader this month. The sister of deposed former ruler Thaksin said she plans to cut taxes, build rail lines, and give out free computers to students to boost economic growth.

Her party also promised to raise the daily minimum wage to 300 baht, almost double the current pay in some parts of the country.

The government’s policies will focus on boosting incomes and cutting costs, and the administration doesn’t “want to look only at inflation,” Yingluck said yesterday. Finance Minister Thirachai Phuvanatnaranubala said this week he plans to meet with the central bank to discuss whether its inflation target may be an “obstacle” for policy implementation.

“The government’s stimulus policies, especially the minimum wage increase, may boost inflation and prompt the central bank to raise the key rate more than expected,” said Pimonwan Mahujchariyawong, an economist at Kasikorn Research Co. in Bangkok. “Even if the government raises the wage in some provinces, that will push inflation to 5 percent next year.”

‘Save the Bullets’

The Bank of Thailand has signaled it may raise borrowing costs further, saying the government’s spending makes the risk of inflation a greater concern than threats to economic growth. Inflation held above 4 percent for the fourth straight month in July on higher rice, pork, fuel and electricity prices.

“The economy doesn’t need much stimulus like during the recession in 2009,” said Pornthep Jubandhu, an economist at Siam Commercial Bank Pcl in Bangkok. “The government shouldn’t do much to create an unnecessary burden. We should save the bullets to use later when needed as we still have a bumpy road ahead.”

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