June 25 (Bloomberg) -- Thai Prime Minister Yingluck Shinawatra risks a backlash from farmers who helped put her in power after cutting guaranteed rice prices following criticism that the program put the country’s finances at risk.
The Cabinet on June 19 approved a 20 percent reduction in rice-purchase prices to help stem losses from the program that the government estimates at about 137 billion baht ($4.4 billion) last year. Moody’s Investors Service said on June 3 the subsidies hamper Thailand’s goal of achieving a balanced budget by 2017 and are negative for the nation’s sovereign ratings.
“If the government doesn’t listen to farmers’ voices, the Pheu Thai party won’t have farmers as a shield to protect them,” said Charin Sing-dee, head of the farmer council from Singburi province, referring to Yingluck’s ruling party that won a parliamentary majority in 2011 elections. “If the price is cut, it is like farmers are being bullied.”
Yingluck raised minimum wages, handed incentives to first-time car buyers and paid rice farmers as much as 50 percent more than domestic market rates since taking power two years ago with support from poorer areas in northern Thailand. The Moody’s report and opposition attacks prompted her to establish a committee to verify losses and lower prices.
“The fiscal burden arising from this program is one of the key concerns of foreign investors,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse AG. “But beyond the fiscal cost, the program also distorts incentives for people. Thailand already has labor shortages in many productive sectors and this program encourages more rice growing by many people who perhaps should not be doing so.”
Agricultural exports slipped 4.4 percent in April, led by an 8.4 percent decline in rice shipments. That has weighed on the baht, which is the biggest loser after the Indian rupee and Philippine peso this quarter in Asia, Bloomberg data show.
The Bank of Thailand cut its policy interest rate on May 29 for the first time this year to boost growth after the Southeast Asian nation’s expansion slowed more than estimated to 5.3 percent last quarter. The government last month lowered its 2013 GDP forecast to as little as 4.2 percent and cut its target for export growth to 7.6 percent from 11 percent.
Thailand has spent 588.7 billion baht since October 2011 to buy 40.47 million tons of unmilled rice from farmers. The program has increased domestic demand and purchasing power by 2 percentage points and helped improve farmer income by about 115 billion baht a year, according to the government.
“If policy continues to pump up domestic demand, relying on credit-led growth, then external risk would gradually rise over the next few years,” Edward Teather, a Singapore-based senior economist at UBS AG, said in a note today. “At some point, a more heightened concern may be justified - just not today.”
The Thai government is carrying debt of almost 160 billion baht for 2012-2013 from implementing the rice price-support program, according to official estimates. By setting purchase limits, it will lose about 80 billion baht a year, calculated from the difference between the support price and market price, including interest and storage costs.
“One concern related to the rice-pledging scheme is that it has impaired fiscal transparency and hampers progress towards deficit reduction,” said Steffen Dyck, assistant vice president at Moody’s in Singapore. While potential losses are sizable, the rating company is maintaining its stable outlook on Thailand, as other macroeconomic and external factors are supportive, he said.
Yingluck has said the government wants to restructure the agricultural sector and adjust plantation zoning. The administration has started to survey areas to determine which crops they are best suited for, she said on June 22.
Revising the program helps, “but a gradual phase-out and a move to other transfer programs will be better,” Santitarn said. “It will be even better if they can gradually switch to targeted cash subsidies for farmers that do not distort the incentive to produce rice and the market mechanisms.”
Parties linked to Yingluck’s brother, former Prime Minister Thaksin Shinawatra, have won the past five elections on support from rice-growing areas that are poorer and more populous than the rest of Thailand. The party took 149 of 189 constituency seats in the north and northeast, while the main opposition Democrat party won 16 seats in those regions, where incomes average about a third of those in Bangkok. The north and northeast account for about 70 percent of rice production.
“This is a policy that the Pheu Thai party announced during the election campaign and it should keep its promise,” Prasit Boonchei, president of the Thai Rice Farmers Association, said by phone on June 24. “When benefits that farmers are supposed to get are slashed, farmers are smart enough to know who they will vote for in the next election.”
Not everyone opposes the price cut. More than 400 farmers submitted a letter urging the government to continue the program even with the revised price of 12,000 baht per ton, Sansanee Nakpong, minister to the prime minister’s office, said yesterday.
“They are supportive of the government’s rice program and they want the government to proceed,” she said. “The government is willing to listen to problems and proposals.”
Yingluck’s popularity has fallen in recent months, Bangkok University said in a survey of 1,234 people taken from June 18 to June 20. The margin backing her as prime minister over opposition leader Abhisit Vejjajiva dropped to 8.6 percentage points, down from 14 in November 2012, the poll showed.
The government is gearing up for a series of planned protest rallies across the country by farmers. Yingluck sought to placate them in a nationally televised address and also instructed party officials to meet with farmers.
Yingluck will need to do more to stem the discontent and improve the government’s image, said Somjai Phagaphasvivat, a political science lecturer at Thammasat University in Bangkok.
“Their popularity with farmers in rural areas is not affected much yet, as they have directly benefited from government policies,” Somjai said. “But if they continue to upset them over and over, it may eventually have a significant impact.”
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