Thailand's Economic Growth May Accelerate After Vote

Thailand's finance minister said the restoration of democracy later this year will bolster consumer confidence and allow the economy to accelerate from the slowest growth in six years.

``The new government's biggest challenge is to bring about political stability, then the economy will take care of itself,'' Chalongphob Sussangkarn, 57, said in an interview in Bangkok. ``We can get back to a normal growth rate, which is around 6 percent to 7 percent,'' within a year.

Thailand hasn't had an elected government since February 2006, when former Prime Minister Thaksin Shinawatra dissolved parliament to call a poll, the result of which was later annulled. The military ousted Thaksin in coup in September and a vote to restore an elected government is planned for the end of the year. Consumer confidence, after falling in 15 of the past 17 months, is at a five-year low.

``If the new government is seen to infer a degree of stability, that would be enough for people to go ahead and buy consumer durables and invest in condos again,'' said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong. ``We would look for a significant bounce in consumption because there is pent-up demand.''

Neumann said his 5 percent estimate for economic growth next year represents an ``underperformance.''

Thailand's military-installed government is increasing spending to foster growth as consumption and investment slump. Economic growth may slow to 3.8 percent this year, the weakest in six, from 5 percent in 2006, the central bank forecasts. An index of business confidence is at the lowest in eight years.

Asian Crisis

``It will take a real big boost to confidence to turn things around,'' said Julian Jessop, chief international economist at Capital Economics in London. ``It doesn't matter what the new government does, as long as they do it well.'' Jessop predicts the Southeast Asian nation's economy will expand by 4 percent in 2007, ``below par for a country like Thailand.''

Thailand's economy grew an average 8.6 percent in the six years until 1997, when the nation gave up a currency peg to the dollar that had overvalued the baht, triggering the Asian currency crisis. Since 1998, when gross domestic product shrank by 10.5 percent, annual expansion has averaged 5 percent.

Weekly anti-government rallies are held in the capital Bangkok after a junta-appointed tribunal banned Thaksin's Thai Rak Thai party and 111 of its executives. It found they broke the law during the April 2006 snap election.

``The coup raised the political risks in Thailand and we're not through that risk yet given what has to happen before it's returned to a democracy,'' said James McCormack, the Hong Kong- based head of Asian sovereign ratings at Fitch Ratings. ``It's the riskiest environment in Asia right now.''

Government Spending

Fitch ranks Thailand's long-term foreign issuer default rating at BBB+, its third-lowest investment grade, with a stable outlook. Moody's Investors Service and Standard & Poor's also assign their third-lowest investment-grade rankings to Thailand.

The government this month lifted its fiscal 2008 deficit forecast by 38 percent to 165 billion baht ($4.8 billion) as it boosts spending and slowing consumption cuts tax receipts. The targeted shortfall for the budget for the year to Sept. 30 is 100 billion baht.

``Government expenditure will help to stimulate the economy, increasing incomes that will then lead to increased consumption,'' said Chalongphob, who headed a private think tank before being appointed finance minister in March. ``We are also trying to push ahead with large-scale investment projects.''

Capital Controls

Chalongphob replaced Pridiyathorn Devakula, a former central bank governor who quit in February. Pridiyathorn had backed the imposition of capital controls in December to slow gains in the baht. The measures triggered the biggest one-day loss by the benchmark stock index in 16 years and have since been mostly unwound.

Thailand's government bonds handed investors a loss of 1.8 percent this month, the worst of 10 Asian debt markets, according to data compiled by HSBC Holdings Plc. Central bank policy makers have cut the benchmark interest rate four times this year to 3 percent to boost growth.

``The government's fiscal position is definitely weaker than it was before, said Kim Eng Tan, S&P's Singapore-based credit analyst. ``If things improve next year, if they get a new government in place smoothly, then this deficit should shrink.''

The yield on the 5 percent bond due May 2017 rose 2 basis points to 4.33 percent yesterday, according to the Thai Bond Market Association. It has gained amore than 50 basis points over the past month.

source:bloomberg.com