Policy Responses

Like governments all around the world that are facing the negative consequences from the subprime crisis fallout, the Thai government has responded to the crisis with various expansionary fiscal and monetary policies.

5.1 Fiscal Stimulus Programs

There have been six fiscal measures to stimulate the Thai economy, as shown in Figure 12 [ PDF 44KB | 1 page ]. Increased government spending and tax cuts are the most common measures. A special Mid-year Budget Act amounting to baht116.7 billion was passed in early 2009, shortly after the current government took office. The details of this mid-year budget are in Table 3 [ PDF 45.9KB | 1 page ]. There are two cash transfer programs amounting to around baht28 billion (about US$800 million); baht18.9 billion for living cost subsidies to low-income households and baht9 billion as supplementary income for the elderly).

Both theory and the experience of some low-income countries indicate that cash transfers are among the most effective ways to both stimulate the economy as well as mitigate the negative impacts of a crisis on the poor and other vulnerable groups. One caveat is that the transfer must be made to the right target groups, that is, any leakage to ineligible recipients, such as high-income people, must be kept to a minimum. However, the two transfer programs implemented by the current government do not strictly meet this criterion.

The living-cost subsidies were given to private employees included in the Social Security System who earn less than baht15,000 per month. Since all Social Security System workers receive wages at or above the minimum wage, and the minimum wage is about twice the official poverty line, it is likely that the subsidies did not to go the very poor, who account for about 10% of the total population. Most of the poor are those working in the informal sector or in agriculture, and are not part of the Social Security System. As the subsidy tended to benefit urban low-income workers, albeit not the very poor, the stimulating effect could still be high, as the marginal propensity to spend among the urban low-income group is likely to be the highest compared to other urban population subgroups. The same leakage problem occurs with the monthly allowance for the elderly. Because the allowance is universal (given to rich and poor alike), most of it will benefit non-poor elderly people.

Table 4 [ PDF 41.4KB | 1 page ] summarizes tax measures that have been initiated in response to the current crisis. The total tax loss from these measures is estimated at around baht40 billion. The effectiveness of these measures in terms of stimulating the economy is expected to be lower than direct government transfers, as most taxpayers are not poor. Also, some sector-specific tax incentives, such as those in real estate, are more likely to work only if the general economy is already on the recovery path.

5.2 Monetary Easing

Again, like in most other countries, monetary policy has also been eased in response to the looming economic crisis. In fact, the monetary authorities (the Bank of Thailand) switched its position quite abruptly from a fear of inflation following the rapid hike in fuel and food prices in early 2008 to a serious concern over an economic downturn in the fourth quarter, when indirect impacts from the sub-prime crisis began to hit Thailand's export. The Monetary Policy Committee (MPC) decided to lower the policy interest rate on 3 December 2008 by 100 basis points. By the end of May 2009, there have been three other interest rate cuts, amounting to another 150 basis points.

Most economists agree that loose monetary policy can only play a secondary role in revitalizing an economy suffering from rapidly shrinking external demand. The main cause of the problem is from vanishing orders from overseas, and lowering the financial cost will not do much to help. Actually, the main problem for most firms now is access to credit rather than the cost of credit. With the downturn, banks became much more stringent about lending. Existing loans may be trimmed or recalled completely and getting a new loan becomes very difficult. Loans from abroad, which were a part of the rapid capital inflows a couple of years ago, have also dried up as liquidity problems hit the financial system in the advanced economies. Thus, getting credit to those that can make productive use of it is probably the key problem at this time. This is not an easy problem to solve, as it is not straightforward to separate those who can make productive use of the credit from those that will quickly be added to the list of nonperforming loans for banks. Of course, one area that will really benefit from the low interest rates is the fiscal cost of government spending, as the government will be able to finance its rapidly growing debt relatively inexpensively.

Table 5: Monetary Policy Decisions [ PDF 48.8KB | 1 page ]

One area of monetary policy which is likely to become an issue of heated debate is exchange rate management. It is natural for an economy like Thailand, where exports are such an important part, that when problems arise for the export sector, such as rapid capital inflows leading to significant appreciation of the currency back in 2006/07 or contraction of export demand as in the current situation, there will be calls from the export sector (which is very vocal) for a weaker exchange rate. This influence is reinforced by the fact that there are countries in the region, countries that can be regarded as competitive with Thailand for certain products, whose currencies have weakened considerably as a result of the large withdraw of capital resulting from the sub-prime crisis, such as South Korea, Indonesia and India. Some of these countries have fundamental problems of lack of enough reserves to back up the short-term debt as well as the contingent liabilities on reserves as discussed earlier. However, what ever the reason for the large depreciation of other countries' exchange rates, the business sector can make a persuasive case that they should also be helped by weakening the local currency.

There is, therefore, a danger of the whole region, which is generally dependent on the export engine, descending into an episode of competitive depreciation. This would benefit no one. It would also make it much more difficult to make the adjustments needed to rebalance the region's growth path, to one less dependent on exports, with an increased role for domestic demand in economic growth. For example, public infrastructure investment, which will be a very important component of growth rebalancing for many economies, will become much more costly because it normally has a high import content.

5.3 Limitations

Most of the policy responses to the crisis are directed to the short-term need to shore up the economy in the face of the economic contraction. Fiscal injections are expected to generate greater domestic consumption, which will ease the pain of domestic producers and consumers. Not much attention has been paid to how to make the fiscal injections sustainable. Even less thought has been given to what a new “rebalanced growth path” for the country might look like and how it could be achieved.

Policymakers seem to hope that the current crisis will be short and that fiscal injections can provide a temporary relief before everything returns to normal. As indicated earlier, this is likely to be wishful thinking. Even if the US and other western economies hit bottom this year, it may take a while before full recovery is achieved. And it is unlikely that a full recovery will mean that East Asian exports can play as big a role in East Asian economies as it did before the crisis. Thus, some fundamental restructuring of the Thai economy, as well as those of other East Asian countries, will be necessary in order to pursue a new growth path which is less dependent on exports. This will certainly not be easy and cannot be achieved in the short-term.

If recovery from the crisis is long and drawn out, then the sustainability of the fiscal injections will become a major issue. If growth depends mainly on fiscal injections, then to be effective, larger and larger injections will be needed each year. If US$10 billion is injected this year and the same amount is used next year, then this is basically zero growth. So if a country were to rely on fiscal injections to generate growth over an extended period, then it could lead to a massive build up of public debt, even though it may have started the crisis with a fairly healthy fiscal position. Once the financial situation begins to become normalized, interest rates could shoot up, as countries around the world all need to borrow to finance their fiscal injections. This could become a major impediment to growth for a sustained period, as many countries that went through the debt crisis in the aftermath of the second oil shock know only too well.

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