Prime Minister Srettha Thavisin and central bank governor Sethaput Suthiwartnarueput are having difficulty seeing eye to eye on fiscal and monetary policies.
Srettha, who is also the finance minister, met with the Bank of Thailand (BOT) chief at Government House on October 2. After the meeting, Sethaput left without talking to the media. Srettha told reporters that they had agreed on some issues and disagreed on others related to economic affairs, but he denied there was any conflict between them.
Observers have speculated for a while that the two men were unlikely to work in harmony. Even earlier, there was a rumour that Sethaput might be sacked. Srettha dismissed rumours that the market seemed to lack confidence about the direction of Thailand’s economic policies, which have partly weakened the baht.
The baht recently depreciated to 37 baht to the dollar, its weakest in 11 months. It was largely caused by a stronger dollar, but also because of the economic outlook and the way the government was managing the economy.
Regarding the sharp recent weakening of the baht, Kobsidthi Silapachai, head of capital markets research at Kasikornbank, said that “investors were concerned about the independence of the central bank”.
Investors talked about the possibility of Sethaput going the same way as former central governor, M. R. Chatu Mongol Sonakul, who was fired in May 2001 by then finance minister Somkid Jatusripitak, who was then a member of the Thai Rak Thai Party, the predecessor of the Pheu Thai Party which leads the current coalition government.
Chatu Mongol was fired because he did not yield to the government’s demand for the BOT to adopt an expansionary monetary policy (by cutting its interest rates) to boost economic growth.
A different approach
To be fair, Sethaput has not shown any political bias, either against Pheu Thai, or any political party.
During the run-up to the May 14 general election, he had expressed his concerns about the big spending promises of political parties competing to win the election.
Sethaput believes that the economy does not need a big short-term stimulus, as it has shown continued recovery driven by the rising number of foreign tourists and domestic demand. He repeatedly says that the country should save money for harder times.
The previous government had already increased the spending to cope with the COVID-19 fallout, similar to countries around the world. Such large spending led to a sharp increase in public debt.
Controversial populist policies
One of Pheu Thai’s controversial populist election policies was cash handouts of 10,000 baht for every Thai aged 16 years and above as a digital wallet scheme. The scheme will allow the recipients to spend the money within a period of six months in a fixed geographical radius.
Implementing it would require a massive outlay of 560 billion baht. Not only Setthaput, but many other economists had strongly objected to the plan. Many critics argued that such spending would be a waste of taxpayer money at the expense of good spending items and push the burden to the future.
“Investors are wondering how government policies would be funded,” said Kobsidthi.
Other critics warn that international rating agencies, such as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings could downgrade Thailand’s sovereign rating, which could result in higher cost of borrowing and low confidence in the country’s fiscal sustainability.
Fitch Ratings in August downgraded US sovereign rating, citing poor fiscal management because of endless fighting between the Democrats and Republicans on the issue of the national debt ceiling. The move is more or less a warning sign to other countries facing difficulty in managing their fiscal stance, a result of revenue failing to cover spending.
Former finance minister Korn Chatikavanij expressed his concern that if the government borrowed money to finance the digital wallet scheme, it would be competing for funds with the private sector, which was already burdened by high interest rates to issue corporate bonds.
Despite strong opposition from many sections of the society, Srettha has been firm on implementing the controversial digital wallet scheme, debt suspension and other spending policies to boost economic growth. During the election campaign, Srettha and other Pheu Thai leaders had promised to achieve gross domestic product growth rate of 5 per cent a year on average during their four years in power.
Rubbing salt in the wounds
The latest policy rate hike likely upset Srettha. The BOT’s Monetary Policy Committee (MPC) on September 27 raised the benchmark rate by 0.25 percentage point from 2.25 to 2.50 per cent.
The MPC justified the rate hike as part of its effort to raise the interest rate from unusually low to the appropriate level, and signalled that the central bank had reached a terminal rate for this round of rate hike.
“The committee seeks to maintain price stability, support sustainable growth in line with potential, and preserve financial stability. In pursuit of these objectives and having normalized policy gradually up to the current meeting, the committee deems the current policy interest rate to be appropriate for supporting long-term sustainable growth,” said Piti Disyatat, secretary of the MPC.
He added that in deliberating monetary policy going forward, the committee would take into account growth and inflation outlook, including upside risks from the government’s economic policies.
The latest move by the central bank is debatable, as some critics do not agree with the rate hike.
“The central bank should have paused the rate hike and waited to see the economic conditions, as inflation has stabilized,” said Anusorn Tamajai, director of Digital Economy, Investment and Trade Research Center at the University of the Thai Chamber of Commerce.
He said the latest rate hike was likely to have upset Srettha who might worry that the higher interest rate would negatively affect consumer spending and ultimately lead to slower economic growth.
Impact of weakening baht
Uncertainty about government policies and the stronger US dollar are seen as the primary reasons for the weakening baht. While announcing the latest rate hike, Piti said the weak baht was not a cause for concern as it would be beneficial for Thailand’s exports. “The baht exchange rate acts as an automatic stabilizer to support exports,” he said.
Anusorn agreed with Piti that the baht depreciation increased pricing competitiveness of the export of goods and services, referring to cheaper Thai goods and the low cost of visiting Thailand for foreign tourists. However, other critics are worried that a potentially steep depreciation of the baht could hike energy costs, as Thailand is heavily dependent on imported energy and that could trigger more capital outflows.
The stock and bond markets have already faced large capital outflows, as foreign investors are dumping those assets.
From January 1 to October 5, foreign investors sold Thai shares worth 164.4 billion baht, according to the Stock Exchange of Thailand.
Foreign investors sold Thai government bonds totalling 150 billion baht in the first three quarters of this year, according to the Thai Bond Market Association.
Rising bond yields and the expectation that the government would issue more new bonds partly contributed to the rising capital outflows.
Critics say market conditions are not in favour of the government, and they pose challenges to both Srettha and Sethaput.
By Thai PBS World’s Business Desk
