Is Thailand facing the risk of stagflation?
Amid the rising cost of living and uncertain economic prospects, more people are starting to talk about the risk of stagflation, a scenario marked by high inflation and high unemployment with the stagnation of economic output.
The rising cost of food, utilities, and transportation are a worry for consumers across the country. Food vendors upcountry have had to adjust their menu, turning away from pork to local stuff, such as frogs. Some vendors are even opting for crocodile meat, which is cheaper, according to local media.
“While Bangkokians are worried about the continually rising cost of living, those whose monthly income is less than Bt15,000 are suffering the most compared with other groups; 36 percent of them said their expenses had gone up by 20 percent compared to the latter months of last year before prices of goods started rising,” Kasikorn Research Centre said.
So consumers have had to change their behavior by reducing spending, cutting out or delaying the purchase of luxury goods, such as fashionable items and brand name products. Sales of clothes, bags, shoes, cars, and property are expected to be hit hard, and this is likely to disrupt business recovery. Some people are settling for second-hand products. Others are choosing substitute animal meat cheaper than staple pork.
A majority of them fear that the inflationary situation will continue for more than a year, according to the research house.
Government under high pressure
The government’s response to the inflation has been to come up with a price-fixing policy and threatening to take legal action against food vendors or shopkeepers who raise product prices excessively.
Government agencies, such as the Commerce Ministry, have also organized campaigns selling some lower-priced food products to some communities. However, such actions have not been successful in stopping the rising prices.
The government has been blamed for mismanagement of the economy, largely related to pork production, as disease outbreaks have hit supplies. The authorities have been accused of covering up the outbreak of deadly African Swine Fever (ASF) over the past few years. It was only recently that the government admitted to ASF cases in some farms.
“Thailand needs to overhaul its pork production system otherwise it will not be able to revive the industry,” Nipon Poapongsakorn, the distinguished fellow at Thailand Development Research Institute, warned.
The country needs to establish independent laboratories that can disclose information to the public about what is going on in food production, he said.
University labs have been accused of being hand in glove with government officials and swine raisers to cover up the ASF outbreak due to fears of losing the export market.
China took about two years to combat ASF. Because of its large geographical size, it could move infected pig farms to safe areas. Spain took about 20 years to eradicate ASF, so Thailand could learn from them, said Nipon.
Raw material constraints
The government should liberalize the import of raw material for animal feeds, he suggested. Imposing tariffs and other trade barriers on imported soybean meal and maize, aimed at protecting local growers, increases the cost of raising pork and other animals.
Thailand produces about 50,000 tonnes of soybean and soybean meal a year while total demand is estimated at 5 million tonnes. Local maize production is about 5 million tonnes versus the demand of 8 million tonnes.
Livestock and aquaculture farmers in November last year urged the government to reduce tariffs on soybean meal and distiller grains or DDGS, a byproduct from corn ethanol production. They also demanded that the government stop forcing them to buy local maize.
A political balancing act
Different groups with vested interests as well as livestock and aquaculture farmers are on one side and soybean and maize farmers on the other. Because of political considerations, past and current governments have not succeeded in resolving the tug of war. The adverse consequences of this situation are confronting consumers today.
The burning of corn stovers to clear farms after the harvest season in Thailand has contributed to making the air toxic with dust particles less than 2.5 microns in diameter becoming a major health hazard. Thai businesses also buy maize from farmers in Asean countries such as Myanmar where farmers burn corn stovers.
“As countries negotiate to reduce air pollution and tackle climate change, Thai food exporters could face a ban on their products in the future,” Nipon warned.
So the government and concerned parties have to take a long-term view and prepare for potential issues, he suggested.
High risk of stagflation
The inflationary trend also can be attributed to the rise in crude oil prices since last year due to the recovery of the global economy, led by a recovery in developed economies, after COVID-19 lockdowns in 2020. It is a global issue beyond the Thai government’s control. As countries inject cash to boost their economies hit by the COVID-19 pandemic, this has also contributed to rising inflation.
The US is facing its highest inflation in four decades, rising 7 percent over 2021, an increase not seen since June 1982, according to the US Department of Labour.
Bank of Thailand (BOT) Governor Sethaput Suthiwartnarueput believes Thailand’s inflation will remain in the target range of 1-3 percent.
Regarding economic prospects, Sethaput believes the economy will grow by 3.4 percent this year, a big jump from the estimated 1 percent growth last year and the 6.1 percent contraction in 2020.
However, Anusorn Tamajai, former dean at Rangsit University’s Economics Faculty, warned that the risk of stagflation is high in the second quarter this year, as unemployment remains high combined with the declining income of people.
Given the rising food prices and the prices of some manufactured goods, inflation could accelerate after March if the country faces a severe drought, which would damage farming, he said. Some areas may be hit by water shortages, affecting farming activities, again pushing up food prices.
The disruption of supply chains in some manufacturing sectors due to the pandemic and shortage of raw materials still persists, he argued.
“If the economy does not recover substantially in the second quarter, the country would certainly face stagflation,” he said.
Therefore, the government’s challenge is to keep the Omicron variant at bay and allow economic activities to continue, he added. Thailand really needs to reopen the country to foreign tourists.
Anusorn said that the BOT would not need to normalize or increase the interest rate.
He did not believe in short-term measures implemented by the Commerce Ministry to combat inflation, such as reselling cheaper products to people. It may be a waste of taxpayers’ money and it may benefit only a few people or politicians’ cronies, he said.
Apart from the effort to control the swine disease outbreak, Anusorn suggested that the government promote plant-based foods.
By Thai PBS World’s Business Desk