Thailand's economic populism

The big risk may be Thaksin himself, if he becomes too autocratic.

Prime Minister Thaksin Shinawatra was elected in 2001 on a strongly populist economic platform. The Thaksin government's populist policies have succeeded in producing rapid economic growth. The only factor that could derail Thailand's economy is the remote risk of social instability.

Replicating the leftward political shift that has swept over Latin America in the past several years, Thaksin Shinawatra's Thai Rak Thai (TRT) party won a landslide victory in Thailand's 2001 general election. The electorate's strong disaffection with Chuan Leekpai's pro-IMF economic policies were instrumental to Thaksin's victory.

Thaksin capitalized on this disaffection by campaigning on a populist platform that included reversal of several key IMF policies. The TRT pledged to improve rural living conditions through new subsidized loans and a debt moratorium for farmers. In addition, the party pledged to improve the nation's health care system.

Thaksin, Thailand's wealthiest man, also pledged major changes for his country's business sector. Economic liberalization demanded by the IMF threatened many of Thailand's wealthy elite in both the private and public sectors. Thaksin promised to create a debt management company to remove bad assets from the country's banks and eliminate significant amounts of private and public sector corporate debt.

Thaksin also hinted that he would oppose IMF-dictated bankruptcy legislation that would have closed many Thai companies. Finally, he also alluded that he would reduce foreign investment in Thailand to protect domestic companies. Interesting parallels and differences exist between the populist shift in Thailand in 2001 and the populist shift in Brazil in 2002.

Lula's campaign theme in Brazil was almost identical to Thaksin's, producing a similar electoral outcome. Both Thaksin and Lula enjoyed strong popular support after their respective electoral victories. However, unlike Lula, Thaksin has managed to fulfill many of his populist campaign promises.

Brazil's Lula has taken the opposite track, embracing the previous government's IMF-mandated economic policies. Whereas Thaksin continues to enjoy strong popular support, running around 65%, Lula's personal popularity has declined. Support for Lula's government has plummeted.

Prime Minister Thaksin has consolidated his political position and now controls an overwhelming majority of parliamentary seats. Meanwhile, President Lula's coalition government has begun to fracture. Economic developments have been equally divergent in Thailand and Brazil.

Typical of countries following IMF-dictated policies, economic growth has remained weak in Brazil. In contrast, Thailand, which has eschewed IMF-policies under the Thaksin government, has seen sharply accelerated economic growth. Real gross domestic product expanded by 5.4% in 2002. Economic growth accelerated to 6.8% last year and should top seven percent this year.

Ironically, the renewed strength of Thailand's economy has led many analysts to speculate that the country is heading for another economic crisis. The risk of a repeat of the 1997 crisis is low. Both credit and investment are shadows of what they were in the mid-1990s. More importantly, the banking system's huge net foreign liability position has reversed.

Strong growth of consumer credit in Thailand over the past two years has unduly raised alarms. Credit card debt grew by almost 80% in 2002 and 30% in 2003. The growth of credit card issuance was similar over the same period. However, at the end of last year, credit card debt remained less than two percent of total bank credit outstanding.

Ongoing problems with non-performing loans has contained total bank credit growth since the economic crisis. The government's assumption of private sector debt through its bank bailout plan has dramatically reduced the stock of private sector credit. Bank credit to the private sector has declined from 133% of GDP in 1996 to 86% of GDP at the end of last year.

One of the most negative consequences of the IMFs economic policies in Thailand was the collapse of private sector investment. Though private sector investment grew strongly last year and is expected to accelerate further this year, this growth is hardly indicative of economic overheating.

Private sector investment accounted for 32% of expenditure-based GDP in 1996. Last year, private sector investment accounted for only 15% of GDP.

It will take many years for the stock of credit to regain its pre-crisis level given the problems private sector banks continue to face with distressed assets. Overall credit growth will be restrained by these distressed assets for several years. It will also take several years of rapid growth before private sector investment regains its pre-crisis level.

Another economic crisis driven by over-extended consumers and unproductive investment is improbable over the next several years. An economic crisis sparked by the sudden withdrawal of external liquidity, as occurred in 1997, is impossible.

Thailand's economic crisis in 1997 was ignited by the refusal of Thailand's foreign creditors to roll-over short-term loans to the country's banks. In 1996, the banking system's net foreign liabilities approached $50 billion - twice the amount of the Bank of Thailand's foreign exchange reserves.

At the end of last year, Thailand's banking system had net foreign assets of almost $7 billion. As implied by the reversal in bank's net foreign liability position, private sector external debt in Thailand declined from $92 billion in 1996 to only $35 billion at the end of 2003. Public sector external debt has also dropped from its peak of $36 billion in 1999 to only $17 billion last year.

Thailand is a much better credit now than it was in 1996 when foreign banks were tripping over themselves to lend money to the country. This should allow the country's private sector enterprises to access external credit in order to finance future investment, ensuring economic growth remains strong.

With all eyes on credit and investment, scant attention is being paid to political and social developments that could, if unchecked, eventually slow economic growth and resurrect problems in the banking sector.

Prime Minister Thaksin's commanding political position is breeding policy arrogance resembling autocracy. This is raising serious concerns, both internationally and at home, about the Thaksin government's commitment to democracy.

Thailand has a strong history of popular revolt against autocratic rulers. The prime minister would be well served to keep this in mind during his next term.

Jephraim P. Gundzik is President of Condor Advisers, Inc. Condor Advisers provides emerging markets investment risk analysis to individuals and institutions globally. Condor Advisers' research foresaw Thailand's economic crisis in 1997. Please visit www.condoradvisers.com for further information.

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