| BANGKOK, July 5
BANGKOK, July 5 Thailand's Puea Thai Party,
which won a landslide election victory on Sunday, pledged a
range of populist measures during its campaign, from wage
increases to infrastructure projects to computers for school
That could fuel inflation and economists are revising up
forecasts for interest rates as a result.
Here are some implications of Puea Thai policies for public
debt, inflation, monetary policy and the markets.
WHAT DO THE PROMISES MEAN FOR FISCAL POLICY, FUNDING?
Among its eye-catching promises, Puea Thai says it will give
a tablet computer to about 800,000 schoolchildren each year, at
a cost of about 5,000 baht ($162) each.
It has promised high-speed trains across the country and
annual development funds of between 300,000 and 2 million baht
for each of Thailand's 73,000 villages. .
These populist measures would require billions of dollars of
spending and could stimulate Southeast Asia's second-largest
But tax revenue is already low at 17 percent of GDP and Puea
Thai is also promising to cut corporate tax to help companies
cope with other of its proposals that will push up wages.
So the new government will probably oversee a bigger budget
deficit than the 350 billion baht planned by its predecessor for
the tax year starting Oct. 1, pushing up public debt and adding
to inflationary pressure.
Even before the election outcome, the Finance Ministry
planned to sell about 450-500 billion baht ($14.8-$16.4 billion)
of government bonds in the fiscal year from Oct. 1, up from
about 410 billion baht this year, according to Chakkrit
Parapuntakul, chief of the Public Debt Management Office.
Chakkrit told Reuters that, by law, public debt must not
exceed 60 percent of gross domestic product but that it was only
around 42 percent now, so the government had some leeway to push
up borrowing. .
Much will depend on whether all the policies are
implemented, and how quickly.
"If they pursue some of this spending too aggressively, it
could well cause some fiscal problems, and also put the Bank of
Thailand in a difficult position," said economist David Cohen at
Action Economics in Singapore.
The debt-to-GDP ratio was already expected to rise above 60
percent -- generally regarded as the safe limit for developed
economies -- within six years, according to the central bank.
Sudden expansionary policies could accelerate that trend.
The bond market <0#THBMK=> could suffer from a jump in
issuance if the government chooses to finance projects through
Yields have already risen steadily this year, especially at
the short end, with two-year yields up around 100
basis points and five-year yields up about 53 basis
points, but the government has not had trouble finding buyers
for its debt.
WHAT ABOUT INTEREST RATES, INFLATION?
Puea Thai has promised a daily minimum wage of 300 baht
($10), up 40 percent from the average around the country, and a
41 percent increase in the monthly wage for new graduates.
That would be good for consumption but bad for inflation.
The spending plans will add to the pressure. Bank of
Thailand Governor Prasarn Trairatvorakul has warned the
government should not go above the 350 billion baht deficit for
2011/12 because that would push up inflation and monetary policy
might have to be tightened more than it otherwise would be.
Many economists believe the central bank will become more
hawkish this year. In a post-election Reuters poll, the median
forecast for the policy rate at the end of the year was 3.75
percent, up from 3.50 percent in a June poll.
"We see scope for a cumulative 100 bps in hikes here on as
lower fuel prices, an extension of subsidies and optimism from
the election results will underpin domestic demand in the coming
months," said Forecast economist Radhika Rao in Sinagpore. She
expects the policy rate to be 4.0 percent by the year-end rather
than 3.50 percent.
KGI Securities said the rate could go as high as 4.25
percent next year.
Credit Suisse said it estimated that a 10 percent rise in
wages added about 1 percentage point to core inflation. It has
raised its end-2011 policy rate forecast to 3.75 percent from
The central bank aims to keep core inflation, which excludes
energy and fresh food prices, in a range of 0.5-3.0 percent.
It hit 2.55 percent in June and the central bank has already
said it could go above the target range at some point this year.
Annual headline inflation dipped to 4.06 percent in June;
government price controls and subsidies on fuel, public
transport and some utilities have helped hold it down.
The Bank of Thailand is expected to raise its benchmark
rate, the one-day repurchase rate , by a quarter of
a point to 3.25 percent at its meeting on July 13, which would
be the eighth increase since July last year. ($1=30.44 baht)
(Editing by Alan Raybould)