Listen to the steely ladies

 16 aug 2004

The people whose public statements the prime minister probably has most reason to fear do not figure among the ranks of his “regular clients”. Rather, they are two elegant, eminently respectable, and coolly restrained ladies — Tarisa Watanagase and Atchara Waiquamdee, deputy and assistant governor of the Bank of Thailand.

Since the start of this year, these two have appeared with clockwork regularity to deliver a series of well-reasoned warnings about the direction of the economy. Their role is now vastly important — because the economy is now a captive of electoral politics.

On its own terms, the government’s management of the economy has been very successful. It promised growth and it delivered. We can argue how much this was due to external factors or just to plain good luck. But the government’s policy of running the country like a company and mobilising any underused resources to increase the national “profit” has played its part. Its main strategy has been to grab the stagnant funds in the wrecked banking system and recirculate these to villagers, householders, and businesses.

This debt-driven recovery worked because of two over-riding conditions: low interest rates and low inflation. People borrow because it seems cheap. But conditions are now changing very fast. Worldwide interest rates are rising. Petrol prices (and rising capacity usage) are pushing up inflation. These twin forces are creating three pressure points.

First, household debt is higher than it has ever been and still rising.. The figure for the first quarter was 60 per cent of annual household income, roughly double the level of a few years ago. In international terms, this is not huge, but international comparisons may not be so relevant. There is no track record on how Thai households will react when the environment changes. Rising interest rates will increase the perceived burden of this debt quite quickly. Rising inflation will reduce both real income and general optimism. What then happens, we really don’t know.

Which is why the steely ladies of the central bank have issued several warnings about household debt over recent months.

The second pressure point is the banks, and especially the government-related banks who have increased commercial lending to fuel the recovery. Over the last two years, the state banks, led by Krung Thai, have accounted for virtually all the increase in banking credit. Private banks complained that Krung Thai was poaching its customers with low interest and easy approvals. The steely ladies have now officially termed this behaviour “lax” and “negligent”. The central bank has forced Krung Thai to reclassify 46 billion baht as bad loans — equivalent to over a quarter of its new lending last year. According to rumour, some of these new bad debtors are firms closely associated with this government.

The third pressure point is the current account. When consumption rises, so do imports. In recent months, the increases have been steep, pushing the current account into the red. The poodle government agencies claim the extra imports are capital goods as firms start to invest. Mmmmm. All those mobile phones come from somewhere. Now petrol will add to the problem. The steely ladies announced that the current account would probably register a deficit over the year. They have also led the way in downgrading the projected GDP growth rate, with the poodle agencies reluctantly forced to follow.

The economy is now a hostage to politics. Thaksin knows that despite all the talk about “policies” and “achievements”, the popularity of the government depends critically on the economy. Many voted for him in the hope his own financial success would rub off on them and on the country. This magic seems to have worked. He needs it to go on working right down to the election. Any slippage would hint that the wizard is losing his powers.

But now the current account is down, NPLs are up, consumer confidence is slipping, the stock market index is going south, and the baht is weakening.

If Thaksin can get past the election and the expected “avalanche”, then he can take unpopular decisions on the economy. The critical interlude is from now to the election. The government’s strategy will be to delay and to conceal.

At the Monetary Policy Committee last month, there was a big fight. We can guess that the central bank wanted to raise the marker interest rate, but the government wanted to delay this as long as possible. Since then, US interest rates have risen once again. While the government delays, capital continues to leak away and the baht weakens.

Similarly, the government is clinging to its subsidy of diesel prices even though the cost is rising steeply, and experts predict the high oil price will continue for a long time.

According to last week’s rumour, the government tried to dissuade the central bank from extending its inspection of Krung Thai to other banks. The government feared the impact on “confidence”. After a short delay, one of the steely ladies came out to state that a central bank has to do what a central bank has to do.

Meanwhile, we are starting to hear a familiar chorus in the background. Government figures talk about the “good fundamentals” of the economy. International financial firms announce that the stock market index is set to soar to untold heights. Real estate developers announce another condo of fabled luxury, advertise it with a yet more fantastical pet (so far: falcon, leopard, and fire-breathing dragon), and insist that the market is still strong. This is very familiar. Remember early 1997.

In fairness, the distortions are not yet that bad. But the twin impact of inflation and rising interest rates is difficult to predict. For certain, it would now be wise to stop listening to what the political leaders, poodle agencies, and interested firms tell us about the economy. And pay heed to those ladies.