September 2011

Korn puts Shinawatra government on watch

The buoyant Thai economy kept motoring on through the political disturbances of the past year. But the recently elected government of Yingluck Shinawatra is already being challenged on its economic policies by former finance minister Korn Chatikavanij. Eric Ellis reports.


WHAT A DIFFERENCE a year makes in Thailand. This time last year, Bangkok’s downtown Ratchaprasong crossroads at the Thai capital’s commercial core was a mess. The iconic Central Department Store was in ruins, trashed after the scorched-earth tactics of the crippling protests earlier in the year. Much of Bangkok’s commercial core – its chic five-star hotels and the luxury brand names of this iconic Asian downtown – was off limits and under reconstruction. And the divide between the red and yellow political factions was as wide as ever.

Today, it is impossible to imagine that anything more violent than a manic dash to a summer sale ever took place here.

Despite deep ructions in society, and some good reasons to be concerned for their future, not least the failing health of their much-loved octogenarian monarch, Thais have not retreated into economic introspection. Despite five years of red-yellow bitterness, airport blockades and that nasty two-month stand-off in central Bangkok last year that ended in a military crackdown, Thailand’s economy steamed on regardless.
 

Thailand enjoyed its most buoyant year in decades, with GDP expanding 8% since the May 2010 disturbances, a China-style performance despite tourism – which makes a bigger contribution to Thailand’s economy than to any other in Asia, up to 10% – taking a big hit after travellers were spooked by the bloody Bangkok siege. (And this prompted the industry’s time-honoured ‘Amazing Thailand’ slogan to be pragmatically amended to ‘Amazing Value’ as $300-a-night Bangkok hotels were marked down by 75% to boost occupancies that fell as low as 10% in the months after the downtown violence.)

The Bangkok stock exchange’s benchmark SET Index has been southeast Asia’s second-best performer in 2010, up 40% and bested only by frothy Jakarta. The baht too was strong, up by around 10% against the US dollar over the year. And the Bank of Thailand has raised interest rates nine times in recent years, to dampen the exuberance that policymakers in most sputtering western economies would like to have. Indeed, the baht performed such that the now former government warned the notionally independent central bank that the buoyant currency was risking growth and export demand.
 

And that probably would have been the case this year had the devastating tsunami not slammed into Japan’s northeastern Pacific coast. That led to critical disruptions in the supply of parts for Thailand’s thriving auto sector, an industry known as southeast Asia’s Detroit for the sprawling plants on the hot plains that surround the Thai capital.
 

None of which saved Korn Chatikavanij and his Democrats, savaged by Thaksin Shinawatra’s re-made Pheu Thai Party, headed by his neophyte sister, Yingluck. In mid-August she – or was it he? – announced Korn’s successor in the finance ministry, veteran regulator Thirachai Phuvanatnaranubala.
 

This is not what was supposed to happen after one of the bloodiest episodes in Thailand’s coup-plagued history. Chronic instability doesn’t usually result in an economic boom.
 

That Thais endured all this mess is a testimony to the economy’s resilience: the disturbances were geographically confined to a downtown core and did not spill over to labour agitation nor to the sprawling Bangkok surrounds where crucial exports are manufactured.
 

Pump-primed

And in time-honoured Thai tradition, some serious government pump-priming also helped. The then Abhisit Vejjajiva-led Democrat government threw billions into stimulating micro-payments in impoverished rural areas, where support for former prime minister Thaksin, ousted in a military coup in 2006, and his red-hued followers is at its fiercest.

Elections are supposed to be won on the economy, but clearly not in Thailand. Abhisit and his deputy, finance minister and former investment banker Korn, had presided over what had reasonable claims to be a ‘miracle economy’. And yet on July 3 they were tossed out in a landslide. Under new prime minister Yingluck Shinawatra, Thailand feels as calm as it has been for years. Thais are clearly tired of turmoil and are prepared to give Yingluck a chance to heal the nation.

Korn is back in opposition, a back-to-the-future moment for the ex-Bangkok head of JPMorgan, who still hopes he might become Thai finance minister again. We first spoke to the urbane Thai politician in 2008, in the parliament in Bangkok as he was doing what most shadow finance ministers do in democracies – present alternative policies to run the economy, which at the time was new ground for Thailand, where governments have tended to rule in isolation.

But now, three years on, he is again in opposition, and in parliament too, where again he was presenting an alternative vision to 66 million Thais and Euromoney. Except that, in between, he’d been in office implementing many of the policies he was arguing for in 2008.
 

His new adversary on the government side is a London School of Economics-educated technocrat economist best known in Thailand for leading Thailand’s market regulator, the Securities and Exchange Commission. He was appointed to the SEC in 2003 during the last Thaksin government and kept his slot during the five prime ministerships that followed, surviving the 2006 military coup that ousted Thaksin. Before joining the SEC, Thirachai was with the Bank of Thailand for 26 years.

Thirachai’s appointment has generally been well received by Thai-watchers; they note that many of his years at the central bank – where he reached the deputy governorship before moving to the SEC – were spent in the financial institution regulation department. Thailand’s economy virtually collapsed in 1997/98 when the management and fiscal prudence of many of its bank and finance companies was found wanting. New to office, Thirachai was unavailable to be interviewed by Euromoney.

Prominent regional economist Jim Walker, managing director of Hong Kong-based economics consultancy Asianomics, says that although the jury is still out on Yingluck’s new team at finance "a number of policies are worrying from a market perspective and I think a lot of them wouldn’t happen anyway".

Walker says the new Thai government of Yingluck Shinawatra "is a much more specifically populist government than the Thaksin government was in 2001. The policies are open to question, they’re obviously pressuring the central bank, which knows they’ve still got a problem with inflation and that this is not the time to be lowering interest rates as the populist Yingluck camp would prefer."

On August 24, speaking at the first main debate since the Yingluck government was formed, ex-finance minister Korn made his first big contribution from the opposition benches to what he said "was the most interesting policy debate of my parliamentary career".

Korn had argued during the bitterly fought campaign that much of the economic platform put forth by the Shinawatra camp was "lavish", "unsustainable" and "undoable".

He said: "All during the campaign they insisted it was not only doable but good for the country and that they were ready to execute them.

"Now that they have the votes, we are arguing: ‘OK, you’ve won, the people are waiting, go ahead and do it’. Yet in their post-election policy statement in parliament they are suddenly not as clear about how they will be executed as they were during the campaign."

Korn cites the controversial policy of raising the minimum wage. The Shinawatra government had promised to raise it to Bt300 a day (about $10), about double the present level in rural areas, and to roll it out across every Thai province. It is the massive income differences, particularly between the rural poor and the urban middle class, that have been a flashpoint of the disturbances of recent years.

The Democrats had moved in government to raise wages substantially but their policy was more directed at Thailand’s poor regions, which also happened to be where Korn’s Bangkok-oriented party had less support. This was unpopular with the Democrats’ core support, the small and medium-sized business owners and economically able Thai middle class. But Korn argued that it was necessary to even out incomes and the cost of living, and to help placate the simmering tensions among the rural poor toward the urban elite in places such as Bangkok and foreigner-drenched tourist areas such as Phuket.

Sensible things

"We agreed that the minimum wage should rise by an initial 25% over the next two years, but we were more circumspect," Korn says. "It had to be balanced so as to incentivize business investment, but our proposal was far short of the Bt300 promised by our opponents." Korn said that was unsustainable and prime minister Yingluck, as she addressed parliament in late August, pledged to press ahead with the policy as sold in the campaign, albeit with some unspecified "adjustments to the details".

Korn claims: "Now they are saying it’s not going to be Bt300 for everybody. Now they are saying the sensible things that they should’ve said all along."
 

He adds: "It’s huge. This is the one single issue that the working population had been waiting for, so it will have significant reverberations.
 

"Now they are being told: ‘Oh, by the way [to qualify] you have to have certain qualifications, increased productivity and so on’. That’s not how you define minimum wage."
 

Had Thais known earlier what they know now, would this have swayed the July 3 poll?
 

"It would’ve made an impact," Korn says. "I wouldn’t go so far as to say it would’ve changed the result of the election. But put together with other promises that are all now looking shaky... well, it’s very different to what was being said. There are significant backtracks to state policy, including with their famous debts amnesty.

"Its just slightly short of criminal. The total cost of their programme exceeds the government’s legal borrowing limit.
 

"They need to provide explanation as to how they are going to fund their programmes." Korn says this will lead to a larger budget deficit and increased inflation.

Walker says former finance minister Korn was a "genuinely clued-up guy" who had managed the economy with prudence. He says the Democrats’ economic policy was "virtually a blueprint of the first two Thaksin governments of the early 2000s, with a Democrat picture in them.
 

"I don’t think that was a bad strategy, and they executed it relatively well, and that was largely to do with Korn, who’s much less a political figure than Abhisit was. He delivered a good case."
 

Walker says Thailand is well prepared to weather any effects of a "Take Two spillover from the 2008 global financial crisis, the continuing euro crisis and sclerosis in the US. Generally Thailand is in quite good shape because it hasn’t gone to any extremes in terms of investment expenditure and capacity expansion over the last few years. It’s one of the defensive plays in Asia, even with the new government."
 

Whether or not that soothes simmering tensions is anyone’s guess. With the semi-divine King Bhumibol ailing and 83, his 64-year reign encompassing 15 military coups, 16 new constitutions and 27 prime ministers, of greater concern to many Thais and foreign investors is how the pivotal southeast Asian country will manage the consequences of his demise.