Capital inflows into Thailand may have a “vigorous” return after a selloff in the nation’s stocks, and the government is prepared to help control such investments if needed, Finance Minister Thirachai Phuvanatnaranubala said.
The Bank of Thailand should “keep a close watch” on the return of capital flows and can approach the government to impose specific measures if inflows are too strong, Thirachai said in a Bloomberg interview in Washington yesterday. It would be “jumping the gun” to say such steps would be necessary and unveil policies the government can undertake, he said.
“Once investors get over this short-term pessimism, the long-term fundamentals would come in and this could translate into a more vigorous capital inflow than of late,” he said. “If the central bank finds the inflows too strong and if they think it would adversely affect our competitive ability, then the central bank is welcome to come to talk to us and ask for whatever help they may need.”
The worsening European debt crisis and threat of a U.S. recession erased more than $10 trillion from global equities since May. Thailand’s benchmark SET Index slid 7.3 percent last week, its biggest weekly decline since November 2008. Overseas investors have sold a net $520.8 million of Thai stocks so far this month, according to data compiled by Bloomberg.
The threat of a global recession is rising and European nations need to gather political will to resolve the crisis, Thirachai said. Europe’s crisis is likely to have a greater impact on Thailand’s financial markets compared to its economy, he said. Thirachai is attending the annual meetings of the International Monetary Fund and World Bank.
“The concern is less about export demand but more about financial market disruption” for Thailand, Thirachai said. Without a resolution to Europe’s debt woes, “whenever the bonds come due and they need to be refinanced, the markets will react again and again like a bullet that ricochets, hitting and bouncing around and it will hurt the emerging markets.”
The Bank of Thailand, which last month raised its key interest rate for the seventh straight meeting, needs to find “the right balance” between inflation risks and threats to growth amid the worsening global environment, Governor Prasarn Trairatvorakul said Sept. 15.
The central bank lifted the benchmark interest rate to 3.5 percent on Aug. 24, the ninth increase since the start of July 2010, and said current rates are close to “normal levels.” The next meeting is on Oct. 19.
“It seems like they are now looking at the external environment as being more adverse than it appeared originally so they will take that into account,” Thirachai said.
Thai Prime Minister Yingluck Shinawatra has pledged to increase the daily minimum wage to 300 baht ($10), almost double the current level in some parts of the country, and buy rice from farmers at as much as 42 percent above market rates, spurring concern inflation will quicken.
The Thai government’s measures to boost domestic demand will have “one-time” effects, Thirachai said.
“There might still be price pressures but with the outlook of the major economies being weak, this might be a good insurance,” he said. The government’s measures “should not put too much worry on the shoulders of the central bank.”
Thai inflation accelerated 4.29 percent in August, the fastest pace since 2008, as rising food prices countered a decline in oil costs. Core inflation, which excludes fresh food and fuel, accelerated 2.85 percent. The central bank uses core inflation to guide monetary policy and aims to keep it at less than 3 percent.
Thailand’s Cabinet this month approved wage and salary increases for government officials as well as tax incentives for first-time buyers of homes and cars to help spur consumption.
The government is targeting a budget deficit of 350 billion baht in the fiscal year starting Oct. 1, and estimates expenses of 2.33 trillion baht. The government earlier this month approved a plan to spend 15.2 trillion baht over the next four years, including 11.3 trillion baht to fund state policies aimed at boosting the economy.
While the previous Thai government had aimed to balance the budget by 2016, Thirachai said that is less of a concern for him.
“With the adverse environment in the international arena, the issue of when the budget would come back into balance is less important than how the spending and the budget are geared toward improving competitiveness of the country,” he said.