Thailand’s new prime minister is promoting optimism, but his populist policies pose financial risks

Months of political stalemate and stock market volatility in Thailand are finally over. The appointment of new Prime Minister Sritha Thavisin is expected to boost investor confidence in the short term, but experts say long-term economic recovery will be a challenge.

Although the Move Forward party won the general elections in May, it was unable to obtain approval from the conservative Senate. A volatile summer ensued when election candidate Pheu Thai abandoned the multiparty movement to form a new coalition government with two military parties – the Palang Pracharat Party and the United Thai Nation Party – as well as the moderate Bhumjathai Party.

Sritha, handpicked by the Pheu Thai Party for leader, was appointed prime minister on August 22 – the same day that former Prime Minister and Pheu Thai founder Thaksin Shinawatra returned to Thailand after 15 years of self-imposed exile. Thaksin’s return is likely to be part of a power-sharing agreement that Pheu Thai negotiated with the military, according to political observers, who believe he will eventually receive a royal pardon under Sritha’s administration.

This political turmoil has been reflected in the stock market, where foreign investors have been net sellers since the May elections. August was the seventh straight month of net selling but sentiment is slowly rising amid hopes for Thaksin’s return and Sritha’s economic promises to bring much-needed stability to the business environment.

“It might boost confidence a little but nothing more than that,” said Pimprat Dosadisaryakul, project director at the Friedrich Naumann Foundation, a German non-profit that focuses on economic research, civil liberties and democracy. “I think we will have to wait and see how the Pheu Thai Party will implement its promised policies and whether Thaksin is still able to maneuver aggressively behind the scenes.”

Due to the chaos in recent months, officials delayed the unveiling of the 2024 fiscal budget, which is now scheduled for the beginning of 2024 even though the fiscal year begins on October 1.

That could worry some investors, geopolitical intelligence firm Stratfor said in an August report: “The budget delay creates economic uncertainty among investors and consumers in terms of the direction of fiscal policy, while implying reduced government services and higher costs.” Borrowing.

These concerns have recently been echoed by Fitch Ratings a report. “A significant delay may slow down capital spending on new investment projects, although we believe there will be less impact on existing spending.”

Preventing recession appears to be Sritha’s top priority. In a speech on September 11, he described the Thai economy as a “sick person” after it grew by only 1.8% year-on-year during the second quarter compared to 2.6% in the first quarter. He said stimulus was needed due to the slow recovery in tourism and consumer spending.

The Prime Minister also pledged to ease the country’s debt problems. This year, public debt has ballooned to more than 60% of GDP, while household debt has risen to more than 90% of GDP.

However, economists are concerned that the stimulus measures proposed by Sritha could increase pressure on public debt and hamper fiscal consolidation.

In line with the Pheu Thai Party’s populist election campaigns, Srettha plans to distribute 10,000 baht ($280) in digital currency to citizens aged 16 and above.

“The funds will be distributed to all regions, creating jobs and economic activity, and the government will receive revenues,” the Prime Minister said in his September 11 speech.

Fitch Ratings estimates that these digital cash grants will reach 560 billion baht, or 2.9% of GDP.

Pheu Thai also plans to spend 300 billion baht (1.6% of GDP, according to Fitch) on elderly care over several years and increase the minimum wage and farmers’ income as part of efforts to increase GDP growth to 5% annually.

“Prime Minister Sritha will implement Pheu Thai’s populist economic policies slowly as he has to meet public expectations,” Dusadisaryakul said. “People expect to receive THB 10,000 as soon as possible and the government can delay the payment while working on the detailed process. This will definitely increase public debt and delay some other projects.”

Fitch Ratings warned that Pheu Thai’s populist pledges and social welfare measures are financially risky: “Implementation could put upward pressure on the ratio of general government debt to GDP, especially if economic growth does not accelerate as planned.” . Moreover, the prolonged financial deterioration may negatively impact the country’s sovereign rating, the credit agency added.

Other experts cautioned against overthinking the financial damage because many of the Pheu Thai Party’s populist pledges may not come true. Stratfor analysts explained that the Palang Pracharat Party and the United Thai Nation Party are fiscally conservative, so they may not agree with Pheu Thai’s policies.

“Implementing the proposal to raise the minimum wage and the digital wallet will require cooperation from the PPRP and UTN to increase current deficit spending limits, which is difficult given the Conservatives’ traditional dislike of the PTP’s populist redistribution platform which they view as wasteful pandering.”

Pheu Thai may be the runner-up in the election, but it is important not to underestimate the power of these conservative factions, said Terasak Serepant, managing director at Power Asia Group. “Businesses can expect the Pheu Thai Party-led government with conservative parties to be politically and economically pragmatic,” he noted.

The May election result reflected a strong demand for reform of Thailand’s most powerful institutions: the military and the monarchy. The Sritha government is not expected to address the latter option, but there is a possibility that it will make some progress on the former to maintain public appeal.

“His government will have to show some kind of reform to the military or highlight the Prayut government’s plans to make changes but did not do so during his term,” Dusadisaryakul said. “This is to settle with the army and show the public small commitments.”

Initially, there was a fear that antagonizing the MHP would lead to large-scale street demonstrations, but these risks have since receded. The party had controversially called for changes to Thailand’s lese majeste law.

Protesters gathered in Bangkok en masse in July after Pita Limjaroenrat’s bid to become prime minister was rejected. But for now, “the MFP and its supporters have little interest in causing chaos,” Stratfor explained in its report. This is because the opposition party may finally have a chance to become prime minister in the upcoming elections. “From next year, the military-appointed Senate will no longer have the voting power to determine the prime minister (and the MNP will be the most powerful party in the House of Representatives, which will have sole discretion to elect the next prime minister).” Stratfor said.