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Threat of deflation among major challenges for next finance minister

Written by World News

Since Srettha Thavisin formed the new coalition government in August last year, the prime minister’s additional role as the finance minister has faded into the background.

In the past six months, his busy travel itinerary has taken him to 14 countries for meetings with world leaders and business executives.

Time magazine recently put Srettha on its cover with the caption “The Salesman”.

Reports have emerged that he plans to rid himself of the responsibilities of the Finance Ministry, and will offer the post to a close aide of the Shinawatra family, which controls the ruling Pheu Thai Party.

The new finance minister will also head the economic team that comprises key ministers from different parties of the coalition government. This could pose many challenges for the new finance minister and his team.

Thailand’s economic growth has been sluggish for nearly a decade with a growth rate below 2 per cent.

“It will be difficult to speed up economic growth this year,” said Supavud Saicheua, advisor to the Kiatnakin Phatra Financial Group.

Threat of deflation

Critics are worried about the threat of deflation, due to negative inflation for the past several months. The Bank of Thailand (BOT) has allayed such fears, saying the economy was still on the path of recovery after the COVID-19 pandemic.

Some economists want to see fresh economic data to check for the threat of a recession.

Srettha and his aides in the Cabinet have been constantly ringing the alarm bells, saying the economy is at the edge of a cliff. They are blaming the BOT for not cutting the policy rate.

Another factor that raises the fear of deflation is China’s economy, which is currently experiencing slower growth, besides other debilitating challenges such as the bursting of a real estate bubble, high debt of local governments, low domestic consumption and overcapacity leading to production of goods far exceeding demand.

The combined lower domestic demand and overcapacity has forced China to export cheap goods to the global markets.

“Cheap goods from China have depressed prices around the world and the pressure is also on Thailand, raising concerns of deflation,” said Supavud.

The threat of deflation would be one of the top items on the agenda for the next finance minister and his economic ministers.

What would be the tools at his disposal? Srettha and his team have been preoccupied with implementing a cash handout scheme under which

Thai citizens aged 16 and above would receive 10,000 baht through a digital wallet for spending. The total cost of this project is 500 billion baht.

Experts are questioning the worthiness of the scheme as well as the funding sources.

The BOT and the World Bank have suggested that the government scale down the scheme by giving money to only those who are in need.

A targeted approach, however, is not what the government wants. The crux of its argument is that to boost the economy, a large part of the population must be covered. The scheme aims to cover 50 million of around the 66 million total population of the country.

Due to limited state revenue, it is likely that the government may have to borrow more money for the implementation of the handout scheme.

This raises the issue of higher public debt from the already uncomfortable level of 62.5 per of gross domestic product (GDP) as of February. Rising public debt would make the fiscal deficit unsustainable.

The House of Representatives only recently passed the overdue budget bill for fiscal year 2024. The government has set expenditure at 3.48 trillion baht with a deficit of 693 billion baht.

The government’s finances are not in good shape due to accumulating fiscal deficits for several years.

Revenue shortfall

“The government revenue can only meet the current spending [salaries of state officials, healthcare and maintenance]. Every single baht for capital spending is borrowed,” Supavud lamented.

The tough task for the new finance minister is how to increase revenue. One way would be to have higher economic growth, but that alone may not be adequate.


Legalizing casino operations is being seen as an option. Srettha has thrown his support behind the idea to establish an entertainment complex. The lower House has just acknowledged the pre-study of a gambling legislation.

Srettha said the Cabinet would next draft the bill and forward it to Parliament. It would take some time before a law is passed and casino investments come in.

Experts have suggested that the government learn from Japan and other countries that have been successful with tax reforms, which is mostly raising taxes.

Japan has implemented massive monetary and fiscal expansion to pull the economy out of deflation.

The country just ended its ultra-loose monetary policy that allowed a negative interest rate until last month.

Japan raised consumption tax several rounds up to 10 per cent currently. Thai economists and the World Bank have suggested that the Thai government raise value-added tax from 7 per cent to 10 per cent.

Each percentage point rise would bring in about 60 billion baht. Srettha has not made such an initiative, so it would be for the new finance minister to make the decision.

Financial market reforms

Apart from slower economic growth, the issue of corporate governance in listed public companies has played a part in the current slump.

Thailand’s stock market is among the world’s worst-performing bourses. The index plunged 15 per cent last year and it continues to struggle this year following accounting scandals and corporate bond defaults of some companies.

Some new measures have been put in place by the Securities and Exchange Commission (SEC) and the Stock Exchange of Thailand (SET).

The frontrunner for finance minister is Pichai Chunhavajira, who is the chairperson of the SET and a director on the SEC board.

He may probably know well how to win over investor confidence and could ensure retail investor protection as well as cultivate a strong governance culture.

In addition to public debt approaching a dangerous level, household debt is more worrisome at 91 per cent of GDP.

“While China has experienced slower growth, its household debt is much lower at about 60 per cent of GDP, so there is room for that debt to increase. Thailand’s household debt is already overstretched,” said Jitipol Puksamatanan, an economist and investment strategist.

“Should Thailand suffer from deflation, debt in real terms will increase,” says Supavud.

He warned that it would be very difficult to pull an economy out of deflation. Look at Japan as an example. It took the country about 20 years to crawl out of deflation, he says.

Attracting foreign direct investment

The Board of Investment is optimistic that Thailand would receive foreign direct investment of over 500 billion baht following Srettha’s travels to 14 countries.

Potential areas of investment include semiconductor manufacturing plants, which Thailand is in need of, as the global AI fever has been pushing up the demand for computer chips.

“We have to wait to see whether those potential investments actually materialize,” said Piti Srisangnam, an economics lecturer at Chulalongkorn University.

By comparison, Vietnam has been very successful in wooing foreign investment as it makes laws compatible with OECD (Organization for Economic Cooperation and Development) standards and it implements a regulatory guillotine – cancellation of outdated laws and regulations that are obstacles to doing business – he said.

Vietnam has also shown it is serious in dealing with corruption. We have not seen reform of laws in Thailand and the country has a negative image. Rule of law is a key consideration for investors, added Piti.

Labor issue

Thailand could face labor shortages as the working population is on a declining trend. The workforce is expected to drop to 47 million in 2030 from about 50 million at present.

The country also faces a shortage of skilled labor. The challenge is how to find adequate labor.

The country would need to open its market to skilled personnel, not only for cheaper labor from neighboring countries as at present, Supavud added.

By Thai PBS World’s Business Desk

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