Thailand's new prime minister boosts optimism, but his populist policies pose fiscal risks

Months of political deadlock and stock market volatility have finally come to a close in Thailand. The appointment of new Prime Minister Srettha Thavisin is expected to boost investor confidence in the short term but experts say the long-term economic recovery will prove challenging.

While the Move Forward party won May's general election, it was unable to obtain approval from the conservative Senate. A volatile summer ensued as election runner-up Pheu Thai abandoned MFP to form a new coalition government with two military parties — the Palang Pracharat Party and United Thai Nation Party — as well as the moderate Bhumjathai Party. 

Srettha, Pheu Thai's choice for leader, was appointed prime minister on Aug. 22 — the same day that former prime minister and Pheu Thai founder Thaksin Shinawatra returned to Thailand after 15 years of self-exile. Thaksin's return is likely part of a power-sharing deal that Pheu Thai negotiated with the military establishment, according to political watchers, who believe he will eventually receive a royal pardon under Srettha's administration. 

This political turbulence has been reflected in the stock market, where foreign investors have been net sellers since the May election. August marked the seventh consecutive month for net selling but sentiment is slowly ticking up amid hopes for Thaksin's return and Srettha's economic promises to bring much-needed stability to the business environment.

"It may boost a bit of confidence but nothing more than that," said Pimrapaat Dusadeeisariyakul, project manager at Friedrich Naumann Foundation, a German non-profit focused on economic research, civil liberties and democracy. "I think we will have to wait and see how Pheu Thai implements their promised policies and whether Thaksin can still maneuver powerfully at the back stage."

Due to the chaos in recent months, officials delayed unveiling the 2024 fiscal budget, which is now due at the beginning of 2024 even though the fiscal year kicks off on Oct. 1.

That could unnerve some investors, geopolitical intelligence firm Stratfor said in an August report: "Budget delays create economic uncertainty among both investors and consumers in terms of fiscal policy direction, while implying reduced government services and higher borrowing costs."

Fitch Ratings echoed those concerns in a recent report. "Significant delays could slow the disbursement of capital spending for new investment projects, though we believe there would be a lower impact on current spending."

Preventing a recession seems to be Srettha's top priority. In a speech on Sept. 11, he described Thailand's economy as "a sick person" after it grew by just 1.8% year on year during the second quarter versus 2.6% in the first quarter. He argued stimulus is needed due to the slow recovery in tourism and consumer spending.

The prime minister also pledged to relieve the country's debt problems. This year, public debt has ballooned to more than 60% of gross domestic product while household debt has spiked to over 90% of GDP.

However, economists are concerned that Srettha's proposed stimulus measures could further weigh on public debt and derail fiscal consolidation.

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

"The money will be distributed to all areas and create jobs and economic activity, and the government will earn revenue," the prime minister said in his Sept. 11 speech.

Fitch Ratings estimates these digital cash handouts will amount to 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 welfare for the elderly over several years and increase minimum wages and farmers' income as part of efforts to increase GDP growth to 5% annually.

"PM Srettha will slowly implement Pheu Thai's populist economic policies as he has to meet public expectations," said Dusadeeisariyakul. "People are expecting to receive THB 10,000 as soon as possible and the government can delay the payment while working on the detailed process. This will surely increase public debts and delay some other projects."

Pheu Thai's populist pledges and social welfare measures are fiscally risky, Fitch Ratings warned: "Their implementation could put upward pressure on the gross general government debt/GDP ratio, particularly if economic growth does not accelerate as planned." Moreover, prolonged fiscal deterioration could negatively impact the country's sovereign rating, the credit agency added.

Other experts warned against overthinking the fiscal damage since many of Pheu Thai's populist pledges may not materialize. The Palang Pracharat Party and United Thai Nation Party are fiscally conservative so they might not agree with Pheu Thai's policies, analysts at Stratfor explained.

"Implementing the minimum wage hike and digital wallet proposal would require cooperation from the PPRP and the UTN to increase current deficit spending limits, a tall order given the conservatives' traditional antipathy to PTP's populist redistribution platform that they see as wasteful pandering."

Pheu Thai might be the election runner-up but it's important to not underestimate the power of these conservative factions, said Teerasak Siripant, managing director at Bower Group Asia. "Companies can expect a Pheu Thai-led government with conservative parties to be politically and economically pragmatic," he noted.

May's election result reflected strong demand for reform of Thailand's most powerful institutions: the military and monarchy. Srettha's government isn't expected to touch the latter but there is a chance he may make some progress on the former to maintain public appeal. 

"His government will have to show some kind of reform of the military or to highlight Prayuth's government plans to make changes but had not done it during his term," said Dusadeeisariyakul. "This is to compromise with the military and to show to the public small commitments."

Initially, there was fear alienating the MFP party would lead to widespread street demonstrations but those risks have since ebbed. The party had controversially advocated for changes to Thailand's infamous lese-majeste law.

Bangkok protestors did gather en masse in July after Pita Limjaroenrat's bid for the prime minister role was blocked. But for now, "MFP and its supporters have little interest in causing chaos," Stratfor explained in its report. That's because the opposition party may finally have a chance at the premiership in the next election. "As of next year, the military-appointed Senate will no longer have voting power to determine the prime minister (and the MFP will be the strongest party in the House, which will have sole discretion to elect the next prime minister)," Stratfor said.