Yingluck Shinawatra, Thailand's prime minister, inspects sacks of milled rice during a tour of the processing plant for Charoen Pokphand Foods Pcl's (CP Foods) Royal Umbrella-brand rice in Nakhon Luang, Ayutthaya province, Thailand on July 18, 2013. Photographer: Dario Pignatelli/Bloomberg
Thailand's decision to expand subsidies for rice and rubber farmers to quell protests is undermining efforts to control rising debt, even as governments in neighboring Malaysia and Indonesia cut back support programs.
The government will pay 21.2 billion baht ($681 million) directly to rubber farmers' bank accounts to offset falling prices, up from 10 billion baht agreed on earlier, after violent clashes between the police and growers demanding subsidies. The administration also promised to buy rice at above-market rates for another crop year, at a cost of 270 billion baht.
The payouts may slow Prime Minister Yingluck Shinawatra's plan to balance the budget by 2017 and contain the ratio of debt to gross domestic product that rose to 44.3 percent in June this year from 38.2 percent in end-2008. A business sentiment index dropped in July to the lowest level in more than a year and consumer confidence fell to a nine-month low on concern political risk is rising as the economy weakens.
"It's a tricky situation, given the demands of the protesters," said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. "The government doesn't have much more room for subsidies. The risk is the protests could be drawn out and the longer they persist the more they become a concern, especially if they are more disruptive and add to an already weak growth outlook."
Thailand's SET Index slid 1.7 percent as of 11:31 a.m. in Bangkok today, the biggest decline in Asia. The baht slipped 0.1 percent, and is the third-worst performer in the past six months among 11 Asian currencies tracked by Bloomberg.
As many as 12,000 farmers blocked roads and railways for two weeks from Aug. 26, stranding thousands of passengers and disrupting traffic in the southern provinces that account for 80 percent of the nation's rubber output. About 76 police officers were injured and nine vehicles torched in Nakhon Sri Thammarat at the height of the clashes earlier this month.
Yingluck said on Sept. 15 that the government and most rubber farmers had agreed on the subsidy amount, prompting many demonstrators to return to their plantations.
Rubber futures in Tokyo have dropped 14 percent from an 11-month high in February as slowing growth in China and a recession in Europe reduced demand. In Thailand, the world's largest rubber producer and exporter, prices tumbled 19 percent to 83.20 baht a kilogram from this year's peak of 102.7 baht.
The Southeast Asian nation has also spent 675 billion baht since October 2011 on buying rice directly from farmers. The government estimates it lost about 137 billion baht in the 2011-2012 crop year as it then sold the grain at a loss.
Yingluck's administration earlier this month backtracked on a plan to lower payments after rice farmers threatened to demonstrate on the streets of Bangkok.
Rice exports tumbled 35 percent last year to 6.95 million tons, ending the nation's 30-year reign as the world's largest exporter. With purchases at as much as 50 percent above the market rate, the government may lose up to 100 billion baht in 2013-2014, according to Capital Economics Ltd.
"The rice-pledging scheme has set a precedent for other groups," said Steffen Dyck, assistant vice president at Moody's Investors Service in Singapore. "The risk is whether these programs will be contained or adjusted in the future."
While agriculture accounted for 8.4 percent of the nation's gross domestic product last year, rural residents make up almost 87 percent of the population of 67 million people. Yingluck's party won a parliamentary majority in 2011 elections with support from poorer rural areas in northern Thailand.
"They try to please voters to keep their popularity," said Somjai Phagaphasvivat, a political science lecturer at Thammasat University in Bangkok. "But they create fiscal problems which may explode sooner rather than later if the global economy faces a serious downturn."
Meanwhile, countries from Malaysia to Indonesia are reducing subsidies to ease pressure on their budgets, with both nations raising fuel prices this year. Fitch Ratings cut Malaysia's credit outlook to negative in July, citing that nation's rising debt and lack of budgetary reform.
Thailand's debt is rated BBB+ by Standard & Poor's and Fitch, and Baa1 by Moody's, three levels above junk. The country still has "strong fundamentals" including high foreign reserves and continued foreign direct investment, Dyck said.
The Thai parliament last month passed the 2014 budget for the year beginning Oct. 1 with a deficit of 250 billion baht, down from a shortfall of 300 billion baht this year. Finance Minister Kittiratt Na-Ranong has said the government will cut the deficit every year to achieve a balanced budget by 2017.
Falling commodity prices will increase pressure on the economy, which unexpectedly contracted 0.3 percent in the three months through June from the previous quarter, when it shrank by 1.7 percent, official data showed. The statistics agency cut its 2013 GDP forecast to 3.8 percent to 4.3 percent from 4.2 percent to 5.2 percent, and the exports growth target to 5 percent.
Thai rice prices may drop to $425 a ton by year-end from about $458 now, and fall to $400 a ton by the end of 2014, Capital Economics estimates. The nation's total exports fell 1.5 percent in July, a third straight month of declines.
"There is no real driver for the economy except exports," said Pipat Luengnaruemitchai, vice president at Phatra Securities Pcl in Bangkok. "Falling agricultural prices weaken farm income and consumer spending. Investments won't rise when the economic outlook is grim. We should hope for the best and prepare for the worst in the second half."
The central bank last month kept its benchmark interest rate unchanged for a second straight meeting after cutting by a quarter of a percentage point in May to aid growth. Governor Prasarn Trairatvorakul said Aug. 28 the economy had hit bottom last quarter and should recover in the second half.
Yingluck's two-year-old administration has tried to speed up budget disbursement as plans to spend 2 trillion baht on infrastructure and 350 billion baht on water-management projects have been delayed. The government also plans to cut import duties on luxury products to help boost tourism revenue and counter the slowdown in domestic spending.
Kittiratt said on Sept. 16 there will be no further negotiations on rubber prices. The government has sought a long-term solution by zoning farms and investing in adding value to agricultural products, Yingluck said the same day.
"I want to ask the farmers to sympathize with us because if we spend too much money on this, we won't have enough in the budget to allocate to other areas," Yingluck said. "We need to find the balance."