Next Thai government must stick to deficit plan: minister

Reuters News
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Posted: Jul 01, 2011 4:13 AM
Next Thai government must stick to deficit plan: minister

By Boontiwa Wichakul and Kitiphong Thaichareon

BANGKOK (Reuters) - Thai Finance Minister Korn Chatikavanij said on Friday he agreed with the central bank that the next government should not push the budget deficit for the fiscal year starting in October higher than the 350 billion baht ($11.3 billion) planned.

"We hope the new elected government will keep fiscal discipline and adopt a lower budget deficit than the previous year in order to achieve a balanced budget in five years," he told reporters.

Thailand holds a general election on Sunday, July 3. The two leading parties are both promising big infrastructure projects and populist policies such as energy subsidies, which economists say could push up inflation and state spending.

The planned 350 billion baht deficit, approved by the cabinet in January and 16.7 percent lower than the gap estimated for the current year, is certain to be reviewed by the new government before being sent to parliament for approval [ID:nSGE70N065].

On Thursday, Bank of Thailand Governor Prasarn Trairatvorakul said the new government should not raise the deficit above that because it would push up inflation and monetary policy would have to be tightened even further.

The central bank has forecast headline inflation of 3.9 percent for this year and core inflation -- -- which excludes energy and fresh food prices -- of 2.3 percent.

But it has repeatedly warned that core inflation could at some point this year breach the top end of its target range of 0.5-3.0 percent, which it uses to guide monetary policy.

PRICE PRESSURES

Commerce Ministry data on Friday showed annual headline inflation dipped to 4.06 percent in June from 4.19 percent in May because of lower oil prices. It forecast another fall to 3.5 percent in July and around 3.7 percent for 2011.

"The Commerce Ministry's food price controls helped ease inflation pressure in the short term," said Pimonwan Mahujchariyawong, an economist at Kasikorn Research Center.

"The outlook for the second half will be influenced by oil prices and the policies of the new government such as wage hikes, which will affect inflation expectations going forward."

Core inflation rose to 2.55 percent -- the highest since September 2008 -- after a jump in May to 2.48 percent.

Since the Bank of Thailand (BOT) uses core inflation to guide monetary policy, and it is edging closer to the top of its 0.5 to 3.0 percent target range, that reinforced expectations of another interest rate rise this month.

"Core CPI accelerated to its fastest pace in three years, a sign that price pressures are becoming more broad-based and further action is needed from the BOT," said George Worthington, chief economist for Asia-Pacific at IFR Markets, a Thomson Reuters unit.

"I'm expecting another hike in July and a total 75 bps before year-end," he added.

Economists expect the rate to go up another 25 basis points to 3.25 percent on July 13, especially after data this week showing economic strength in May [ID:nL3E7HR0BY]. Most expect it to rise to 3.50 percent by the year-end.

The BOT has been one of Asia's most hawkish central banks in this cycle. It has raised the benchmark rate seven times since last July, when it started to push it up from a record low of 1.25 percent set during the global financial crisis.

($1=30.8 baht)

(Writing by Orathai Sriring; Editing by Alan Raybould)