This is not the time for a spending spree

“Political risk was high six months ago, and is higher now. I think sooner or later, the United States or Israel will strike Iran – it’s almostinevitable,” said Faber, who publishes the widely read “Gloom Boom and Doom Report.”

Thai officials have been slow to react to the looming crisis in the Middle East. If the war were to erupt, Thailand’s energy supply would be severely disrupted.

At present, the country imports about 80 per cent of its oil from the Middle East. Moreover, Thailand is one of the most vulnerable countries in Asia when it comes to energy imports, which are equivalent to almost 10 per cent, or more than Bt1 trillion, of the nation’s gross domestic product.

There were discussions yesterday about boosting the country’s strategic oil reserves. So far, oil companies have been keeping crude stocks at 55 days of consumption. After talks with Energy Minister Arak Chonlatanon, the oil companies have agreed to raise the strategic oil reserves to 64 days. This increase is equivalent to 6.1 million barrels.

“The [possible] conflict over the Strait of Hormuz, between Iran and other Middle-Eastern oil exporters, has increased the oil price volatility,” Energy Minister Arak said. “If the situation worsens, we need to consider other measures, including floating reserves and prohibiting exports of crude oil and refined products.”

Yesterday, oil prices hovered around US$106 per barrel. In the worst-case scenario, or in the event of a military clash between Israel and Iran, global oil prices could soar to US$200 per barrel.

According to Kasikorn Research Centre, if the dispute over Iran’s nuclear ambitions turns into a military confrontation, crude oil prices could more than double to above $200-$250 per barrel. In a worst-case scenario, if any military conflict is prolonged until the end of the year, it is expected that the average price of Dubai crude oil this year could surge to $195 per barrel, up 84 per cent year on year, it said.

“Given this, the world economy could then face ‘stagflation’, and Thailand's inflation rate in 2012 could average a staggering 8 per cent, thus adding immense pressure to private consumption,” it added. 

Moreover, Thai exports could contract by up to 20 per cent on a faltering global economy. As a result, the Thai economy could shrink by 5.5 per cent, against current projected growth of 4.5 per cent to 6.0 per cent.

The situation in the Middle East is indeed rather worrisome. Thailand’s dependence on oil imports is also a source of great concern. Yet the Yingluck government is looking forward to spending taxpayers’ money in the trillions to tackle the possibility of another flood disaster, and on unnecessary populist projects.

The government is spending billions here and billions there every week, acting as if our national coffers will never run dry. This spending spree will increase the level of public-sector debt in a hurry, and will limit the country’s ability to spend money on crucial programmes during future hard times. During its four-year tenure, the government intends to increase ratio of public debt to GDP from 40 per cent to 60 per cent.

Given the uncertain outlook in the Middle East, the best strategy for Thailand is to save the money for difficult times ahead. It is not the role of the government to stimulate the economy with taxpayers’ money. Japan and many developed economies have committed the grave mistake of Keynesian spending, which fails to put economic recovery on a long-term path, but which results in unsustainable public debt. Now they are paying the price, with fiscal bankruptcies.

It is not too late to revise the “Thaksinomics” of popular spending that will damage Thailand’s fiscal position in the medium term.