Democracy, interrupted

Thai poll leaves few options but monetary overkill

Thailand's disrupted - and soon to be disputed - elections have left the central bank with no option except monetary adventurism.

Prime Minister Yingluck Shinawatra probably won the February 2 poll, which was boycotted by the opposition Democrat Party. But anti-government protesters interrupted voting in 69 out of 375 constituencies, according to the Election Commission. Add the 28 constituencies where candidates couldn't even register, and Yingluck's victory has none of the lustre of her emphatic 2011 win.

Which is just what her detractors intended. Given the fragile situation, reopening parliament after holding by-elections can take months. Moreover, the Election Commission is expecting legal challenges to the legitimacy of the outcome. Until those get resolved, Yingluck's government will remain in caretaker mode with limited borrowing authority. That means it will struggle to pay farmers above-market price for their rice - a major source of political clout for Yingluck and her exiled brother Thaksin. It also means the government won't be able to come to the rescue of the stalling economy. Major infrastructure projects will remain on hold.
 

That leaves monetary policy as the only available tool for managing the economy - even at the risk of an overkill. The central bank's policy interest rate is already low at 2.25 per cent, and household debt is high at 80 per cent of GDP. Cutting interest rates further could threaten financial stability, especially when investors are taking a dim view of emerging markets' ability to withstand capital outflows this year.

The only other hope is for a weaker baht to revive struggling exports. But that depends on a recovery in anaemic developed-country imports. Besides, a depreciating exchange rate isn't an unalloyed blessing. Thai companies will find it harder to repay foreign-currency debt, and some of that strain may show up as rising bad loans.

Unless the wounded political relations between Bangkok's anti-Thaksin elite and rice farmers in the northeast heal quickly, Thailand will miss its remaining growth years before rapid ageing slows the economy down. The best the central bank can do in the meantime is supply a band-aid.