Thailand May Increase the Price of Diesel as Oil Fund Shrinks, Korn Says

Thai Finance Minister Korn Chatikavanij said the nation may need to curb diesel subsidies as funding runs out, a challenge to the government’s efforts to quell inflation and build support ahead of elections this year.

“We can continue as long as there is money in the oil fund, and that would last in cash terms until around July,” Korn said in an interview with Bloomberg Television in Bangkok today. Prime Minister Abhisit Vejjajiva said today his policy priority is to help people cope with rising prices.

Abhisit has added price controls and pledged higher wages to cushion the impact of inflation as he prepares to dissolve parliament in May and hold a general election. While costlier diesel may push up the cost of living, Korn said the government doesn’t intend to let the oil fund go into debt and hopes to phase in any increases in diesel prices.

“Given surging oil prices, the subsidies can’t last for long,” said Pornthep Jubandhu, a senior economist at Siam Commercial Bank Pcl in Bangkok. “But the government can’t allow producers to raise prices suddenly to cope with actual costs as it will spark a public outcry, and that’s not good ahead of elections.”

The government says it’s spent 13.7 billion baht ($453 million) on diesel subsidies since December last year to cap prices at 30 baht per liter. The oil fund has 35 billion baht, Korn said March 22.

“In the past the oil fund has been in debt by as much as 90 billion baht to help subsidize diesel,” the finance minister said today. “We don’t think that’s necessarily a good idea for the economy as a whole, and we’re not looking to do that.”

Top Priority

Abhisit said his top priority if he returns to power after elections later this year will be to help people cope with rising oil and food costs.

“I believe we have the plans to address their problems, and the number one complaint now clearly is that they want their incomes to keep up with prices,” Abhisit said in a Bloomberg Television interview in Bangkok today.

Thailand’s currency has risen more than 7 percent against the dollar over the past year and Korn said the chances are the baht “will still continue to do well.” It was little changed at 30.28 per dollar at 2:29 p.m. in Bangkok.

Thailand’s budget deficit is expected to fall to 3 percent of gross domestic product next fiscal year, from 5 percent this year, Korn told investors in Bangkok today.

‘Gradual’ Tightening

The central bank on March 9 boosted the one-day bond repurchase rate by a quarter of a percentage point to 2.5 percent and lifted its inflation forecast for 2011 to a range of 3 percent to 5 percent. Abhisit’s goal of increasing the minimum wage by 25 percent over two years and boosting civil service pay next month may add to price pressures.

Any tightening of monetary policy should be “gradual,” the prime minister said.

The increase in the price of crude oil is already a “drag” on the economy, while the earthquake in Japan may have a “negative impact on our GDP by around 0.1-0.2 percent short term,” Korn said in the interview.

Officials in Southeast Asia are evaluating the consequences for trade and investment of Japan’s worst earthquake on record. Thailand’s overseas shipments may be hit in the short term by the March 11 temblor, which also poses a risk to foreign direct investment because Japan is the largest investor in the Southeast Asian nation, the Bank of Thailand said March 14.

Inflationary Pressure

The government also subsidizes electricity costs and controls prices for some consumer products. Diesel subsidies must stop “sooner or later,” which “will add to inflationary pressure and that will be a problem,” Korn said last week.

The prime minister is seeking to lead his Democrat party to its first election win since 1992 and counter criticism that he lacks a popular mandate. Abhisit took power in a 2008 parliamentary vote after a court disbanded the ruling party linked to former Prime Minister Thaksin Shinawatra for election fraud.

A tussle for power in the country of 67 million people since the last election has claimed more than 100 lives, threatening investments.

Still, “you have to take a long term view” on the political situation, said Peter Fleet, president of Ford Asean. “Thailand is a huge opportunity for us, along with Southeast Asia.”

The minimum-wage increase and a pledge to provide more university scholarships may help the premier win over poorer northern areas that backed Thaksin and his allies in the past four nationwide votes.

Aside from Thailand, India, South Korea and the Philippines have also raised borrowing costs this month, while Malaysia and China ordered lenders to set aside more cash as reserves as they strive to restrain consumer-price growth.

Thailand’s export growth quickened to the fastest pace in eight months in February, while inflation slowed to 2.87 percent. Industrial production fell 3.43 percent last month, a report showed today. The economy is expected to grow as much as 4.5 percent this year, according to the state planning agency.

(Source: http://www.bloomberg.com/news/2011-03-28/thailand-may-raise-diesel-prices-korn-says-as-abhisit-targets-inflation.html)