Thailand Crisis

Businesses start to criticize, publicly, the prices controls policy of the government. At last !

Thai Namthip Ltd, the local bottler of Coke, Fanta and Sprite, yesterday criticised the Internal Trade Department for refusing to let soft-drink companies raise prices even though sugar and transport costs have soared in recent months.

The state-mandated price ceiling on ex-factory prices was distorting the entire market, said Pornwut Sarasin, the vice-chairman of Thai Namthip.

”The department should allow the soft-drink market to move freely under the current market mechanism. If soft drinks are priced higher, then consumers will decide for themselves whether to buy or not,” he added.

Soft-drink companies saw their production costs surge because of the impact of higher oil and sugar prices.

”What the department should do is to play a major role in monitoring fair trade among operators in the market rather than making a market intervention,” Mr Pornwut said. (Bangkok Post)

It’s a perfect summary of how a free market should work… common sense and rationality.

Now here is the mindset of the authorities.

However, Yanyong Phuangrach, the director-general of the Internal Trade Department, said it had not yet taken into account any request from soft-drink companies to raise their prices as it was not an urgent issue.

Instead, the director-general urged producers to weigh the impact on the entire economy, particularly for inflation, if soft-drink prices were allowed to increase.

Soft drinks are currently on the Commerce Ministry’s watch list, which covers 177 products. The watch list is the group of products that need close price monitoring every 14 days. Any price increase needs prior approval from the department.

Of course moron ! Higher prices will fuel inflation !

So, with such twisted logic, it’s enough to forbid higher prices… in order to solve the inflation problem ? Stupid little civil servants (?) and politicians with butter in their brains.

It’s the Zimbabwe path. In this country, people can go to jail if they increase prices… Inflation is illegal. We saw the results. Collapse. And 165 000 % of inflation in one month (read here).

What is the rationality behind the idea of controlling prices of… soft drinks ?

Are Fanta and Coke essential goods, like rice, water and housing ?

Is getting fat by drinking soft drinks a human right ? What kind of degenerated mind can think this ?

It’s the level zero of politics and… civilization.

So what will happen ? The government will continue for a few months this little game… Then at one point… will have to authorize increases of prices… Otherwise businesses will just cut the supply (there is no point to produce something if you loose money on the long term). Dams will break…

It’s the inflation tsunami.

Prices controls are wrong, stupid and worse… counterproductive.

But again and over again, the politicians think they’re smarter and stronger than markets laws.

The lesson is going to be painful.

More than 1,000 taxi operators brought their vehicles to have their meters reset after the approved increase in fares was published in the Royal Gazette Wednesday.

The Department of Land Transport works together with Mahanakorn University of Technology on the resetting of the meters.

According to the university dean Sujet Chantarang, it takes about half an hour for the setting, with the price of 200 baht. (Bangkok Post).

Voila. Done.

This saga started more than 6 months ago (read here). And for what result ?

It’s going to fuel the inflation rate… at the worst moment, when many other prices are going up too. Congratulations to the thai authorities and their famous “postponement policy” Zimbabwe style.

As for the details of the new taxis fares (+12 % in average) :

The new rates will start at 35 baht for the first kilometre, not two kilometres as before.

The fares will then be five baht a kilometre for the 2nd-12th kilometres, 5.50 baht a kilometre for the 12th-20th kilometres, six baht a kilometre for the 20th-40th kilometres, 6.50 baht a kilometre for the 40th-60th kilometres, 7.50 baht a kilometre for the 60th-80th kilometres and 8.50 baht a kilometre beyond that.

But wait… Because nothing can be simple in Thailand… There is a problem. A technical one.

The new taxi fare structure for Bangkok came into effect on Thursday. Ironically however, taxi drivers can’t yet charge their passengers the new fare as they haven’t been able to update their metres due to a technical problem.

Bangkok taxi drivers lined up Thursday at ten official centres to adjust their metres, after winning permission to raise their fare for the first time in 16 years. However, Mahanakorn University of technology and the nine other centers were not ready to adjust metres because the software provided by the university had not been finished.

It will take about one week for the university and certified companies to be ready to offer the metre adjustment service. (TNA)

It’s clear that it must be a very complex software… And that they didn’t have enough time to prepare it.

Just another normal day in Thailand.

This chart closes my “inflation tsunami” case for june (source Bureau of Trade and Economic Indices).

I’m sorry to have more bad news folks…

What is the PPI ? It “measures the average change over time in the selling prices received by domestic producers for their output“.

We could say that it’s the avant-garde of the inflation, the one you see around you, in your daily life… Those prices will fuel the prices of the goods at the end of the chain.

PPI is a precursor. Or a messenger.

You can see on the next chart that there is an obvious correlation between CPI (Consumer Price Index) and the PPI.

We touched the bottom in august 2007… Since then… it’s an explosion.

This is why the CPI (+8,9 % in june) will continue to increase in the coming months.

Those who say otherwise are deluding themselves. The PPI figures are a clear proof.

At such level, the businesses have to offset the increasing costs by increasing their own selling prices.

It’s Economy 101.

And it’s the inflation tsunami on the move.

… At least (and at last) in the main stream medias.

I just want to show that I’m not the only lunatic to speak about the risks of “inflation tsunami” in Thailand.

The idea is very basic : higher prices spread from raw materials, commodities, to intermediary goods, then to finished goods… businesses margins start to be under severe pressure… at one point (but the process is slow)… they can’t take it anymore, they increase their own prices… even for services. It increases the pressure on the people… Who start to demand higher wages… etc.

Spillovers effects, secondary effects or just “vicious circle”, you name it.

On top of this picture, that is easy to understand, we have to add other factors that worsen -a lot- the problem  :

-subsidies (fuels, etc.) : very bad because it prevents people from taking rational decisions (”honey ! Let’s buy a car ! Okay”). They live in a virtual reality. And subsidies… always cost. Someone, eventually, has to pay.

-controls and capped prices : it creates a dam… working great. But at one point the dam can break… leading all the actors to increase their prices simultaneously, creating an even greater inflation shock.

-”stimulus packages” and other “government expenditures” and budget deficit : the state tries to substitude itself to weak private investments… by throwing money around. Efficiency ? Close to zero. The thai state can’t be efficient.

-cheap money, cheap debt : for too long, the BOT (central bank) has kept negative real interest rates (look at the chart). It’s a total distorsion of the market and a total anomaly on such long period of time.
Too much free money or cheap money chasing too many cheap ideas of investments, or worse… non productive investments.

-weak currency : In 2006, 2007, the BOT has done everything to… weaken the THB versus USD, in order to “boost” the exports. This system created a lot liquidities on the market (BOT was buying USD, exchanging USD for THB) and then issuing bonds to try to mop up thoses liquidities. The bonds are short term : 1 year). And this system increased of course the imported… inflation.

-the last factor (with no thai responsability) : the black swan. Oil prices of course.  in may 2007, barrel = 63 USD… One year later = 130 USD. And counting.

Mix all those points… and you get a very bitter potion. And probably even poisonous.

There is no point to try to deny it : the inflation tsunami is on the move.

Raging inflation could be worse next year and stay in double-digit territory as businesses would be under pressure to adjust costs and raise prices after they have depleted their inventories, a leading economist warned yesterday.

Virabongsa Ramangkura, a former deputy prime minister, said that even if oil prices stay at US$120 (Bt4,000) to $150 per barrel next year, inflation will continue to rise into double figures.

“I believe that inflation will continue to rise and it will stay at the double-digit figure next year. This year it might touch 10 per cent or slightly more. But next year it will rise even further as businesses have to adjust their costs after using up their inventories,” he said.

The inflationary pressure is compelling many businesses to embark on drastic restructuring of their operations to cope with the high-cost environment. (Nation)

The National Statistical Office has updated its Labor Force survey, with Q1 2008 figures (my old chart here).

Table 7 : “Average wage of Employed Persons by Industry“.

Something clearly happened…

Total average wages increased by 18,1 % compare to Q1 2007 (and +8 % compare to previous quarter) !

For agriculture sector, it’s even more astonishing : +47 % compare to Q1 2007, and +52 % compare to the previous quarter (Q4 2007) !

Non agriculture sector : +16 % year-on-year, but “only” +5,7 % compare to Q4 (it’s still a big increase).

Even though there is always a hike on Q1s compare to Q4… seasonal effect… but hikes on Q1 this year are much stronger.

It’s important to note that we are talking about Q1… Therefore the current gvt and all its “boost policies” is not really linked to this jump (albeit in march…).

It’s certainly more an effect of the… global inflation, particularily the huge increase of prices of agriculture products, etc.

And those wages increases are much higher than the growth… of the economy (GDP) !

Therefore, this money is going to fuel… inflation.

We see already the effects (CPI at +8,9 % in june, see my chart).

From my point of view : it validates the idea that the inflation is creating “spillover” effects… The BOT is going to increase its interest rates, it’s compulsory now. Wages can’t increase at such pace… it’s not sustainable.

Otherwise… welcome to the Zimbabwe path…

[if you want to look at the datas, click on the image

note : don't ask me why item 3 "Electricity, gas and water supply" goes from 20 000 THB on Q4 to 6 000 on Q1 ! Miracle of thai statistics ?]

Here is a new version of my chart about indexes (private consumption, private investment, industrial capacity utilization, business sentiment), with the datas for may (source BOT).

I’ve changed the methodology in order to ease the reading : base 100 for all indexes is january 2005.

Plus, I’ve added another component : “expected business sentiment” (3 months ahead).

One word on this survey conducted by the BOT every month. A reading inferior to 50 means that business sentiment has worsened, and superior to 50 has improved (and 50 = remains stable).

We need to go back to april 2004 to have a result superior at 50.

Last point -important I believe- look at the expected BSI in may… there is a severe fall. It means that businesses are very pessimistic about their perspectives for the 3 coming months…

Of course, it’s just a sentiment… but we never had such fall.

Thailand it’s… Wonderland everyday.

A country where a Prime Minister makes paper birds in Parliament, where the president of the national airline is fired on thursday morning and then called back in the evening… and where the Energy Minister changes his mind on a daily basis.

Wonderland indeed. And every sane people should feel like being Alice.

Anyway.

Since april, PTT has announced that LPG prices would go up in july. On june 20, the Energy Minister was speaking about it too. But then… the U-turn (famous style figure in the country).

The energy minister postponed a planned increase in the price of liquefied petroleum gas (LPG) for use in vehicles after a severe shortage in the market raised suspicions vendors were hoarding supplies.

Energy Minister Poonpirom Liptapanlop said yesterday the priority was to ensure supply for LPG meets demand.

The ministry previously announced it would raise the LPG price today and later gradually float it to alleviate the burden of a state price subsidy. The announcement led to a serious shortage of LPG for vehicles over the weekend.

The minister said a date would be set later for floating the price.

”As of now, the date for the LPG price rise is unconfirmed. The ministry has not yet considered it,” she said. (Bangkok Post)

Thailand’s supply of liquefied petroleum gas (LPG) is in shortage at present mainly because greater numbers of personal vehicles have been converted to use the alternative fuel, according to the Energy Ministry.

Officials conceded that LPG procurement had been squeezed because gas use in May had risen by 5,000 tonnes.(TNA)

Energy Minister Poonpirom Liptapanlop affirms there will be no adjustment to LPG prices in the immediate future. She says a joint integrated committee will be set up to study the effects of the price adjustment by next week.

A proposal will be made to revise up the price of LPG, which was widely-expected to take place this month. The joint committee will be responsible for evaluating the effects of the increase on the economy and consumers. It’s hoped a final report of the study will be completed in a few weeks. The report will then be submitted to the the National Energy Policy Committee for its consideration. (TOC)

So ladies and gentlemen… you’re lucky ! You just won a few days, maybe a few weeks. And without any doubt, this courageous decision is going to reduce the inflation problem we currently have…

Of course, until then, you’ll face chaos and hoarding and shortages… but don’t take it personally. The Energy Minister is working, hard, for you.

Just in case : be prepared for the next U-turn. Into the Rabbit-hole.

UPDATE 3 JULY
For once, the Democrat Party says something intelligent : “motorists, consumers, suppliers and vendors saw the disapperance of LPG from the markets because government leaders made conflicting remarks.

“The prime minister said the price of LPG will rise on July1, the finance minister said the price increase will happen later this month and the energy minister said there is no plans for price hike,” Jurin said.” (Nation)

Well put.

We know that the Finance Minister is not afraid to call Lord Buddha’s help (read here) and is a partisan of the “middle path economic policies“.

Here is another example of this philosophy…

State-owned financial institutions should cut their lending rates to help borrowers suffering from rising living expenses, says Finance Minister Surapong Suebwonglee.

He said he had no firm targets on how much state banks should reduce rates, as it depended on the funding structure of each institution.

“This is not an order. But I do think banks should help to relieve some of the burden for the public,” Dr Surapong said.

The call comes even as loan and deposit interest rates are rising across the banking system. (Bangkok Post)

We always go back to the same point : cheap money, more debts, more fuel in order to boost the “boost”.

You are suffering from inflation ? Your purchasing power is decreasing… Surapong has the solution for you : “take more debts !”

Totally twisted logic.

Inflation explodes (look the chart)… At +8,9 % in june (year on year)…

Let’s remember that for inflation in 2008 :

-NESDB forecasts between 5,3 to 5,8 % (revised in may from 3,2 and 3,7 % !)
-Bank Of Thailand sticks to 4 to 5 % (revised in april from… 2,8 and 4 % ah ah ah)…
-and the government… well… 5,5 %.

What a bunch of clowns. But wait, here is the gold medalist… The Commerce Minister (picture)… Aka The Great Deflator (the man who managed to reduce the price of toothpaste… it’s very serious, read here and there).

However, the Commerce Ministry remains optimistic the oil-price spurt may have run out of gas and that oil prices will not rise as expected in the remaining months, so it has left its annual target unchanged at 5.5 per cent for the year. (Nation)

There is only one comment to make : surreal.

You have to understand their utter despair : they prefer to look (and they are !) for perfect and total fools, to loose face… instead to aknowledge the gravity of the situation… because that would fuel “inflation expectations”…

So I guess, even in november, they will tell us that inflation for 2008 could be 5,5 %.

[last word and "now something completly different" like the Monty Python were saying : The Great Deflator is also the man who wanted to... patent the full moon party "to prevent other countries from copying Thailand’s famous festival" ! I know you don't believe me... read here]

Three low-cost airlines - Nok Air, One-Two-Go and Thai AirAsia - have cut and rescheduled flights in response to record-high jet fuel prices.

Effective yesterday, Nok Air cut three domestic routes - Bangkok-Chiang Rai, Bangkok-Ubon Ratchathani and Bangkok-Krabi. It is also considering reducing its 21 flights a week to Phuket.

Affected travellers are being transferred to Thai Airways International and Thai AirAsia.

The domestic route changes followed the cancellation of its international Bangkok-Bangalore and Bangkok-Hanoi flights.

“We’re losing money,” an airline representative said, who declined to confirm if losses were as high as Bt1 billion as had been reported. The reports have fuelled expectations that the airline would be shut down soon.

Meanwhile, One-Two-Go has cut the number of Bangkok-Chiang Mai and Bangkok-Phuket flights from 28 per week to 21, starting yesterday. The flight frequency to Hat Yai has also been cut by half to seven, while those to Chiang Rai and Nakhon Si Thammarat are down from seven to two flights per week. The daily flight to Surat Thani is to continue.

Thai AirAsia has cancelled the weekly flight to Xiamen, China, due to lack of passengers. (Nation)

Hum… Nok Air suffers a lot. The route Bangkok-Hanoi was opened… just last november ! And Thai Airways is not in a good position (read here and here).

Here is the chart of Consumer Price Index with the (just published) june’s datas.

+8,9 % compare to june 2007, versus 7,6 % in may.

The index is at 127,7, versus 126,2 the previous month.

Core CPI (food and energy excluded) is at +3,6 % year on year.

I can already tell you that the CPI in july will be minimum at +8,9 %. And certainly equal or higher than 9,3 % (how ? Easy : base effect. Just copy the value of june for july, and compare with july 2007…).

And that in august, we will have +10 % (mark my words).

It’s the inflation tsunami on the move.

Prices of more products and services are about to increase in the coming weeks and months… despite all the tricks, postponements, delays used by the government.

Will the BOT increase interest rates (real rates are negative since way too long, look the chart here) but then fuel a recession ? Stay on hold ? Cut ? But that would send the THB to the toilets and increase the energy bill (imports of oil) ?

Checkmate.

All the other central banks face the same dilemna, more or less.

So what can we do ? I don’t know.

I know however that the whole story about “speculators” is bullshit.

And I know that the only way to really break the inflation is to really break the demand (of everything, from gasoline, raw materials, to new cars, to condos, houses, from steel to cheap loans… everything).

And the only way to really break the demand is to have… a real recession. A dirty one. A nasty one.

Of course, this idea isn’t very popular…

I remind you that we have dozens of millions of people (and soon hundreds if we continue with the growth rate) who were driving bicycles 15 years ago… and who now want (and can afford) cars…

O course it’s a very rough summary of the situation…

But this very simple fact is highly inflationary… Difficult to deny it.

Don’t get me wrong : I don’t blame the chinese and the indians (and many others). Their behavior is perfectly normal. We certainly would do the same. I would.