The cost of Thailand's rice-subsidy scheme is rising, thereby adding to the country's fiscal deficit, the World Bank warns in its "East Asia Pacific" update.
Begun in 2011, the scheme seeks to support rice farmers with direct government purchases of unmilled rice at prices 50% higher than the market rate. With rice prices 12-15% lower at the end of 2013 than at the beginning of 2011, the government has not been able to auction the stock.
Unmilled rice has piled up in government warehouses at twice the annual volume of the global rice trade or 18 million tonnes at the end of last year's third quarter, with the quality of the stockpile deteriorating.
The subsidy has cost the government US$12.7 billion or 3.5% of gross domestic product in its first year of operation, raising the country's fiscal deficit to 4.4% of GDP in 2012 from 1.7% in 2011. The scheme cost the government another US$13.9 billion or 3.6% of GDP in 2013.
Even though Thailand reported a lower deficit in 2013 (2.3% of GDP) than in 2012 (4.4%), the country must return to fiscal consolidation, replacing generalised subsidies such as the unsustainable rice-pledging scheme with targeted income support for vulnerable groups, the report said.
Larger Southeast Asian economies such as Indonesia and Thailand will face tougher global financial conditions and higher levels of household debt.
The countries' exports will increase, but higher debt servicing costs and ongoing fiscal consolidation will weigh on domestic demand.
Current monetary policies provide some insurance against downside risks in big countries in Asean including Thailand, but creeping inflation needs careful monitoring.
The nreport said while investment has weakened considerably, delays in implementation have continued to hamper government plans for large infrastructure investments.
The Constitutional Court's ruling against a borrowing bill supporting the government's 2-trillion-baht megaproject development plan will delay work on transport projects.
Structural reforms are key to reducing vulnerabilities and enhancing the sustainability of long-term growth.
China has already begun a series of reforms in finance, market access, labour mobility and fiscal policy to increase the efficiency of growth and boost domestic demand.
"Over the longer term, to keep growth high, developing East Asia should redouble efforts to pursue structural reforms to increase their underlying growth potential and enhance market confidence," said Bert Hofman, the World Bank's chief economist for East Asia and the Pacific.
He said developing countries in this region would see stable growth of 7.1% this year, bolstered by a recovery in high-income economies and the market’s modest response to the US Federal Reserve’s tapering of its quantitative easing programme.