Pongpen Ruengvirayudh: The state of the Thai economy and
macroeconomic policy
Speech by Ms Pongpen Ruengvirayudh, Deputy Governor for Monetary Stability of the Bank
of Thailand, on behalf of Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the
Joint Foreign Chambers of Commerce (JFCCT), Bangkok, 28 May 2013.
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Opening remarks
Your Excellencies,
Ladies and Gentlemen,
First of all, on behalf of the Governor, I would like to thank the Joint Foreign Chambers of
Commerce for the invitation. Thailand and the members of JFCCT have a long-established
relationship, in some cases spanning over several decades. The Chambers' work and efforts
over the years have contributed significantly toward the economic development and
prosperity here in Thailand. I hope that our economic partnership and cultural ties will
continue to thrive as we further our cooperation in the future.
Let me share with you today my views on Thailand's economic assessment and how
monetary policy can help address some of the immediate challenges facing the economy.
Later in my talk, I will also touch on longer-term structural challenges which monetary policy
may have little bearing on, but are nonetheless crucial for sustaining economic prosperity.
But first, let me begin by reviewing current economic conditions and medium-term economic
outlook.
Economic outlook and monetary policy
The economic expansion in 2012 at 6.4 percent proved to be stronger than most had
anticipated, driven mainly by robust domestic demand amid post-flood reconstruction
spending. The broad strength of private spending also testified to inherently sound economic
fundamentals, including rising income, low unemployment, and robust private sector
confidence. At the same time, additional support from accommodative macroeconomic
policy, both fiscal and monetary, helped maintain economic momentum throughout last year.
Notwithstanding a somewhat lackluster economic performance in the first quarter of this
year, many of the supportive factors are expected to remain in place. Forward-looking
indicators suggest both businesses and consumers continue to hold positive outlook on the
economy. Fiscal stimulus related to the large-scale public investment in infrastructure should
begin to phase in from the latter part of this year, potentially generating positive crowding-in
effects on private spending. Financial conditions also continue to be supportive of growth,
with policy interest rate staying low and private sector credit growth expanding at a
doubledigit rate. Longer-term interest rates and borrowing costs have been low and stable, affording
both businesses and households relatively easy access to finance. In fact, if anything, a high
pace of credit growth may have raised risks of overheating in some sectors, with potential
implications for financial stability. The Monetary Policy Committee (MPC) has flagged this
risk several times since last year, and will continue to monitor the situation closely.
On the other hand, there remains an important drag to growth, largely stemming from a
protracted global recovery. In some parts of Asia, the first quarter growth has turned out to
be lower than expected, as a result of slowing global trade. In Thailand, Q1 growth has
similarly been subdued, expanding 5.3 percent as both private consumption and investment
moderated. Part of this pullback may have been a natural reversion to a lower pace of growth
after an unusually strong expansion last year. Lingering uncertainty about global demand
may have also caused some export firms to delay planned investment. Consumption may
have been held back by farm income in the midst of low global commodity prices, and an
accumulation of household debt, which is now at 78 percent of GDP. Set against this
weaker-than-expected domestic demand, is relatively resilient exports which expanded more
than 8 percent.
Given the still weak global demand on the one hand, and already easy financial conditions
on the other, monetary policy must carefully weigh the merits of providing growth support
against financial stability concerns. Policy interest rate is not the only available tool to
address these multiple objectives. Macroprudential measures, in particular, are also part of
the policy tool kit. The MPC will continue to exercise its best collective judgement as to what
course of action and policy mix are deemed most appropriate to ensure maximum
sustainable growth for the Thai economy.
Challenges from capital flows and exchange rate volatility
Let me now turn my discussion to a topic that has attracted a lot of attention recently, namely
the issue of capital flows and exchange rate. The appreciation of the Thai baht this year up to
late April has raised some concerns. During this period, the baht strengthened nearly
7 percent against the US dollar, and 10 percent against our trading partners' currencies.
What has caused such movement in Thai baht?
There is little disagreement that, over a long period of time, exchange rates tend to
appreciate in economies with better growth prospects, strong external balances and overall
sound fundamentals. Over the past decade, currencies in Thailand and other parts of Asia
have followed gradual appreciation trends, broadly consistent with their respective
fundamentals. What sets this recent episode apart is the pace with which the baht has
appreciated. Part of the appreciation could be interpreted as a 'catch-up' move, following a
tepid period of last year when the baht underperformed many in the region. Meanwhile,
several currencies in the region were also subject to their domestic issues. In South Korea,
geopolitical factors resurfaced. In Malaysia, a looming election curbed risk appetite until
midMay. In Indonesia, current account balance remains in deficit, for example.
But even if one takes these factors into account, sharp movements in Thai baht in March and
April are still difficult to justify by fundamentals alone. Our internal analysis has shown that
the baht has, at times, deviated from its range of equilibrium or fair values. Elements of
selffulfilling prophecies were likely at work, encouraged by market speculation that the policy
makers were adopting a hands-off approach regarding exchange rate. We welcome signs
that the market has abandoned this misguided belief. The baht has been depreciating since
late April, reducing the year-to-date appreciation against the dollar to about 3 percent. The
correction is also evidence that under flexible exchange rate regime, unwarranted
overshooting inevitably will be corrected by market forces.
The fact is that although the exchange rate is not the BOT's main policy tool, or an
intermediate policy target, it is an integral part of our macroeconomic analysis and policy
deliberation. Beyond aggregate statistics, it is also recognized that sharp exchange rate
volatility can have significant impact on small businesses with less capacity to adjust. Thus,
while exchange rate is allowed to play an active automatic stabilizing role under current
framework, the MPC constantly monitors the impact of baht movements on the overall
economy. To supplement this baseline analysis, the BOT staff also conducts projections
under different degrees of baht appreciation. In a recent joint forecast exercise with the
Ministry of Finance and the Office of the National Economic and Social Development Board
(NESDB), the BOT's estimate of growth impact of baht appreciation in fact proved to be the
largest among the three, testifying to our conservatism. In broad terms, however, the three
agencies' analyses agree that baht appreciation alone should not derail the underlying
momentum of the economy.
The MPC continues to be prudent, and vigilant about the potential adverse impact of extreme
exchange rate volatility. The committee recognizes that, in the current environment where
growth prospects differ wildly across regions and monetary policy in advanced economies
remains ultra-loose, pressure from capital inflows may persist in the medium term. All
available policy options are therefore open to considerations. Substantial preparation work
has been ongoing to ensure that the right measures can be readily implemented should the
situation warrant. Investors seeking long-term presence in Thailand should be reassured that
productive capital inflows are still highly valued, and any introduction of measures will be
carefully designed to minimize unintended consequences. After all, the goals of these
measures are to preserve the financial and economic integrity, the very reason that attracts
investors to Thailand in the first place.
Structural Impediments
Ladies and gentlemen,
Macroeconomic stabilization and demand management policy can only get us so far. The
ultimate determinants of long-term growth are tied to the supply side of the economy, namely
the deployment of effective capital and labour inputs. It is a pity that the supply-side issues
are often overlooked in policy discussion, and action is often limited to structural 'reform' that
comes too late. By addressing the structural issues early and preemptively, the long-run
growth benefits are likely to be more substantial. So let me venture out of my familiar
territory, and devote the rest of my talk to discuss one key structural issue facing the Thai
economy - the labour shortage.
Unemployment is persistently low in Thailand, and is not very sensitive to the business
cycles. One underlying cause is the low labour force, which limits the supply of workers. The
total size of workforce may further decline with the secular demographic trend, an important
issue I will come back to in a moment. But the low degree of cyclicality of unemployment
suggests that there may be factors keeping the labour market tight other than demand
pressure. Through our business contact and recent surveys, the labour shortage has
repeatedly come up as one of the top concerns, alongside competitiveness and production
costs among others, yet pressure on wages is largely absent. What labour market
imperfections are responsible for the structural shortage of labour supply, or equivalently,
persistent excess demand for labour?
A long standing issue is that of education and skills mismatch. The manufacturing industry,
for example, often reports difficulties in hiring workers with vocational training, which is in
shorter supply relative to university graduates.
There are also reports of under-supply of graduates in science, relative to social science.
One reason may be the firms' reluctance to adjust wage upwards, resulting in shortage of
supply at the going wage. This reluctance, in turn, may be caused by low marginal
productivity of labour, which is a consequence of subdued capital formation over the years,
resulting in low capital-to-labour ratio. Escaping this vicious cycle of low wage and labour
shortage, involves an improvement in labour productivity via higher investment in physical
capital. Several strategies have been proposed. Some argue that raising the minimum wage,
despite its costs, can potentially promote investment and improves labour productivity. Some
prefer to provide direct fiscal incentives for firms to invest. Others see public investment as
holding the key.
The jury is still out as to how successful these approaches will prove to be in catalyzing an
investment up-cycle, and ultimately alleviating the labour market issue. Fortunately, the
currently conducive macroeconomic environment is already providing ample incentives for
businesses to invest. Financing costs are currently low. Strong baht facilitates imports of
capital goods. Firms stand to gain more from AEC
integration if they carry out their planned
investment in a timely manner. Collective efforts by all will also generate positive
externalities, and can go a long way in easing the labour shortage problem for all parties.
One fundamental force that may exacerbate the labour shortage problem is the demographic
change. Slowly but inexorably, the Thai society is aging, as the total fertility rate is
consistently lower than the replacement rate. The number of people aged 65 and above will
double in less than 10 years. As projected by NESDB, by 2030 the working-age population
will fall from the current rate of 68 percent to just over 60 percent, making Thailand's old age
dependency ratio slightly higher than the Asian average. The government can help manage
this demographic transition by speeding up the reform of immigration policy, and simplify
registration procedure. The initiatives can also fit in with the broader agenda of ASEAN
integration, to leverage on regional resources and promote regional economic integration
simultaneously.
Closing remarks
Let me close my remark by
thanking all of you once again for your invaluable contributions to
the Thai economy. The Bank of Thailand will continue our work of ensuring a stable financial
and economic environment, so that businesses can continue to thrive and individuals can
enjoy better standards of living on a sustainable basis. I hope that Thailand will continue to
be a destination of choice for your investment, and a country of shared opportunity and
prosperity for us all.
Thank you