Prasarn Trairatvorakul: Navigating through volatility with long-term
focus
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Association of
International Banks (AIB) Dinner Speaker Series, Bangkok, 29 July 2013.
* * *
Excellencies, distinguished guests, ladies and gentlemen,
I would like to thank the Association of International Banks for inviting me to give a talk this
evening. It is my honor and pleasure to be here for the prominent institution that has its
presence in Thailand since 1996. The association's work and efforts have contributed
significantly towards the strength of the Thai banking system as well as economic prosperity
here in this country. For this special evening, I would like to share with you my views on the
recent economic and financial challenges, as well as the Bank of Thailand's role in
safeguarding economic and financial stability.
Navigating through volatility
Over the past few years, we have gone through many economic surprises. Last year alone
the Thai economy had to face several challenges, both inside and outside Thailand -
recovering from the devastating floods and coping with fragile global economy. And just a
few months ago we only just started talking about a pick-up in global growth, driven mainly
by robust demand in emerging markets. Today, circumstances have changed, and we are
facing with unexpected slowdown in emerging markets as well as the prospect of Fed QE
tapering.
As far as global economic environment is concerned, I think we are going to see a lot more
surprises. The world, in my view, is now obsessed with just a few things. I would like to
highlight them in turn.
First, the prospect of QE tapering is having wide implications for financial markets. We have
already seen a sell-off of emerging market debts and equities, and a reversal of foreign
capital flows that had rushed into the region earlier this year. With uncertainty in the amount
of global liquidity provided by major central banks like the Fed, we will likely see more volatile
capital flows, exchange rate and commodity prices going forward.
Second, financial markets are watching closely Abe's plan to revive the Japanese economy.
Its effectiveness, especially of its third-arrowed plan of structural reform, will be significant for
global outlook and the degree of risk aversion in general. If the third arrow has failed before it
even properly began, the economic momentum running by the previous arrows - monetary
and fiscal stimulus - would be weakened.
Third, signs of Chinese economy and emerging markets slowdown have already started to
affect world growth. With prolonged recovery in G3 countries, the last hope for global
recovery seems fading. China's aim to tame its real estate boom and inflation resulted in the
economy slowing more quickly than initially hoped. So the slowdown of China will
undoubtedly be a key risk to the global economy.
Consequences for the Thai economy
Along with weaker global outlook, the Thai economy this year started out with much
moderation. Growth in the first quarter has been subdued as domestic spending, both private
consumption and investment is weaker-than-expected. Part of this pullback may have been a
natural reversion to a more normal pace of growth after an unusually strong expansion last
year. At the same time, on the external side, a drag on the overall Thailand's trading
partners' growth continues to weigh on Thai exports.
Going forward, however, many of the supporting factors remain in place. High level of
employment and strong private sector confidence should provide an enabling environment
for growth. Fiscal stimulus related to large-scale infrastructure investment should also begin
to phase in from the latter part of this year. This would potentially generate a positive
crowding-in effects on private spending. For this, I would expect the economy to return to its
normal path in the third and fourth quarter of this year.
Apart from slower growth, a potential threat to financial stability has increased, stemming
from development in household indebtedness. Currently, household debt is rising to over
70 percent of GDP. International evidence suggests that a prolonged period of rapid credit
growth could lead to a build-up of financial imbalances, worsen households' debt servicing
ability and loan quality, as well as sow a seed for asset price bubbles.
The need for long-term focus
Ladies and gentlemen,
Having said all of the above, I may seem to paint the picture that the Thai economy is
slowing down recently, largely as a result of weaker global growth. But I would like to point
out that the Thai economy has not just slowed down recently. In fact, it has been growing
slower for more than a decade, both in terms of quantity and quality of growth. Without
enough quantity and quality of growth, we will not be able to grow sustainably and it will be a
long way until Thailand can get out of the middle-income trap. The problem is that we are
now caught in the middle- unable to compete with either low- or high-income countries. If this
trend continues, it will prevent us from reaping the full benefits of future economic integration.
Part of this may stem from structural changes in Thailand's endowment. Labor is now scarce,
increasingly mismatched and becoming more expensive. So, labor-intensive driven growth
strategy is no longer applicable to Thailand. It is important that we create new sources of
growth. To achieve this goal, an improvement in technology, education and labor productivity
via higher investment in physical and human capital are needed.
Another thing I would like to note is that, as in most developing economies, economic
development is often associated with rising income inequality and social exclusion. Thailand
is no exemption. In fact, the economy has been growing unevenly. But growth without
inclusiveness is not sustainable, because it can lead to deterioration of social solidarity,
political uncertainty and finally affect economic growth. Thailand's economic development
should, therefore, properly address the issue of equitable growth going forward.
The Bank of Thailand's role
Ladies and gentlemen,
This leads us to the second part of my talk this evening. Although short-term volatility has
often caught us by surprise, there is a pressing need to consider longer-term issues. And to
support long-term perspective, the Bank of Thailand has set economic and financial
environment to support such goal.
The Bank of Thailand always attempts to strike the right balance between economic growth
and macroeconomic stability. Monetary policy decision via interest rate setting has always
been made while taking into consideration growth, inflation and financial stability dimensions.
However, there are limitations that monetary policy cannot achieve. A single instrument,
namely, the policy interest rate cannot target multiple objectives such as price stability,
financial imbalances, exchange rate and capital flow simultaneously. The policy choices
inevitably involve trade-offs between different objectives. Policymakers will have to weigh
carefully the costs and benefits of a policy decision.
Although exchange rate is not the Bank of Thailand's main policy tool, or an intermediate
policy target, sharp exchange rate volatility can have significant impact on exporters and
small businesses with less capacity to adjust. The Bank of Thailand, therefore, constantly
monitors the impact of baht movement on the overall economy and stands ready to use
policy instruments to prevent and manage dysfunctional market conditions and excessive
speculation. Nevertheless, in the long-run, exchange rate should be determined by market
mechanism and serve as an important price signal and catalyst for structural changes.
Despite more exchange rate volatility ahead, we could seize this opportunity to strengthen
the fundamentals of the economy and reap long-term benefits that are likely to be greater
than short-term costs of adjustment.
For the banking sector, having a competitive and efficient banking sector is of extreme
importance in the world where competition is borderless. For this, the Bank of Thailand is
ready to provide an enabling environment for the Thai financial sector. Today, the Bank of
Thailand has embarked on several important measures to enhance efficiency, strength and
access of the Thai banking system.
New banking licenses were granted, including new subsidiary license for foreign commercial
banks who want to operate their businesses in Thailand. This should further increase
competition, thereby raising the efficiency of the financial system. In addition, the Bank of
Thailand has liberalized the opening of branches of Thai banks to allow them more flexibility
in managing branch network and reducing costs. Further financial liberalization to facilitate
regional integration is also considered. The ASEAN central banks are negotiating the
common standard of Qualified ASEAN Banks (QABs). This will allow awarded banks to
operate on a region-wide basis. And along with more liberalization, the Bank of Thailand has
ensured that financial institutions are stable. So even though the Thai banking sector is
already well-equipped with capital and sound positioning, the Bank of Thailand has
strengthened their capital bases earlier this year, following Basel III, and in line with
international standard.
As we already know, the payment and settlement systems are the backbone of the modern
economy. In this regard, the Bank of Thailand has laid down financial market infrastructure to
facilitate business operations. This year the Imaged Cheque Clearing and Archive System
(ICAS) coverage will be expanded across the country to speed up the provincial cheque
collection and clearing. This will help promote a more efficient payment system, enabling
fast, safe, and secure financial transactions. The Bank of Thailand also encourages the use
of electronic payment by coordinating with relevant parties to build infrastructure to facilitate
this process.
Concluding remarks
Ladies and gentlemen,
Despite many roles that the Bank of Thailand plays in ensuring economic and financial
stability, I would like to say that the Bank of Thailand's policy alone cannot ensure
sustainable economic growth. Given Thailand's structural shortcomings, there is the need to
improve Thailand's infrastructure and productivity, by improving technology and innovation.
The well-being workforce and quality of education and training are also crucial to increasing
competitiveness. For this, long-term coherent vision and concerted efforts among all
stakeholders, both public and private, are needed.
Let me close by leaving you with some final thoughts.
Thailand is now challenged by both external and internal risks. These are not necessary
unfavorable, as they also come with opportunities to urge us to prepare ourselves collectively
to cope with uncertainty in the global economy. In an increasingly volatile world, we must do
more. Our efforts should not be just about coping with short-term fluctuations, but also about
laying long-term foundation for Thailand's future. That requires a forward-looking plan of
action by all stakeholders. The Bank of Thailand, for our part, will continue to ensure 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.
Thank you and wish you all an enjoyable evening.