Prasarn Trairatvorakul: Bank of Thailand's policy direction in 2013
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Bank of
Thailand, Bangkok, 22 January 2013.
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Honourable guests and members of the press,
Thank you all for attending this annual event, in which I would like to outline the Bank
of Thailand (BOT)'s policy direction in 2013. Throughout history, our country might at
times be faced with economic challenges and obstacles of different nature and severity,
but the BOT's mission and resolve to safeguard Thailand's economic and financial
stability has remained unchanged since its birth over 70 years go. Today our country is
moving into an era of ever-closer linkages, whose scope extends well beyond the
technology and communication dimension. It involves regional economic integration, not
least among neighbouring countries or what is collectively known as the CLMV area.
Within our country itself, the volume of cross-provincial trade and the number of SMEs
outside the capital have grown, suggesting that growth has been increasingly inclusive. On
the other hand, the greater economic interdependence brought about by closer trade and
financial integration could also be a source of systemic risk, if an imbalance, however
small, was allowed to develop unchecked.
The BOT, as one of the nation's key policy makers, strives to foster a sound and stable
economic environment that enables the private sector not only to grow, but also to retain
sufficient resilience and flexibility to withstand competition and uncertainties. We continue
to place an emphasis on promoting the global competitiveness of Thai businesses, while
ensuring the integrity of the economic and financial system as a whole, the very foundation
of consumer and business confidence.
The key challenge this year for the BOT and other policymakers is to preserve the right
balance of policy mix, which in turn demands both intra- and inter-agency cooperation. Our
common goal is to promote a sustainable growth path and ensure a high standard of living
for all Thais.
Economic developments and policy implementation in 2012
Last year, the Thai economy had to grapple with the stagnating global economy, volatile
capital flows, and challenges in recovering from the flood crisis. Notwithstanding these
difficulties, the economy proved to be resilient and flexible enough to withstand various
shocks and uncertainties. Indeed, robust domestic demand has become the main
engine of growth amid the softening global economy, helped in part by government
stimulus measures. Overall economic activities consequently improved, and I would like to
thank all parties for their collective efforts.
On the monetary policy front last year, a greater emphasis was placed on risks to growth,
which justified the accommodative monetary policy stance throughout 2012. The Monetary
Policy Committee (MPC) lowered the policy interest rate twice by a total of
0.50 percentage points. The first cut took place earlier in the year, and was designed to
help speed up economic recovery after the severe flood. The last easing in the latter
part of 2012 was intended to provide an additional cushion against the impact of global
economic slowdown and to further bolster domestic demand to sustain growth momentum.
These policy decisions were deemed consistent with keeping inflation within the target
range, as well as maintaining the overall financial stability. In fact, the first joint meeting
between the MPC and the Financial Institutions Policy Committee (FIPC) took place last
year, where the two committees shared their perspectives and information, as well as
discussed in depth potential sources of systemic risk that could arise from economic and
financial linkages. Regarding capital flow policy and in collaboration with the Ministry of
Finance, the BOT continued to relax regulations to promote outward investment and foster
more balanced capital movements.
A clear lesson from the recent global financial crisis is that a good conduct of monetary
policy alone does not necessarily guarantee a sound and stable financial system. As a
result, central banks around the world have stepped up efforts to strengthen the
supervision of financial institutions, improve risk management, and place a greater
emphasis on monitoring systemic risks. Last year, the BOT introduced the Basel III capital
regulatory framework with focus on improving capital quality, increasing capital base to
provide cushion in the event of a crisis, and strengthening risk management procedures,
especially in the realm of credit risks. These initiatives would further strengthen the stability
of financial institutions, laying the foundation for stronger financial system and economy in
the longer term.
To increase the efficiency of the payment system, the BOT has launched the Imaged
Cheque Clearing and Archive System (ICAS), for Bangkok and its vicinity since February
2012. In addition, the Financial Consumer Protection Center (FCPC) was set up to
provide information about the BOT, to receive consumers' complaints regarding financial
services, and to offer financial education to the public, all of which have been well
received.
Economic outlook in 2013
Looking ahead, risks to growth have declined on the back of firmer, if moderate, global
recovery, and robust domestic demand which continues to be the main growth driver
for the Thai economy. Private consumption would continue to benefit from the first-car tax
rebate program as well as the reduction in personal income tax which would take effect this
year. Furthermore, private investment continues to expand steadily on positive growth
prospects, post-flood reconstruction in some parts of the manufacturing sector, and various
government stimulus measures. Meanwhile, exports started to show signs of a
broadbased recovery, and should pick up pace in the latter half of this year, lending an
additional support to growth momentum as the effect of government's stimulus wanes.
Inflationary pressure meanwhile should remain contained. The impact of the second
minimum wage hike on inflation is expected to be limited, as most businesses manage to
keep a lid on cost via increased production efficiency, encouraged in part by a highly
competitive goods market. The BOT will however continue to closely monitor any
inflationary impact of the wage increase.
Policy challenges for 2013
While it may seem that the worst is behind us, one must continue to be vigilant of risks.
It is crucial for policy to be forward-looking and proactive, quickly adjusting to changing
environment and shifting challenges. As I have mentioned, the key immediate challenges is
to preserve the right balance of policy mix, in order to ensure that each policy's
effectiveness is maximized and grounded on the basis of sustainable economic well-being,
as well as safe and sound financial system. Toward these goals, the BOT has a number of
functions to perform.
Monetary policy and exchange rate policy
The overriding objective of monetary policy continues to be the safeguarding of economic
stability, which encompasses the dimensions of growth, inflation, and financial stability.
This year, a key challenge will be in striking the right balance between providing sufficient
support to growth while ensuring that financial stability is also preserved. In particular, a
prolonged accommodative monetary policy may pose risks to financial stability if it
encourages excessive debt accumulation, or induces overinvestment in risky assets as
investors search for higher yields. Financial imbalances or a bubble may develop as a
result, further complicating policy decisions. Thus, the BOT will continue to closely monitor
credit developments and household's debt servicing ability, especially for the
lowerincome group.
Another key challenge will be the management of volatile capital flows, and implications
of exchange rate movements on the real economy. In meeting this challenge, the BOT
has at its disposal various policy options, ready to be deployed under different
circumstances. The recently announced Capital Account Liberalization Master Plan was
aimed in part to encourage Thai companies to diversify their investments abroad, including
towards neighbouring countries, and operating their businesses more efficiently using
local currencies. The initiative would help foster more balanced capital flows, and
promote financial market development that facilitates the regional integration under the
ASEAN Economic Community (AEC) in 2015. We will continue to support businesses in
strengthening their abilities to cope with exchange rate fluctuations.
Financial institutions policy
It is now universally recognized that economic growth and financial institution
development must proceed hand in hand. The development of financial institutions in
Thailand has indeed seen a significant and continuous progress, which has greatly
helped support economic activities over the years. Still, many steps must be taken to
further enhance the financial system and promote a more efficient intermediation. To
deepen financial access, the BOT will cooperate with relevant agencies to allow
commercial banks and non-banks to offer microfinance services, under the business model
appropriate for risks and behaviour of the targeted group. At the same time, it remains
our priority to reinforce the stability of financial institutions by strengthening capital base and
improving risk management, to cushion against potential shocks under adverse
circumstances.
This year, we will establish a licensing framework for foreign commercial bank
subsidiaries, with a view to enhancing the competitiveness of the banking industry as
envisaged in the Financial Sector Master Plan Phase 2. Meanwhile, a guideline will be
laid out allowing domestic commercial banks to expand and integrate into the Qualified
ASEAN Banks (QABs) network under the AEC. This integration offers an opportunity for
Thai banks to step up their efforts to fortify their strategic strengths and prepare for a
fiercer competitive environment. Stronger institutions could seize the opportunity to
expand internationally and diversify their risks. A balance must be struck between the
three objectives of increasing financial service efficiency and access, safeguarding
financial system's integrity, and strengthening consumer financial protection.
Payment systems policy
The priority this year will be to expand the coverage of the ICAS across the country, to
speed up the provincial cheque collection from 3-5 business days to 1 business day.
The initiative will help promote a more efficient payment system, enabling fast, safe, and
secure economic transactions as well as promoting a substitution of electronic for cash
payments. In doing so, the BOT will collaborate with relevant agencies in developing the
payment infrastructures that support not only domestic electronic payments, but also
cross-border ones, which require risk management mechanisms able to handle foreign
exchange settlements under different time zones, and a standardized payment system that
allows international connectivity for example. These undertakings, in turn, would lay the
foundation for more efficient intra-regional trade and investment within the AEC. The
challenge for payment system policy consists of keeping a balance between encouraging
development for efficiency gain, and ensuring that there is adequate supervision in place to
ensure a safe and sound payment system for Thailand.
Conclusion
I believe that Thailand has one of the highest potentials in the region. Though there are
challenges ahead, opportunities abound. The BOT, as a key policy maker, will endeavour
to implement economic policies under its purview in a timely and judicious manner. We
are ready to work with all parties, public and private alike, to create a supportive
environment conducive to sustainable growth. I trust that, through closer policy
coordination among all relevant agencies, a common vision for the country will emerge,
leading ultimately to constructive engagements between all parties. With a shared vision
and collective efforts, our goal of long-lasting prosperity for the nation is not beyond our
reach.
Thank you.