Prasarn Trairatvorakul: Thailand's economic outlook in 2011
Opening remarks b Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, for the
JSCCIB seminar titled "Thailand's investment environment - looking forward", Bangkok,
21 July 2011.
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Mr. Chartsiri Sophonpanich, Chairman of the Joint Standing Committee on Commerce,
Industry and Banking (JSCCIB),
Mr. Dusit Nontanakorn, Chairman of the Board of Trade of Thailand,
Mr. Payungsak Chartsutipol, Chairman of the Federation of Thai Industries,
Mr. Nandor G. von der Luehe, Chairman of the Joint Foreign Chambers of Commerce in
Thailand (JFCCT),
Distinguished Speakers and Guests,
It is my honor and a pleasure to be here today, to give our distinguished audience an
opening remark for this seminar, organized by the JSCCIB in cooperation with the JFCCT1.
The theme, "Thailand's Investment Environment: Looking Forward" is most timely and is of
everyone's interest. I am sure that the discussion and exchange of views and ideas
presented throughout the day will be fruitful and beneficial to both public and private sector
alike.
Before entering into a full-fledged panel discussion, I would like to give you, as an overture,
an overview of Thailand's economic outlook in 2011, focusing on two parts. The first part will
convey that 2011 is the year of normalization in several aspects, and the second part is
to look beyond this ongoing normalization process and lays the basis for many
challenges ahead.
Ladies and gentlemen, over the past years, the Thai economy has been very resilient to
numerous economic shocks, ranging from the oil price shock, natural disasters such as flood
and drought, series of political uncertainties as well as the 2008 global financial crisis.
Nevertheless, Thailand's average annual growth rate for the last decade registered at
4.4 percent which is within the range of our estimated potential growth. The Bank of
Thailand expects economic growth for this year to return to this normal trend, with
moderate growth in the first half of the year and steady growth in the second half after the
supply chain disruption unwound. This is the first aspect of returning to normalcy, or growth
normalization, which is a feature of resilient economy.
On
Such economic expansion is on the back of sound external and domestic demand.
the external side, however, risks to the global economy have increased recently due to
damages caused by Japan earthquake, a weaker-than-expected US economy and concerns
over Euro area fiscal crisis. These developments will have to be monitored closely. As of
now, we expect a slightly lower global growth prospect but this should not change Thailand's
economic outlook to the extent that derails the economy from its present growth path.
In particular, Thailand's export remains robust. Supply chain disruption due to the
Japan earthquake is proven to be limited and temporary; limited in the sense that
impacts are mostly felt in the production and exports of vehicles. Temporary in the sense that
problems in Japan have been mitigated, at the same time, we see recovery in vehicle
production for Thailand since late May.
As for the domestic side, high income and confidence are supporting domestic
economy going forward. Domestic demand, both consumption and investment have been
and continue to be strong as underpinned by a high level of farm income, high employment,
and good consumer and business confidence, complemented by a favorable credit condition.
Tighter resource utilization also reflected these vibrant economic activities. The
seasonallyadjusted unemployment rate fell to the lowest record in April. Meanwhile, the capacity
utilization rate is expected to accelerate in the second half of the year following the recovery
in the vehicle sector.
Overall, the economic momentum in 2011 remains sound. Nevertheless, political stability
remains a key factor to facilitate this ongoing momentum. Having an orderly outcome of
the election is one step, but the underlying conflict must continue to resolve in order to further
boost confidence and business climate in the economy.
Given the current economic development, the Bank of Thailand is more concerned with
inflation which is a common outcome in a good growth prospect environment.
Increases in inflationary pressure have become a worldwide phenomenon particularly among
emerging market economies. Thailand is no exception. Both headline and core inflation are
expected to edge up from last year despite the government's attempts to contain inflation
through administrative price controls.
As such, the Bank of Thailand continues to gradually normalize the policy interest rate. At
present, the policy rate is still deviated from the norm as the real policy rate remains
negative at around -0.7 percent. Thus, interest rate normalization is another feature for
the year 2011. Last Wednesday rate hike marked the 8th increase in the policy rate to
3.25 percent. Many have asked at what level of interest rate the Bank of Thailand's target is.
There is no definite answer to when the upward cycle of interest rate will end.
Theoretically, a desirable interest rate path would be the path that leads economy to
its potential output level without exerting excessive inflationary pressure on the
economy. However, this state is subjected to change with economic developments. Thus,
the Monetary Policy Committee's decision must be based on their assessments of current
economic development and outlook at each time of the meeting.
Having said that, even if inflation has been curbed and the economy is on its normal trend
growth, Thailand should not be complacent with economic normalcy. We need to look
Moving the country
beyond normalcy which is the second part of my focus today.
forward will be more challenging than the past especially now when competition intensifies
across the globe. Raising productivity will be the key objective of economic development in
this regard.
Ladies and gentlemen, the current economic situation is comparable to the one in 2001 in
the sense that the economy at both times has fully recovered from the crises, namely, the
2008 global crisis and the 1997 Asian crisis. However, in 2001, the Thai economy still
operated at the level far below the potential level. At that time, stimulus policies which
encouraged spending were suffice to lift the country demand to the level closer to the
potential output. Thus, the economy prospered without exerting much pressure on inflation.
The present situation, on a contrary, characterized by rising inflation, reflects that the
economy's capacity is operating near the potential level. An expansionary fiscal policy is
therefore no longer necessary. The situation today is not about bringing the economy to
the potential level because we are already at it, but rather, it is about how to increase
this potential level of output which has to be done by improving the country's
productivity.
Increasing productivity is a topic which has been discussed in many forums, nevertheless, let
me stress again that to achieve such a goal, adequate investment in both physical capital
and human capital are necessary. In this regard, there are several challenges for all
parties. For the new government, there will likely be three fundamental challenges.
First, the government must find the right balance between public consumption and
investment. Over the last decade, government consumption has been gaining its share of
the budget, while public investment growth was somewhat moderated. This does not bode
well for productivity. Thailand's infrastructure continuously needs improvement in several
areas, particularly logistics, irrigation and quality of education. These public investments will
also influence private investment through the "crowding in effect" as public and private
investment complement each other. Therefore, the government policies should be prioritized,
be gradual and have specific target in their spending. Priority should be given to productivity
enhancement project and spending should be selective and targeted to certain areas to
ensure policy's effectiveness. At the same time, graduality of policies is necessary to
minimize inflationary pressure and allow time for private sector to adjust.
Second, fiscal stance, like monetary policy, is also required to normalize in order to
ensure fiscal discipline and sustainability. In a time of normal trend growth, there is a
lesser need for a fiscal stimulus. Rising public debt, together with increasing contingent
liabilities, may endanger fiscal sustainability in the long run. Reforms of the tax revenue
collection and tax structure should be implemented along with rising expenditure to ensure a
healthy balance sheet of the fiscal sector.
for maintaining an
Third, political stability is a vital condition to the private sector
investment-friendly environment. These three challenges, if prevail, will put Thailand forth
into a competitive frontier.
Likewise, the private sector contribution is as equally important. One immediate
challenge which businesses face today is the problem of labor shortages. Under a strong
baht environment, this is a great opportunity to import and invest in machinery and
equipment which will upgrade Thailand towards a more capital-intensive country. The private
sector can also help to improve labor quality through appropriate education and training,
which is one way to help spread the benefits to workers as their productivities improve. As a
long-term prospect, shifting input factor of production towards capital is more
superior than using immigrant labor for three reasons. First, other than training, capital
investment will improve labor productivity which will fully benefit Thai labor in a form of
increases in real wage. Second, immigrant labor will likely worsen income inequality as
wages for low-skilled worker will be suppressed. Third, a cutting-edge technology as well as
modern machinery and equipment help facilitate R&D activities. Therefore, relying on
immigrant labor is not a long-term solution for Thailand.
Promoting R&D investment is another key challenge for Thailand as current R&D spending is
extremely low compared to our peers' and only accounted for about 0.2 percent of GDP. The
public and private sector must work together to promote R&D investment which then lead to
value creation for the economy. In addition, businesses could speed up the R&D process by
seeking regional alliance opportunity with strategic partner who can provide complementary
advantage to us in the area.
As for the Bank of Thailand, we continue to improve the efficiency, hence the
productivity, of the financial sector through the Financial Sector Master Plan II. It aims
to eliminate unnecessary regulatory burdens, increase competition and improve financial
infrastructure as well as elevate financial literacy with sufficient consumer protection. The
payment system is also being improved. The Imaged Cheque Clearing and Archive
System or the ICAS, which allows physical cheques to be replaced by images in exchanges
between commercial bank, is expected to be implemented within this year for the Bangkok
and vicinity area and for the whole Kingdom at a later stage. This more efficient payment
infrastructure will eventually make Thailand a "one-day cheque clearing country", which is a
way to reduce financial cost of the private sector.
Ladies and gentlemen, all parties can help improving the country's productivity and let
me now end my talk by stressing that our good economic fundamental and diversity make
this country resilient to negative shocks. Returning to normalcy is one resilient feature but
moving the country forward in a global competitive arena will be ever more a challenging
task. A strong will alone is not enough, all parties, including Thai and foreign, public or
private entity alike, must communicate, coordinate and take action in unity. I believe that with
everyone's efforts, we can prevail with prosperity for all.
Thank you.