M R Chatu Mongol Sonakul: Some ideas for the new government in Thailand
Statement by Mr M R Chatu Mongol Sonakul, Governor of the Bank of Thailand, at the British
Chamber of Commerce, Bangkok, on 23 November 2000.
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Chairman of the British Chamber of Commerce and all the chambers here today, distinguished guests,
and ladies and gentlemen. Good afternoon.
Let me begin by saying that it behoves me, and I have to use that word as a career civil servant who
has taken his duty righteously for the last 35 years, not to comment on the work of the present
government especially during an election period. In any case what they have done is fast becoming
history and we have to take it as facts. A datum from which we will have to operate.
In my career, I have been unenthusiastic in commenting about history, and only study it with a view to
creating the future rather than commenting on it. If I wanted to comment on history, I guess I would
have continued my dual career as a university lecturer which ended abruptly after the first year of my
working life, since I found the responsibility of turning up regularly on time every week for anything
quite unbearable as well as preferring to be on the implementation side rather than a commentator or
analyst.
I shall keep my comments mainly therefore to what the new government should do, be it really a new
government or just the old one in a new bottle, and I shall refer only to the present or historical
developments only in so far as it is necessary to understand future recommendations.
As this is an after lunch speech, I shall also keep it short and not try to be comprehensive, but only
comment on things that interest me or I think might be useful to the audience.
Let's start with a simple concept, the Credit Bureau. One of the reasons the NPL could become so
high, and banks with high NPLs could remain supported by the public, is because in the present law
the concept is that financial transactions are secret and banks are secret places, looked after and owned
and supervised by responsible people.
It would be nice if it were true, but the banking industry is leveraged by a ratio of 12:1 and the
temptation is rather great for the owner to take advantage of other people's money, people who have
no right to know what is going on with their money even once a year because they are not
shareholders but just depositors. The temptation of the supervisors to evade their responsibilities by
not taking the correct action is also great, as rich people are powerful, and bad political systems over a
long time do not help to make you brave.
This philosophy must be changed. We must go on to the philosophy of transparency where offences
and important financial ratios or numbers are publicised, and peer or investor pressure could be used
to reduce the flow of resources to wrong-doers.
Back to the Credit Bureau, of course, borrowers are very important in all this. Banks shouldn't lend to
bad borrowers, and banks that lend to bad borrowers are bad banks. But how can banks not lend to bad
borrowers, if they don't know who they are? There are, of course, alternative remedies, but the best
instrument is to have an industry-wide Credit Bureau which keeps track of the credit standing of
borrowers.
This is not possible at present because the law does not allow you to disclose clients' information. The
Bank of Thailand has required that prospective borrowers and renewals must sign a form declaring
that they will allow their credit standings to be disclosed, but this is a feeble alternative. It is very time
consuming and argumentative, with all its consequences. A Credit Bureau Law should be quickly
legislated, where, as a price for a better society, bad debtors can be identified.
As to commercial banks, good governance should be put in place. Audit committees are now required.
Independent directors, not voted upon by the major shareholders, are being encouraged. NPL, related
lending and fines and penalties imposed must be disclosed by each bank at the end of every month,
and are published in the BOT's web.
Directors must devote their time to the bank, cannot be a director of more than three other
profit-seeking companies, as well as disallowing of borrowing where cross ownership is more than
one percent of the paid up capital of the borrower.
Of the 92 people involved, 53 have now complied, and arrangements have been made for most of the
others to comply, with the possible exception of the representatives of the Ministry of Finance who
may find that their representatives are not the sort of people who can devote that much time to the
bank because they are not part of the ownership or operation of the bank, but are just government
representatives. We are looking into this and will discuss with the Ministry when the time is right.
The problem in fact is not as innocuous as it looks as state bank remunerations are affected by
considerations other than just how should directors be rewarded so that shareholders' value can be
maximised.
But all this is being done through sanctions and coercion, and in the New Commercial Bank Act the
authority will be explicit.
My last words on commercial banks, the intervened banks might not yet be completely taken care of,
but at least the cost of rescue can now be well estimated. The proper financing of the debt burden is
probably one of the first jobs of the new government.
Temporary or provisional financing is better than none, but a clear-cut schedule on how the very large
debt should be financed over the next ten or twenty years must be made if investors and trading
partners are to have confidence or a clear idea of what they are dealing with, and I think that is
essential.
How central banking will be done is also important. The Bank of Thailand itself is being
revolutionised. The pay system will change, the promotion system will change and career
development has been instituted. Risk management supervision will be instituted from the first of
January next year.
Simple things such as a letter of transmittal of the supervision team to the manager of the bank will be
required. This may seem trivial, but it will put responsibility firmly on the supervisors, which was
never possible before because supervision missions went whenever they felt like it and did not tell
anybody except the banks. It also makes job control of the supervisors impossible and it is very
dangerous to allow people with criminal prosecution capabilities to work in this manner.
The most important thing about the new central bank though is probably to keep it really independent.
Thailand is now quite a complicated place, a large economy with considerable sophistication. The role
of the central bank in helping finance development and directing among the sectors of the economy
will soon no longer be possible.
If the central bank could keep the economy stable, that would be a major achievement.
But most forces in the country, especially the political ones, are directed towards higher growth rather
than the sustainability or stable growth, even if in the end stability would probably lead to a better and
higher level of the economy than the roller coaster growth of the past.
To do that, the central bank will have to go against the rest of the economy and the government from
time to time as has been evident in the past year or two. If the central bank is not independent, it will
be very difficult to do this.
In my mind, the best model of central banking is one where the central bank becomes a constitutional
body of parliament just like the Election Commission or The National Frequency Management Board.
This doesn't mean that we have to change the constitution because the constitution differs from
ordinary law mainly in so far as it supersedes ordinary law and the procedure for changing its
provisions are rather complicated. By ordinary legislation, we could make the central bank a body of
parliament or the senate which is what other new central bank legislations now usually do.
This doesn't mean either that the central bank will be operating monetary policy independent of the
economic and social policy of the government. The two must be made to intertwine and clear
legislation should be made for the procedures for the central bank at appropriate intervals to agree
monetary targets with the government and then to be allowed to implement its work independently and
unimpeded.
But I guess there's no point in talking much about it now. Let's wait and see what mandate people
give during the election. The only obvious thing is that the present Senate seems to be quite qualified
to take up such an important role as safeguarding the central bank.
Let me continue on what the new government has to look at, for instance the general guarantee on
deposit. This general guarantee cuts across all good banking practices. Banks that misbehave are not
being penalised and those that try to do well are dragged down by those who are capricious with the
general guarantee that the government gives.
The general guarantee will have to be got rid of sooner rather than later if Thailand is to get back on an
even path. Probably, in order to do this, some kind of deposit insurance will have to be in place and
seen to be working.
It does look like a long road for the new government, where sequencing and implementation of many
difficult concepts is still needed before full prosperity returns.
Let's start on this road to prosperity as soon as possible.
Ladies and gentlemen, let me turn to the general economy because a central bank or commercial banks
alone cannot make the country good very quickly.
It is quite obvious that world grain prices are on the way down. Between the years 1800-1900 when
the West was being opened in the United States, grain prices fell over 30% over a span of a century.
With genetic engineering, something of a similar nature might happen over the next 20 or 50 years.
We have to plan our still agricultural-dominated population for this eventuality.
It does not make sense to base strategy on an expansion of production in a falling market. It makes
much more sense to base strategy on cost reduction and to add value to the final agricultural products.
A ton of grain may be worth 10,000 baht, but a ton of biscuits is worth 100,000 baht. But to make
biscuits, you need a brand and you need flavours, things which take a long time to develop and endow
to the economy.
As to agricultural finance, the most that is available at the moment is crop finance. But you can't make
the weather to order. The bad year will kill you, and a mechanism must be developed to finance the
disaster of the bad years from the abundance of the good years rather than leaving it to pot luck or to
the effort of individual farmers as at present.
Again in the same vein, resources must be made available for farmers to better their production
methods or change the nature of their farming so that costs can be reduced or farmers can change to
more valuable products needing bigger investments or having larger gestation periods. No doubt in
doing this, old debts, being quite considerable and pervasive, will also have to be looked at.
In industry, the problems and the roles of the SMEs are obvious. There is no major industrial economy
without SMEs. I would say that over half the SMEs are NPL. And a lot of the owners have abandoned
their old companies because they don't need historic records or quota, for instance. They could assume
some other identity and live another life and become SMEs again in a not too difficult way, but it is a
big burden on the banks.
A lot of SMEs can't do that because they need past performance records. Efforts to prod these SMEs
into viability are obviously going to need some government assistance. The problem is too big for
commercial banks to handle alone.
The government has made some efforts in improving the technology, marketing and management of
the SMEs. How well it has done this depends on who you ask and I am not really in the field of the
SMEs well enough to know the generality of what most people are thinking.
But in financing, it is quite obvious that the SMEs with NPL have to get some more money or some
guarantees, and one or the other must come from the government. This happens to be the one area
where, for various reasons, there is the least progress. The new government must take a look at this
immediately and bite the bullet and adopt what might well be necessarily a fairly costly solution.
Another important or strategic sector of the economy is probably tourism with Thailand well-situated
in the air routes of the world.
But people don't want to spend 50 weeks in a year or half of their life, whichever the case, and then
spend time in an inhospitable location. We have to clean up, especially the visual environment of
Bangkok, and the major historical sites of Ayuthaya, Sri Satchanalai and Chiengmai. Putting the
electric power line for these cities underground, for instance, would be a most expensive investment,
but worthwhile, and the new government must immediately begin to adopt long-term solutions like
these.
The last area of the private sector which I would like to talk about today is the Stock Exchange of
Thailand.
The Stock Exchange of Thailand lacks sophistication. It has only just begun to allow short selling,
which is essential to allow liquidity in a controlled manner. Derivatives are very rare, and this is
another area which needs development to reduce the various risks associated with the market, but of
course, one should only do it under well known rules, and personally I think only to a limited extent,
not to the extent that the beneficiaries are mainly the intermediaries as might be the case in a really
large, sophisticated market.
As to the scale of the market, I have been visiting MSCI and other important players in the world. It
really is quite easy to improve our market performance. Presently, Thai market requirements are
designed only to fit the Thai requirements. Requirements that are often self-destructive and unreal
leading us into the bubble of 1997.
The market in the Stock Exchange has not been much changed from the bubble days. It's still doing
the same thing, just without the bubble. Realistically, our rules will have to be changed so that it will
comply with and take advantage of rather than be penalised by international norms.
In government, the Board of Investment (BOI) is probably a crucial instrument. It's doing a good job
giving privileges on an individual project basis. That has its own limitations and faults. It might well
soon be the time to make operating in Thailand generally viable.
The original BOI philosophy, in that these are projects you wouldn't get if you didn't give tax
privileges and therefore have no tax loss costs, is becoming more and more untenable. Generally,
systems are working better and the economy is getting bigger and bigger and more and more
sophisticated; doing exemptions on a project basis, except in very rare cases, will soon hold us back.
The new government should take that last hurdle and make the general system acceptable, even if
minimally by lowering taxes and making improvement in civil service performance, probably by
making the civil service remunerated by output and productivity rather than the tenure system as at
present.
That leads to my comment on the long term initiatives that the government might carry out that would
help in the long run, which I think is the main strategy for real recovery to take place. Without good
long run prospects, there isn't much hope to do well in the present.
The government will have to be moved more on to the private sector footing. This doesn't mean just
selling state enterprises and such things. But it does mean that the government units that are retained
would have to work for incentives in terms of output and cost reduction and have to, in general,
compete with the private sector for government budget.
Generally, the private sector is not necessarily more efficient than the government. The key is that
those that are not don't survive and better ones expand. This doesn't happen in the government
because those that are inefficient just ask for some more budget, and this is forcibly collected.
In my own view, large complicated government units are probably not possible in Thailand unless we
get some fantastic new government which is very sophisticated and lasts a very long time, say, 10 or
20 years, a prospect, which presently one should not plan on. In this case, one should then design
government units to be small independent units, independently managed, and the governments that
come in execute their mandate through budget allocation and legislative changes where necessary.
Interestingly, all over the world for a very long time, the concept has been that civil servants have a lot
of authority and are not profit-oriented. One should make sure that they have tenure and are well
compensated with pensions after they leave, otherwise they might try to stock up some assets for their
later life.
The philosophy is going in the opposite direction everywhere now. Civil servants are powerful and
important and therefore they should not have tenure. For that reason one must make sure that civil
servants perform by giving them only limited term contracts, and they will have to perform
responsibly and efficiently to get a new contract.
I am inclined more towards the latter as one can never make sure of hiring or promoting the right
person, and therefore one should plan on an easy change of personnel to get the best results.
Let me make a controversial statement on the platforms of the various political parties in terms of
spending more and taxing less. We routinely run the general equilibrium model and the inflation
targeting model as well as Market Implied Models or MIME, a technical word that is used for trying to
find things out from people's normal actions that could be captured in a data system.
We also, of course, do single equation estimates as well as pure intuition from graphs and tables and
such things.
Our staff is generally of the opinion that increased expenditure and tax reduction of moderate amounts
will not destabilise the economy.
This is predominantly because the economy is still very docile with a capacity utilisation stable for
quite a while now at 58%. Cost push inflation from the exchange rate and the oil prices are now
substantially absorbed or have been passed on, so cost push also is not presently much of a factor.
The important thing though is how to make expenditure useful and constructive in the long run
without too much leakage. The important thing is how to make tax cuts reasonable and directed
towards the areas where people benefiting from the cuts could utilise it for a spate of new investment.
If this were to happen the debt to GDP ratio might not increase significantly due to the resulting
increase in GDP over the long term.
With abundant liquidity and low interest rates, this is not just a time for a general tax cut for its own
sake, but a program must be designed for it to be directed to where investment could best be made. In
a way, this is not as easy as it seems, because generally we have been over investing and have great
overcapacity.
But it's also not as hard as it might look. There are only a few areas that are really doing well, and
benefits from the cuts could be directed there. The problem is how to make it fairly just, so that not
only the good players that are already there benefit, but new players should be brought in to these all
important areas.
Ladies and gentlemen, I have been giving you some of my thoughts on the economy. Thoughts that
are spotty and veer obviously somewhat to the financial aspects.
The new government must be much more comprehensive. But since this is not a party platform but
only some comments to make more apparent the effect of what might happen in the next few months
in the hope that, as in all things, elucidation and transparency makes for a more stable market, let me
therefore not bother you further with my thoughts and stop at this point.
Let us hope we will have a good new government, with new ideas to bring Thailand into the future and
take Thailand into that most important next level of development, a more comfortable life, and a more
stable growth.