Veerathai Santiprabhob: The Bank of Thailand's financial and
monetary policies - the way forward
Speech by Dr Veerathai Santiprabhob, Governor of the Bank of Thailand, at the Thailand Focus
2016 "A new growth strategy", Bangkok, 31 August 2016.
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Chairman of the Stock Exchange of Thailand,
Secretary General of the Securities and Exchange Commission,
President of the Stock Exchange of Thailand, Chairman of Phatra Securities, and
President of Asia Pacific Bank of America Merrill Lynch
Distinguished Guests
Ladies and Gentlemen,
A very very good morning to you all.
It gives me great pleasure to be back at this prestigious forum. Let me begin by thanking the
Stock Exchange of Thailand, Phatra Securities, and Bank of America Merrill Lynch for inviting me
to be part of the 10th anniversary of Thailand Focus. I believe many of you, if not all, have learnt
about Thailand's reform initiatives and kept eyes on the outcomes of these developments. Today,
this forum will bring you insights from the nation's key policymakers and give you a chance to
learn about exciting opportunities which Thailand has to offer.
As for my part, I would like to share with you my perspectives on 'The Bank of Thailand's
Financial and Monetary Policies'. Indeed, as the Thai economy is undergoing transformation in
order to lift our growth potential, I would like to highlight the roles of monetary and financial
policies in facilitating this critical transition.
If you may recall, the key takeaway from my talk last year is that the Thai economy is like a
car which has good suspension, but whose engine is in need of an overhaul in order to
move faster. Our sound external position and strong financial institutions are analogous to that
good suspension, which has so far afforded us a smooth ride on the bumpy road of global
financial volatility. It has been almost a year since our last check-up, and as it has indeed been
an eventful year, I would like to start my talk today by revisiting how the conditions of our car have
developed since then. In the second part of my talk, I will discuss how the Bank of Thailand will
contribute to the engine overhauling process - along with the private sector and the government
which have already launched several initiatives.
In the span of just 8 months since my last Thailand Focus address, the global economy
has gone through several turbulent periods. If you all may recall, on the first working day of
the year, the Shanghai Stock Index fell by 7%, with two circuit breakers triggered in one day.
Crude oil prices saw a steady rise from below 30 USD per barrel to over 50 USD, before being
struck in a back-and-forth market within the 40 to 50 USD range. Besides, we have again
witnessed multiple rounds of volatility in the global financial markets as a result of shifting
expectations of the Fed's rate hikes. More recently, Brexit brought to the forefront the concerns
over the health of the European economy, leaving the rest of the world with less hope of a
broadbased economic recovery. Furthermore, 6 central banks have implemented the negative interest
1
rate policy resulting in irregular financial market structure . An extraordinary amount of the
world's sovereign debts carry negative yields. Meanwhile, major currencies have been volatile.
Relative to the USD, the Japanese Yen appreciated by 18%, whereas the British Pound dropped
by 12% year to date.
As for a small open economy like Thailand, domestic financial markets inevitably felt the
ripple effects of the developments and growing anxiety at the global level. Once again,
risk appetite has turned towards emerging markets - and Thailand is no exception. While last
year, we saw a net portfolio outflow of around 7.6 billion USD, the first 7 months of this year
already recorded a net inflow of over 5 billion USD into bond and equity markets combined.
10year bond yield hit a record low at 1.54%, while the Stock Exchange of Thailand index has
marked about 20% gain to date, compared with a 14% fall just one year earlier.
Despite volatile asset price movements, the Thai financial system remains resilient
thanks to our sound external position and sound financial system. As in the past, foreign
participation in the Thai bond market remains at less than 10 percent, while that in the stock
market is around 30 percent of the market capitalization. Both figures are well below those of our
regional peers, suggesting that we are relatively more immune to abrupt capital flights. On the
external stability front, Thailand continues to perform well across most indicators. Last
year, our current account recorded a large surplus of over 8% of GDP, and it is expected to grow
further this year. Moreover, we continue to have more than enough international reserves to
cover our foreign debt obligations.
Our banking system continues to be strong, with ample capital buffer and cushion
Their capital adequacy ratio continues to be well above the required level of
against bad loans.
8.5%, and has increased slightly since my last address. Moreover, amid the gradual economic
recovery, banks continue to accumulate high level of loan loss provision to cushion for
deteriorating loan quality. The aggregate NPL figure remains manageable at around 2.7% and the
combined profits of the banking sector remain sizeable despite being slightly trimmed by the
additional loan-loss provisioning.
Ladies and Gentlemen,
Maintaining sufficient buffers have proved essential in coping with the financial
turbulence of the past year, as they helped to shield the economy from facing the full
impacts of external shocks. Besides the financial system, the real economy has also
been a beneficiary of stable financial environment. In the first half of this year, the Thai
economy expanded by 3.4%. Despite being weighed down by one of the most severe droughts
during the past year, farm income and rural consumption have recently regained their
momentum, as rainfalls are back to its normal level. In the meantime, public investment and
stimulus measures have also helped restore private confidence, while strong growth in the
tourism sector continues to reinforce the momentum of our economic recovery.
Ladies and Gentlemen,
Such positive economic development should indeed be welcomed. However, it should
not distract us from making continued investment on a more important task which is to
undertake the much-needed structural adjustments. This is what I referred to as "an
engine overhaul" in my talk last year. Fortunately, technology and innovation offer very
powerful tools which can be used to accelerate our growth engine. We need to first position
ourselves to receive the full benefits of their arrival - both in terms of human capital and
infrastructure. The good news is that the government has already launched several initiatives
geared in this direction. Throughout this forum, you will get to learn about the rationale and
aspiration of key reform initiatives, such as the new S-curve, public private sector collaboration,
and upgrading of the tourism and the healthcare sectors.
The Bank of Thailand also plays a critical role in this engine overhauling process, both
through our conduct of monetary policy and financial sector development policy. In the
former, we aim to provide an accommodative and stable macroeconomic and financial
environment, so that the ongoing recovery is supported by ample liquidity and not interrupted by
excessive volatility. In the latter role of development, we aim to put in place more efficient
financial infrastructure in order to facilitate business activities and thereby enhancing their
competitiveness. Let me elaborate on each role one by one.
Recent experiences have demonstrated to us just how volatile the financial environment
could be - both in terms of risks to economic growth and the policy responses that
Unfortunately, the journey ahead is paved with similar challenges, if not greater - financial
follow.
stability risks and economic rebalance in China, the growing monetary policy divergence, the
lower-for-longer interest rate policy and perhaps a more widespread use of unconventional
measures by central banks of Advanced Economies. As a small open economy, we must
therefore ensure that there is sufficient policy room to mitigate the potential adverse impacts or
events that could unfold in the future. In this context, the Monetary Policy Committee's
decision to maintain the policy interest rate should be viewed as a preference to
preserve the limited policy space for rainy days ahead. The Monetary Policy Committee
expected headline inflation to return to the target band later this year, while core inflation has
stayed positive at around 0.8% since the beginning of this year. However, in the event of abrupt
or excessive movements of financial market variables or capital flows, the Bank of Thailand
stands ready to utilize the necessary policy tools in order to support economic recovery and
ensure the well functioning of the domestic financial markets. Looking forward, amid the
prolonged low rate environment both at home and abroad, we will continue to closely monitor the
buildup of imbalances and underpricing of risks in the financial system, while preparing to take
necessary actions in order to prevent them from becoming systemic risks.
All in all, monetary policy in the periods ahead will continue to be a delicate balancing act
between risks of inflation, growth and financial stability, and the Monetary Policy
Committee will make sure that its actions do not add vulnerability to the financial
environment.
Regarding our financial sector development policy, the Bank of Thailand believes that
efficient and inclusive financial and payment systems can help empower our growth
engine. By efficiently allocating resources to match the diverse needs of different
sectors in our economy, we should be able to release their untapped potential and
Indeed, our three master plans - namely the
therefore enhance Thailand's competitiveness.
Financial Sector Master Plan, the Payment System Roadmap and the Capital Account
Liberalization Master Plan - have been designed with such goals in mind.
Although each plan is different in their rationales and implementation, their intended outcomes
can be summarized along three key dimensions - (1) to reduce cost of financial services for
households and businesses (2) to deepen financial inclusion and (3) to facilitate financial
connectivity in the region.
Allow me to delve into some details.
Starting with reducing costs of financial services. As the Thai economy can no longer compete
on supply of cheap labors, cost competitiveness in other areas are critical. In light of this
objective, the Financial Sector Master Plan and the Payment System Roadmap envisage
that cost savings in the financial sector due to more efficient operation of financial
institutions and the payment system would be passed on to the real sector and the
Here, I would like to note that the term financial institutions go beyond banks and
households.
finance companies to include non-bank players like e-Payment service providers and FinTech
(Financial Technology) firms as well.
The Bank of Thailand believes that the very foundation for improved financial services'
efficiency is through the adoption of digital technology and shared infrastructure. The
former comprises digitization of operations, product offerings and service channels. An example
of the shared services initiatives is the PromptPay system, the Minister of Finance mentioned in
the speech.
PromptPay is an integrated retail fund transfer system that will allow
individuals, businesses, and government to transfer funds across service providers at
low costs with ease, flexibility and resilience.
On top of the promotion of e-commerce, PromptPay together with other e-Payment initiatives, for
example shared point of sales (POS) terminals, digital tax messaging, standardized QR codes,
will lead to significant reduction in costs of cash management and paper processing,
currently borne by banks, businesses, consumers, as well as the Bank of Thailand. In addition,
the move from cash-based transactions to more electronic-based transactions can potentially
reduce incidences of corruption and improve governance through greater transparency.
On the regulatory front, an important development is the crafting of the Payment System Act
which aims to consolidate fragmented laws and regulations governing electronic payments. The
Act will set out business rules and regulatory framework for our payment systems that meet
international standards. To date, the Act has been endorsed by the cabinet and expected to soon
be presented to the National Legislative Assembly.
Let me say a few words about FinTech. We view FinTech as an important addition to our
financial service ecosystem. FinTech would give consumers more options and save
operating costs for financial institution and service providers. On a bright side, FinTech
firms are agile and efficient by nature. Yet allowing certain types of them to run freely may
destabilize the ecosystem. We need to promote financial innovation while ensuring that potential
risks from its misuse would not contribute to systemic risks' build-up. Equally important, there
needs to be adequate consumer protection.
The Bank of Thailand aims to foster a symbiosis between FinTech and our current financial
ecosystem. Among others, we would adopt the Regulatory Sandbox Framework, allowing
banks and FinTech firms to test their innovation with limited group of customers before launching
their services to broader public. Financial institutions are also allowed to invest more flexibly in
It is worth noting here that the benefits of FinTech are not
FinTech related venture capital.
only limited to lower cost of financial services but also greater financial inclusion, to which I now
turn.
Greater financial inclusion not only improves welfare of the people but also unleashes
economic potential of the previously excluded. The Bank of Thailand has focused on
promoting financial system's access and inclusion. For instance, e-Payment channels play
an important role in providing payment access at low costs. Money transfer via the PromptPay
platform will be free for the amount not higher than 5,000 baht. Besides, the government will also
be able to use e-Payment as a means to directly transfer welfare benefits to the targeted group
of end beneficiaries as mentioned by the Minister of Finance.
In addition to embracing FinTech and implementing the e-Payment as part of the key measures
to improve financial access, other notable measures are the implementation of the Business
Security Act and the expansion of data bases for individual and SME borrowers. The Business
Security Act, which came into effect in July of this year, expands the list of eligible
collaterals for secured lending by financial institutions to include things like inventories, and
receivables. The passage of this Act is a win-win for small businesses as well as banks. The
Bank of Thailand regulations on loan classification, provisioning requirement, and valuation
guidelines have been issued to help banks adopt this new collateral regime.
Ultimately however, we would like to see Thailand moving from collateral-based lending
towards cash-flow-based lending especially for small businesses with few or no eligible
collaterals but otherwise viable prospects. In order to do so, we need to have sufficient data
for credit risk enhancement and monitoring. In light of this objective, we are developing an
industry-wide SME database from pooled bank data for banks to use for their planning and risk
management. In addition, we are working with relevant parties to amend the Credit Bureau Act
to expand its membership to players like Peer-to-Peer (P2P) lenders. These efforts would get
along well with the government policy to expand the roles and coverage of Thai Credit
Guarantee Corporation (TCG) to provide credit access for SMEs lacking collateral security.
Ladies and Gentlemen. If we look beyond our domestic market, increasing regional
integration brings numerous exciting business opportunities. Thailand's strategic location
at the heart of Mainland ASEAN along with close economic relations with our neighbors make us
a natural candidate to become a regional connector of trade and financial services. We have
offered many fronts to enhance such connectivity.
To begin with, the aims to make our financial
Capital Account Liberalization Master Plan
markets serve residents and non-residents more flexibly with diverse products and services.
This would facilitate regional financial transactions. Companies with regional operations are
encouraged to set up a with the flexibility of foreign exchange regulations
Treasury Center (TC)
as well as tax incentives. To date, 16 companies, most of which are Multinational Corporations
(MNCs) with intention to use Thailand as a springboard to gain access to CLMV, have already
received a TC License, with several more to participate.
The Bank of Thailand is also continuously promoting the use of local currency in regional
trade settlement. In March this year, cross-currency dealers were appointed to act as clearing
agents for the Baht and the Malaysian Ringgit. In the near future, we will allow securities
companies to buy and sell foreign currencies within the scope of their brokerage business.
Foreign corporations will also be permitted to borrow directly in Thai baht from domestic
financial institutions to invest in the Greater Mekong Subregion (GMS). Also in March of
this year, we have signed Letter of Intent with Malaysia and Indonesia, and negotiations are
currently under way, to establish Looking forward, this initiative
the Qualified ASEAN Banks.
should help enhance financial connectivity, and improve operational flexibility of businesses in the
region.
Ladies and gentlemen, as I outlined above, the Bank of Thailand is committed to
If
establishing financial infrastructure which will facilitate efficient and inclusive growth.
Thailand were to drive through the volatile and fragile global economy, the growth engine must be
modified to suit this demanding environment. The financial technology, financial inclusion and
regional connectivity are very potent tools which can be used to upgrade our financial engine - so
that our vehicle will be agile and powerful enough to move forward effectively in the changing
terrain. In the meantime, the Bank of Thailand will continue to ensure that our suspension system
be well maintained in order to have a smooth ride on the bumpy road toward sustainable
economic prosperity.