Sethaput Suthiwartnarueput: Navigating the Thai economy through
global uncertainty
Speech by Dr Sethaput Suthiwartnarueput, Governor of the Bank of Thailand, at the
Association of International Banks (AIB) Dinner Talk, Siam, 4 August 2023.
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Khun Somlak Tinmanee, Chairman of the AIB
Khun Payong Srivanich, Chairman of the TBA
Distinguished guests,
It is a great pleasure to be here again. Given this broad topic, I will cover three areas
today. First, I will share with you my thoughts about the economy, where it is now and
where it is heading. Second, I will talk about the Bank of Thailand (BOT)'s policy
responses to the economic conditions, both on the monetary policy side and on the
financial policy side. And third, the risks I see going forward that we should be paying
attention to.
Part 1: The stage of economic recovery
On the topic of the economy, the short message is that recovery is intact, with
growth and inflation moving back to targets. The broad contours of where we see
the economy going are along the lines of what we anticipated, though there is
some degree of softness.
Initially, economic recovery was largely driven by domestic factors - consumption,
services, and tourism. This is still the case, but there is some softness. On the growth
front, GDP numbers for Q2, due later this month, are likely to come out a bit softer than
expected, as exports have been impacted by global factors like China's slowdown and
late recovery in the electronic cycle. On the other hand, domestic consumption is
growing quite well, with a forecast of well above 4%. Given the softness we have seen
in the first half of the year, our latest GDP forecast of 3.6% could be revised slightly
downward, but we still expect to see growth within the long-term potential range of 3 -
4%. The second half should still hold up quite well compared to the first half, mainly
driven by tourism. We still maintain our forecast of 29 million tourists this year despite
fewer Chinese tourists than expected. Non-Chinese tourists have compensated for the
shortfall, but we see some softness in total spending.
We see the same story in terms of inflation. The disinflation process in Thailand has
been faster than expected. The latest headline CPI outturn of 0.23% in June-23 is
probably the lowest in the world. However, this is a result of a lot of temporary factors -
base effect, temporary measures on electricity and a variety of other measures - which
suggest that going forward inflation is gradually going to come back up again. Overall,
inflation should still reside within our target range for the year.
Hence, the broad contours of the economy are fairly encouraging. Even with all the
uncertainties out there, overall recovery in Thailand has remained intact. On the
global front, there are rising concerns about a slowdown in China, but concerns over a
slowdown or risk of a recession in the US seem to have gone down. So, there are
positive economic surprises to counter negative ones. Domestically, the big question is
what is going to happen with the government. I believe some of the concerns over
government spending may not be accurate. The BOT's forecasts have already priced in
a delay in government budget disbursement of about 3 - 6 months. The fact is that, with
our budget, the fixed expenses still go out the door but what will not be spent is the
discretionary investment budget, which is not huge in size. So, the impact on this year's
headline GDP from any delay in fiscal spending is not large. The impact, if it comes, will
come next year. Overall, the picture is broadly intact in terms of economic recovery.
This is positive news that we should take away.
Part 2: Policy responses - monetary and financial policies
Policy is a balancing act. We must try to manage the trade-offs properly and be
flexible and agile in adjusting our policies in response to the economic
circumstances that have changed.
On Monetary Policy
When we started our policy normalization process last year, the economy was
recovering much more slowly than the region because it was highly dependent on
tourism. Our policy objective at that time was to ensure a smooth takeoff . We did
not want to do anything to interrupt the recovery process. Hence, our policy response
was to undertake a 'gradual and measured' interest rate normalization and we
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increased the policy rate from the low level of 0.50% by 25 bps each meeting .
This was different from what other central banks were doing, and we received a fair
amount of criticism - Aren't you in danger of being behind the curve? Aren't you in
danger of inflation not being transitory? No. We did not think so. We genuinely felt that
the situation in Thailand is very different from the situation we saw in advanced
economies. In the US, inflation was coming from the demand side and not just the
supply side, labor markets were overheated, the chance of seeing a wage-price spiral
was increasing. We did not see any of those things in Thailand. Recovery was quite
weak, so the demand side pressure was not strong. Inflation was mostly driven by
supply side shocks, which were likely to dissipate. We did not see an overheated labor
market or wage pressures at the time. Hence, we felt that this 'gradual and measured'
normalization was the right policy response.
Thankfully, as it turns out, inflation peaked at 7.9% in August last year and started to
come down to target quite rapidly - even more so than we had anticipated. It was the
proper read and proper response not to slam on the brakes at the time, which
would have stalled that recovery and prevented the smooth takeoff that we
wanted to see last year. GDP growth is gradually recovering from 2.6% last year to
around mid-3% this year.
So that was then, what about now? Two days ago, the Monetary Policy Committee had
a meeting and issued a press statement. Those of you that paid attention would have
noticed that the statement started to shift in tone, reflecting the fact that our policy
objective is now a bit different. From trying to ensure a smooth takeoff, now the
focus is on getting the landing right. There is this expression in gymnastics - 'stick
the landing' - the idea is that whatever vaults, jumps, summersaults, and spins you do,
the most important thing is to finally land on your two feet without falling. So, 'sticking
the landing' is our challenge at the present.
There were a couple of changes to the statement. First, we took out the 'gradual and
measured' language that we had been using for so long, to signal to markets that the
process of normalization is now closer to an inflection point. Second, we now
need to focus on medium-term considerations - adjusting interest rates to where
they should be consistent with longer term macroeconomic equilibrium. What does that
mean? It means that we want interest rates to be at a level where (i) economic growth
is consistent with its long-term potential (3-4% range in Thailand), (ii) inflation is
consistently and sustainably within our inflation target range of 1-3%, and (iii) they do
not cause financial imbalances to build up. In the past, interest rates have been very
low for a long period of time which have allowed financial imbalances to build up. The
clearest manifestation of that is the high build-up of household debt in Thailand.
This interest rate consistent with long-term macroeconomic equilibrium is called the
neutral rate or r*. It plays the role of the north star - a guide - for policy. But unlike the
north star, r* is not something you can actually see, and estimates are hard to get
exactly right. Our challenge in terms of getting the landing right is to get the interest rate
as close to r* as much as possible. The reason I mention this is because the situation in
Thailand and our policy response is different from almost every other country out there.
Most countries are trying to overshoot the neutral rate to slow down the economy and
bring inflation down to target, then eventually bring the rate back down to neutral level.
Our situation is different. We do not need to overshoot because our inflation and
recovery are slipping into targets. 'Sticking the landing' for us does not mean
stepping on the brakes, but it means easing off on the accelerator enough so that
our interest rates gradually converge to that long-term neutral rate.
Finally, the statement is also trying to signal that we want to preserve policy
optionality. Next time, we may pause or raise rates depending upon the outlook. We
tend to be outlook dependent rather than data dependent because policy occurs
with a lag and data is very noisy. Trying to base policy decisions on the latest data
creates more noise rather than add stability to the market, which is the last thing we
want to do. Our policy response would, therefore, be based on whether the outlook has
changed. Given that the current outlook is still broadly in line with what we expected, we
feel that the policy response we have been undertaking so far has been appropriate.
On Financial Policy
Facing the structural issue of high household debt, our policy response has
evolved in accordance with economic conditions and circumstances prevailing at
the time. During the pandemic when there were lockdowns and people lost their
incomes, the proper response was to freeze debt. However, when the lockdowns were
over and economic activities started to resume, albeit slowly, we saw that there was a
divergence in how people were affected by the crisis. Blanket-type measures like debt
moratorium were no longer appropriate, so we switched to more targeted measures and
emphasized long-term debt restructuring suitable to each person's situation.
Now that the economy has returned to pre-Covid level at the beginning of this year and
things are gradually and slowly coming back to normal, these policies must also revert
to a more normal pace. It is time to move to a different phase if we want to try to
address the structural issue of high household debt. We recently announced a
policy package made up of three components: (1) Responsible Lending, of which an
important component is dealing with persistent debt, (2) risk-based pricing, and (3)
macroprudential measures associated with debt service ratios. The goal is to reduce
the level of household debt to a more sustainable level over the long-term.
Part 3: Risks ahead
Before going into the risks that we should worry about, I want to talk about the risks that
we should not worry about, because there is a lot of misinformation out there.
First, we should not worry about a non-performing loan (NPL) cliff. Some reports
in the media have been saying that all these loans are going to become NPLs,
overwhelm the banking sector, and perhaps lead to a banking crisis. No. It is very
unlikely that we are going to see an NPL cliff. Although there are a lot of special
mentioned (SM) loans out there, not all of these loans would become non-performing.
Taking an example of mortgage loans, based on the past data, only about 22% of SM
loans migrate into NPL (about 30% revert into performing loans) and the migration rate
has actually dropped over time. This suggests that we are not likely to see an NPL cliff
coming.
Second, we should not worry about a financial crisis, such as a repeat of the Asian
Financial Crisis of 1997. All the vulnerability indicators that we track suggest that the
danger of having that kind of episode again is extremely unlikely. Our external position,
in terms of external debt, reserves, and current accounts are in good shape. We do not
see vulnerabilities that normally would lead to currency or balance of payment
problems. Banking indicators are solid. Our public debt at just above 60% of GDP is
higher than what it should be, but not crisis-level high. Government bond yields remain
relatively low and the government is still able to service debt without problems.
Third, we should not worry about a deflationary episode. The significant drop in
headline inflation was due to very specific factors and we do not see a broad-based
decrease in prices that would typically be associated with a disinflationary problem.
About 40% of items in the CPI basket still see prices going up. We also do not see a
slowdown in consumption, which has been growing quite well this year.
So, what should we worry about?
First, there are a lot of uncertainties on the global front. To quote Warren Buffet,
"only when the tide goes out do you learn who has been swimming naked." One of the
worries is that the world has been used to low interest rates for so long and now interest
rates are rising in such a rapid and coordinated manner that we have never seen
before. For anyone whose business models rely on the expectations that rates are
going to stay low, cracks will start to appear. We have already seen the problems
appear with liability-driven investment funds and pension funds in the UK, and the
regional banks in the US. And there could be other problems out there waiting to
surface. Given how quickly and how much rates have risen, more cracks are bound to
appear, more people you will see swimming naked.
Second, market volatility is bound to persist. Exchange rates in Thailand have been
more volatile than we would like to see. Last year, we went through an episode where
the Thai baht depreciated from 32 to 38 baht per USD in about 9 months and then
came back down in about 4 months. So much of that has been driven by what is
happening outside the country. First and foremost, the US dollar, which has been
extremely volatile and will continue to be so given that inflation in the US remains high.
The Thai baht is also experiencing more pronounced volatility because, compared to
other countries in the region, it is very correlated with the Chinese yuan and gold prices.
These global factors have been exacerbating the currency fluctuations in addition to
uncertainty on the domestic front.
Third, the big uncertainty on the domestic front is over politics and policy.
Regardless of how things are going to be resolved, the uncertainty has already had an
impact on the risk premium associated with Thailand. On the policy front, there is
danger from excessive populist policies that could undermine stability. Stability at this
juncture is at a premium. We have seen instances where countries have been punished
for policies that undermine stability - the UK and even more recently when Fitch
downgraded the US. Hence, if we have policies that go against the direction we should
be going - towards normalization, consolidation, enhancing stability - then that is a
significant risk for us going forward. If rating agencies are already punishing advanced
economies, they would have even more appetite to do that for emerging countries like
Thailand.
To end on a happy note, is there a happy scenario? I think there is. That scenario would
be if the new government implements policies within reason (even if they have to
undertake some populist policies) with adequate budget discipline, properly
communicates to the markets, and undertakes long-term structural policies that we
have been wanting to see for so long. Improving the investment climate, doing
regulatory guillotines to help with ease of doing business, and getting another
investment cycle going are absolutely critical to enhance growth and productivity in the
long term. There are a lot of global headwinds and uncertainties ahead, especially
with geopolitics, but if we handle it the right way, maybe we could turn some of
those headwinds into tailwinds. In that regard, Thailand is not such a bad place to
be. We are very well connected. We have strong relationships with major economies.
We might not be the best at anything, but we are not bad in a lot of areas. And maybe
that is not a bad place to be in a world where there is now a premium on resilience. If
you think about the kind of shocks we have been through, Thailand is a pretty resilient
economy.
I will stop on that positive note and thank you very much for your attention. The MPC
has raised the policy rate 7 times since Aug-22, bringing it to the current level of 2.25%.
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The MPC has raised the policy rate 7 times since Aug-22, bringing it to the current
level of 2.25%.