Tarisa Watanagase: Current topics of the economy and monetary policy
of the Kingdom
Dinner talk by Dr Tarisa Watanagase, Governor of the Bank of Thailand, to the Japanese
Chamber of Commerce, Bangkok, 24 March 2010.
* * *
Good Evening,
Ladies and Gentlemen,
First of all, I would like to thank the Japanese Chamber of Commerce for the invitation to
speak again at this annual event. It is indeed a great pleasure to be back here for the
institution that has, for a long time, been playing a key role in promoting a closer cooperation
and better understanding between the Thai authorities and the Japanese business
community in Thailand.
Tonight, I would like to focus my remarks on three issues. The first is Thailand's current
economic conditions and outlook. The is the key challenges for policymakers going
second
forward. And the third is the Kingdom's policies to ensure a sustained growth recovery along
with price and financial stability.
Many of you may recall that my speech here last year took place during the most testing time
for both the global economy and policymakers. In the western economies at the core of the
crisis, the financial and real sectors have been severely impacted. And for Thailand, it was
the first time in ten years that the Thai economy registered negative growth, as the collapse
in global demand led to a sharp contraction in the Thai exports.
Fortunately, the global economy has now turned the corner and recovery has continued to
gain stronger momentum. The latest figures have indicated the better-than-expected
recovery of the global economy and financial markets due to the large, timely and
broadbased economic stimulus measures that have been implemented to combat the crisis.
In most countries, manufacturing production and trade have improved, while rebounding
consumer and business confidence has helped boost the private demand. As for the financial
system, de-leveraging and the tightening of credit underwriting standards have moderated.
Banks have gradually rebuilt their strength and become less dependent on the support from
government facilities.
Ladies and Gentlemen,
Let me turn to the case of Thailand. Our successful navigation of the Thai economy through
the crisis can be credited to two key factors. The first is our strong economic fundamentals
including the resilient financial system as a consequence of intensive and continuous reforms
since the 1997 Asian crisis and the second is the timely implementation of both monetary
and fiscal stimulus measures.
You may remember that, the Bank of Thailand has reacted decisively and preemptively by
lowering the policy interest rate by 250 basis points to a historically low level of 1.25 percent,
while the Thai government launched massive stimulus packages and other measures to help
relieve households' cost of living through the difficult time.
As a result of these policies and the revival of the global economy, our GDP data for the
fourth quarter of 2009 shows solid growth and momentum, growing 5.8 percent year-on-year
and 3.6 percent quarter-on-quarter, one of the highest in the region and the world. The latest
data for January also shows continuation of a broad-based economic recovery in all sectors.
• Our manufacturing production index rose at 28.6 percent;
•
Exports grew at 31.4 percent;
• Private consumption expanded at 4.7 percent;
• Number of inbound tourists are now exceeding 1.6 million for the second
consecutive months; and
• Farm income has improved noticeably from mid-2009.
All of these have been instrumental in reducing the unemployment rate of our economy from
the peak of 2.4 percent during the crisis to a near historic low level of 0.9 percent, with some
sectors such as electronics and automobile industries now starting to experience labor
shortages.
These are exactly the picture of the economy that we are hoping and looking for: growth that
is based on confidence of consumers and investors that feel secure enough about their jobs
and business prospects. So much so that it leads to the renewal of consumption and
investment activities, especially the consumption of durable products such as cars,
refrigerators, and televisions as well as the purchase of new home and new investment
projects.
Going forward, the prospect of the Thai economy remains robust. The momentum of the
recovery is expected to continue into both 2010 and 2011. Our latest economic projection as
of January 2010 suggests an economic expansion of 3.3-5.3 per cent in 2010 and
2.8-4.4 per cent in 2011, with an increasing role of private investment replacing government
expenditure, which will gradually subside since the need for continued fiscal stimulus wanes
as the economic growth becomes self-sustaining.
Here, I would like to point out that this projection is due for a revision in April. With the
stronger-than-expected performance in the last quarter of 2009, it is highly likely that these
numbers will be revised upward.
Ladies and Gentlemen,
Having pointed out a fairly positive outlook, I will now turn to the second topic of my talk: the
key challenges going forward and I must quickly add that looking ahead there are both
external and domestic uncertainties. Policymakers therefore will have to be watchful and
well-prepared to implement appropriate policy to ensure continued growth momentum amidst
these challenges.
First, the global economic recovery, particularly those of the industrialized economies,
remains fragile and subject to downside risks. In spite of the higher-than-expected growth in
the fourth quarter of 2009, the US economy is still beset by high unemployment, continued
deleveraging, and weak financial institutions. All of these will have dampening effects on
domestic demand, especially consumer spending - the main growth driver for the US
economy. At the same time, concerns on the Eurozone's sizable fiscal deficits especially
those of the peripheral economies may trigger another round of confidence problems.
Furthermore, the exit policy especially of the major economies could spill additional risks to
the ongoing global recovery. Their timing and speed will be crucial. The action that is either
too early when the economy is not sufficiently robust, or too late when inflationary pressure
and/or economic imbalances have already been formed will have important implication on
recovery, price and financial stability.
Second, emerging economies, Thailand included, face the challenge of sizeable and volatile
flows of capital due to their better growth prospect and sooner policy normalization vis-à-vis
G3 countries. These flows could lead to volatility in foreign exchange markets and might
potentially create financial imbalances. From the data thus far, we have seen sizable inflow
of capital into some of the Asian countries such as Korea, Taiwan, India, and China since the
second half of 2009. And in the last couple weeks, this money started to flow into Thailand.
Third on domestic front, as you are well aware, Thailand also faces two major uncertainties:
the problem of Map Ta Phut and the on-going political unrest.
I believe the "Map Ta Phut" problem is of the most interest to Japanese investors, and
therefore I would like to say a few words. At present, the authorities have put all efforts to
achieve the resolution of the problem, given its implications on the country's future
investment prospect, industrial practice, and economic recovery. So far, the processes of the
EIA, HIA, and public hearing processes have been formalized and the government is now in
the process of establishing independent agencies which will be responsible for evaluating all
of the proposed investment projects. It will take some more time, but progresses are being
steadily made.
In my view, the "Map Ta Phut" problem is only a temporary hiccup in Thailand's long record
of investment-friendly climate and rapid industrial development. It can be seen as part of a
growing pain that developing countries such as Thailand experienced as it becomes more
developed. On the positive side, it should provide opportunity to forge a closer coordination
among related parties and establish a clear process in achieving sustainability of industrial
development.
As for the second issue, I think, it is too early at this point to put out an exact estimate of its
negative impact on the recovery process.
Should the problem takes time to resolve itself, the negative impact on the economy will
become more visible especially on the tourist industry and private consumption. These,
together with the severe drought that we have been experiencing thus far, may somewhat
dampen the robust economic momentum that we carry forward from the fourth quarter of last
year.
Ladies and Gentlemen,
I would like to turn to my last topic: Thailand's economic policies going forward, starting with
our monetary policy strategies in 2010.
In the last few months, we have seen slight upward price movement with both headline and
core inflation rates turning positive since the fourth quarter of last year. Currently, headline
and core inflation for February 2010 are at 3.7 and 0.3 per cent respectively. The turnaround
was due to a combination of the base effects from oil prices and the pick-up in domestic
demand.
Looking ahead, with the firming economic recovery, inflationary pressure is expected to
increase further, with core inflation forecasted to surpass the midpoint of our target range of
0.5-3.0 percent by the end of the year.
Thus, it is clear that in the near term, policymakers need to perform a delicate balancing act
that would at the same time ensure a continued growth momentum, the anchoring of
inflationary expectations, and the containment of potential financial imbalances.
In light of the solid fourth-quarter GDP figures and January's economic indicators, the current
extraordinary accommodative monetary policy stance will be of less need for the Thai
economy. Furthermore, an over-extended period of low interest rates can lead to heightened
inflation expectations or financial imbalances such as asset price bubbles, as this crisis has
vividly demonstrated in many countries.
To this end, the timing of monetary policy normalization will be important so that it will not
jeopardize economic recovery particularly as private investment has yet to pick up enough
pace. Thus, I would like to assure you that, we will put our best effort in considering its timing
carefully.
As for dealing with consequences of capital inflows, we see the current managed float
exchange rate regime as appropriate and beneficial to the Thai economy. We will continue to
let the level of exchange rate be determined by market forces, but make sure that it is not too
volatile to the extent that it will be too difficult for the private sector to adjust to.
And to give the private sector greater flexibility to manage foreign exchange risks, last month
we further relaxed restrictions on Thai direct investment abroad and on the unwinding of
foreign exchange hedges. These moves, which are parts of our ongoing capital account
liberalization plan, will also make our capital flows situation more balanced, by facilitating
two-way foreign exchange flows.
On the fiscal front, you will agree that fiscal policy is one of the key instruments to support
the economy during the difficult times when private sector growth engines have been
impaired. However, the stimulus packages that the government announced last year, have
been done on the assumption that Thailand will face the most severe global recession in the
last 60 years. But as it turned out, the global crisis was not as severe as thought. Given that
our economy is on the robust recovery path, the need for stimulus may be less. And the
government should also find the way to normalize the fiscal policy stance at an appropriate
time.
Here, the latest development on sovereign debt crises in Europe underscores the importance
of the restoration of our fiscal discipline. If there are no changes in our policy, the ratio of
public debt to GDP will increase to over 60 percent by 2012. This will not only leave little
room for the government to use more fiscal stimulus should there be a new crisis in the
region or in the global economy but it could also put Thailand in the spotlight of the foreign
investors who have become much more sensitive to the issue of fiscal sustainability.
This is why we have to rethink the stance of our fiscal policy once the short-term political and
economic uncertainties fade away. Furthermore, to ensure fiscal sustainability over the
medium to longer term, Thailand will need fiscal reforms that include:
• Continued fiscal consolidation;
• Broadening of our tax bases;
• Reforms to increase the efficiency and equality of the tax system; and
• Greater allocation of public spending toward investment expenditures.
Indeed, the government realizes the need for fiscal consolidation and reforms. With the
better-than-expected tax revenues, thanks to the solid economic recovery, the budget deficit
for this fiscal year and the extent of public debt will probably be lower than originally
expected. The government has also taken initiatives to work on some reform measures such
as the introduction of property taxes. These are commendable initiatives that remain to be
seen whether will be successfully implemented.
Ladies and Gentlemen,
Looking forward, Thailand has no other choices but to embrace the force of globalization.
This means that we have to continue to integrate our economy to the global economy and
world financial markets. And a closer cooperation with economies in the region would then
be a vital factor that will help strengthen the overall recovery and enhance the potential of
Thailand in the global stage.
This is why we continue to engage in free trade agreements both on a bilateral and
multilateral basis, for example, the ASEAN Free Trade Agreement (or AFTA) that should
facilitate intra-regional trade and technological development. And at the same time, we also
need to prepare ourselves for the coming volatilities in the flow of capital. As of noon today,
our Chiang Mai Initiative Multilaterization (CMIM) will be in effect to provide the swap lines
of foreign exchange liquidity for the ASEAN+3 countries during periods of liquidity or balance
of payments distress.
I am certain that these closer integration and cooperation will be critical for our success
together as a region in new global economy after the crisis and Thailand is looking forward to
working with the Asian communities and especially with Japan, one of Thailand's closest
friends and economic partners, in achieving our potential.
Thank you for your attention.