Roong Mallikamas: Keynote speech - Central Banking Asia Summit
Keynote speech by Ms Roong Mallikamas, Deputy Governor of the Bank of Thailand,
at the Central Banking Asia Summit, Bangkok, 24 July 2024.
* * *
Distinguished guests, ladies and gentlemen,
A very good morning to you all. First, let me thank Central Banking for inviting me to
deliver the keynote address at this year's Asia Summit. This event offers a good
opportunity for us central bankers to share our views on the trends and innovations that
shape our economies.
But beyond this two-day seminar, I hope the networks we build here will help foster
ongoing dialogues on regional collaboration, especially in addressing the challenges
facing emerging market economies, and in exploring digital currency developments,
cross-border payments and future trends.
Today, I will share with you my thoughts about the changing global context we are
navigating through, from more fragile global economies to geopolitics and the
advancement in digital technologies. I will then touch on how this has created
challenges for us small open economy central banks - both in delivering on traditional
mandate and in meeting expectation in emerging areas. And finally end on a positive
note - how we can overcome these challenges by leveraging on innovation and
collaboration at many levels.
Part I - Global context
On the context, the global economy is in a fragile condition - having gone through the
pandemic and crisis after crisis. Most legacies of the pandemic are still with us til this
day - more debts, less policy buffers, lower potential growth, and high inflation.
Let me start with inflation.
After a long-dormant phase during the Great Moderation of the 1990s and low
inflation post-GFC, inflation has risen and gained the attention of central bankers
worldwide. Inflation in advanced economics (AEs) had average around 1.5% for
the past decade but shot up to around 7% in 2022. Then came the synchronized
tightening monetary policy around the world that gradually brought inflation down.
While emerging market economies (EMEs) faced similar inflation developments
as AEs, with inflation nearly doubled from 5% in 2010s to nearly 10% in 2022,
there are vast differences in inflation dynamics and disinflation process across
region. In ASEAN-5, inflation averaged around 5% in 2022 and is expected to
come down to around 2.5% this year, while in emerging market Europe, Latin
America and Africa, inflation averaged more than 15% in 2022 and will remain
elevated this year before slowly coming down in 2025.
On the fiscal front, the buffer is increasingly eroded.
Governments were called upon to provide assistance during COVID-19, resulting
in fiscal deficits nearly tripled from 3.6% in 2019 to 9.5% in 2020. Although some
countries started the consolidation process during 2021 and 2022, more crises
unfortunately erupted - starting with the war in Ukraine and the accompanied cost
of living crisis, then conflicts in Gaza - and both AEs and EMEs once again
dipped into the government's purse. With one crisis after another, fiscal support
cannot be withdrawn even with the pandemic being five years behind us. As a
result, we only see a slow pace of fiscal consolidation - with deficit globally
remaining above pre-pandemic level at 5.5% in 2023 and is expected to be more
1
than 4% each year until the end of this decade .
Consequently, total government debts worldwide are on an ever-increasing trend,
from 84% of GDP pre-COVID to 94% in 2024 and almost 100% of GDP by 2029.
On a longer horizon of 30 years, the IMF expects the gross debt to GDP of the US
and China - the two biggest economies in the world - to double to 240% and
163% of GDP, respectively.
Pandemic and war-induced shocks further complicate existing structural challenges that
have not been addressed - but we are now left with even less policy space to deal with
them. Potential growth worldwide has been revised downward due to lower productivity,
with one of the underlying causes being "aging society". Major economies face a
demographic transition, with declining fertility rates and a shrinking share of
workingage population. These demographic shifts have a direct bearing on global labor supply.
By 2030, the IMF projects global labor supply growth to be only 0.3% - a fraction of its
pre-pandemic average. While these trends were evident before 2019, the pandemic
exacerbated the drop in labor participation, especially in emerging markets. Some
countries, such as Thailand, also emerged from the pandemic with a deteriorated
household balance sheet. This can have strong implications when interest rates are
raised to temper inflation but income growth is harder to come by because of lower
productivity and cannot act as a tailwind. Overall, there is less room to maneuver, but in
hard times, there is often higher expectation from the public for governments and
central banks to shore up the economy, not to mention to deal with other structural
issues and climate change.
The second context is the return of politics and geopolitics to the forefront of
policymaking. Risks of further geoeconomic fragmentation and domestic political
tensions make it even harder to collaborate both at home and abroad.
In the short term, we already see trade restrictions around the globe tripled from
around 1,000 measures pre-COVID to around 3,000 in 2023, according to the
IMF. One of the consequences is that the two biggest economies slow down trade
with each other [4.2% growth in 2016-2018 to 1.9% growth in 2019-2023] and
shift to trade more with the rest of the world. This trend is also likely to continue
into the future as foreign direct investment into ASEAN grew by 40% since 2017,
leading by the US and China.
In the medium term, increasing tariff and reshoring could further challenge the
objective of low and sustainable inflation, while ongoing reconfiguration of
investment and supply chain could make economies more prone to disruption.
The third is rapid advancement in digital technologies that support payment innovation,
new business model for financial services, and advances in AI that could be
incorporated in many dimensions of banking. Such advancement leads to opportunities
and unprecedented level of cross-country collaborations, as reflected in digital currency
projects and cross 98 border digital payments linkages, but they have also exposed us
to risks such as faster and more sophisticated fraud, as well as digital divide.
Part 2: Challenges of Small Open Economies/EMEs' central banks
and what we do to overcome the challenges and be 'future ready'
All of these backdrops amplify old challenges and create new ones. I think there are
primarily 3 challenges which this context presents to us. The first is that our task in
ensuring macro-stability is much harder given limited policy space but higher
expectation. The second challenge is to ensure the financial sector serves its purpose
in allocating resources efficiently - with a pursuit to build a financial landscape that
embraces innovation to help address legacy problems rather than worsening them. The
last challenge is to reap benefits of technologies and innovations in building resiliency
of the economy and addressing the risk of geopolitical fragmentation.
[Challenge 1: Macro stability] First, the changing context makes the job of
ensuring both macroeconomic and financial stability harder.
Lower growth and limited policy space leave smaller room for maneuver. Nature
of inflation dynamic itself is also changing with inflation increasingly driven by
supply-side factors outside of the central bank's control, such as geopolitical
tension and supply chain reconfiguration. For example, in Thailand, oil and food
price movements account for approximately 65% of overall price changes during
the past 2-3 years. And we will continue to face persistent supply-side price
pressures going forward as countries form stimulus strategies around concerns
regarding geopolitical tension and supply chain reconfiguration. Secular trends
such as digitalization and technological advancements and green transition will
likely lead to large-scale adjustments in relative prices as well. This comes at the
time when the public has higher expectation, not just to deliver on traditional
issues but also new emerging ones, while the tools that central banks can use are
quite limited and constrained.
[Solution 1] To deal with this challenge, we need to first ensure robust policy
framework and to ramp up our efforts in policy coordination at many levels. Both
missions are of first order importance if we are to maintain credibility and public
trust that allows us to work on other very challenging emerging areas.
Let me lay this out in a three-step approach:
Step 1: Monetary policy needs to prioritize domestic conditions while policy mix needs
to be tailored to country-specific contexts. Moreover, policy decisions should be made
with a risk management mindset, to preserve policy optionality. Monetary policy must
look through the noise and, as suggested in this year BIS Annual Economic Review, the
focus should be on robustness to broad range of scenarios, awareness of any
longerterm costs or side effects, and sufficient safety margins or room for maneuver.
Step 2: Macro-financial policy coordination is a critical step in ensuring that we use our
limited policy space in an effective manner. In the case of Thailand, higher legacy
household debt post-pandemic requires good coordination of monetary policy with other
complementary tools such as targeted financial policies to address heavy debt burden
in specific segments and other macroprudential measures to ensure better new lending
practice. We should be mindful that trust in the central bank applies to all domain of
central banking. Any gaps or pain points on the banking side, such as a rise in fraud
cases or even IT outage that disrupts financial services, will have repercussions on
central bank credibility and trust and ultimately on the effectiveness of monetary tools
necessary in fulfilling our core mandate.
Step 3: Since public policy requires public trust, it is important to ensure coordination
across public policymakers, particularly the government and the central bank, and to
ensure transparency and accountability.
At a fundamental level, this starts with the central bank having established transparent
communication with the government to ensure accountability. For the Bank of Thailand,
our accountability mechanism involves issuing the Open Letter addressing the rationale
2
to the Ministry of Finance in case inflation falls outside the target range .
In the era of rapid information dissemination and easy access to social media,
misinformation or misinterpretation could spread easily and wider than before. Effective
communication therefore does not just mean publishing press releases or doing
surveys of business sentiment. It also involves preemptive steps, such as the use of
social listening to identify issues that are top-of-mind concerns of the public and could
evolve and undermine the trust of the central bank. Then plan out scenarios and
appropriate engagement strategy before the problem morphs into something more
damaging. In a broader sense, effective communication does not just aim to correct the
misinformation, but also to set healthy expectation for the public regarding the work and
the mandate of the central bank.
[Challenges 2: Financial landscape] Second challenge is how to adapt financial
landscape to address underlying problems in our financial system as well as
capture opportunities from innovation to support new business model and
financial services.
The real challenge lies in improving financial inclusion for the underserved groups,
while at the same time not fueling further indebtedness for the structurally weak ones.
In the case of Thailand, SMEs usually face much higher cost of financing, part of the
reasons being that financial institutions lack data to appropriately assess their
underlying risks. We believe more efficient financial solutions have the potential to bring
their cost of financing down.
[Solution 2 3O's, AI/Fraud] Resolving this will require new thinking on
regulations, allowing new players with different business models to come into
market and better utilize data - while ensuring a level playing field.
So what can central bank do to reap benefits of new technologies and both address
legacy issues and future ready our financial landscape? - again to maintain trust in the
central bank and the financial system.
While we understand that each country is different and what is suitable for Thailand
may not be suitable for others, let me share with you our thinking at the Bank of
Thailand on how we as a policymaker and regulator can shape financial landscape of
the future. BOT has issued the Financial Landscape Consultation Paper outlining
crucial steps to reposition the financial sector, supporting a sustainable digital economy.
The cornerstone of this strategy revolves around the "3-Open" principles - Open Data,
Open Infrastructure, and Open Competition - to foster innovation and enhance financial
services.
(1) Open Data facilitates easier data exchange such as promoting mechanisms in
which consumers can transfer their own data from one service provider to another
more conveniently. This will enable new financial services and address the problem
of SMEs' access to finance due to data scarcity. By leveraging micro-level data,
including behavioral insights from transactions, Open Data promotes analytical
advancements and innovative service development.
(2) Open Infrastructure aims to allow service providers to access financial
infrastructure at reasonable costs. In Thailand where the financial sector has been
predominantly bank-based and incumbent banks already made significant resource
contributions in the early stage of key infrastructure development, opening up
access to nonbanks requires some public intervention, for example in fee
negotiation and the governance structure of the infrastructure. Nonetheless, this is
necessary to foster competition that benefits both the public and diverse business
sectors.
(3) Open Competition promotes a level playing field, encouraging incumbents and
new entrants to innovate and meet consumer demands effectively. This principle
aims to cultivate a balanced ecosystem where competition among players with
similar as well as different risk appetites drives continuous improvement in financial
services.
One of the key policies is the introduction of Virtual Banks as new players into the
financial landscape. The objective is to allow applicants who possess the
expertise in technology, digital services, and data analytics to offer financial
services efficiently through the digital channel and better serve the needs of each
customer segment, particularly the unserved and underserved segments of retail
and SMEs customers. Working toward this objective is a challenge as we want to
see Virtual Banks truly bringing new value proposition with lower operating costs,
optimized processes, and enhanced user experiences.
Looking ahead, optimizing data flows is critical. Finding ways for banks, Virtual
Banks, and nonbanks to better utilize data is essential for improving financial
services extensively and intensively. However, navigating the regulatory
landscape, which currently lacks robust legal frameworks, demands creative
execution to achieve these goals effectively.
Another group of issues, namely AI and fraud, are new developments that could pose
risks to our financial system. While fraud maybe as old as time, the emergence of social
media, fast payment and AI has super-charged them to the new prevalence and speed
with scam easier to commit. Fraud is also increasingly borderless; it could be committed
by someone in one jurisdiction while money moves through accounts in others including
through crypto.
Solving this complex issue will surely require work on financial literacy and
domestic regulation and supervision at a fundamental level. We need to also work
on addressing the entire life cycle of fraud in a holistic manner, so there is no
leakage or bottleneck that would erode effectiveness. Moreover, given its
complexity and potential to attract public criticism, we must focus on efficiency,
tackling the spot with bigger return to effort, for example, how to prevent money
from getting into a mule account in the first place for that would be more effective
and easier to unwind than to stop money from being drawn out of a mule account
once already in. Given most of the fraud cases are now committed online, working
with relevant authorities and social media/e-commerce platform to make it harder
for fraudsters to advertise and scam people will be an extra critical step as well.
But working on domestic fronts is not enough given its borderless nature; this is
the challenge we cannot walk alone. To cope with digital crime, we would need
greater collaboration among countries at regional and global levels to identify
risks, find solutions, and come up with a rulebook or international guidelines that
facilitate data sharing or collaboration. Without this cooperation, differing
standards of domestic fraud will create the weakest link and make dealing with
cross-border fraud much harder.
[Challenge 3: Geopolitics and how to create resiliency] The last challenge
concerns how to make economy more resilient and robust to risk scenarios as
geopolitical tension increases and technology advances.
Apart from addressing gaps in our current financial system above, what most central
banks have learned from global economic uncertainty is to explore alternative
infrastructure as a volatility mitigation or risk mitigation option. Like many EME central
banks, the Bank of Thailand has been exploring and using technology to enhance both
the efficiency and resiliency of our financial system. There are two main areas that our
region already has partnerships, namely cross-border payments and local currency
usage.
1. Cross-border payment linkages
Given our regional economic linkages, it makes sense for the central banks to develop
cross-border payment linkages that facilitate real economic activities and welfare.
Central banks play a role in ensuring that such infrastructure is open and inclusive
enough - to help address rather than worsen financial inclusion at a national level, and
to avoid creating further fragmentation at an international level. In the case of Thailand,
we started linking our payment system with Japan in 2018 and currently has bilateral
linkages with 8 countries. Apart from bilateral linkages, Bank of Thailand, along with 4
ASEAN peers, initiated Project Nexus to showcase the potential of fast payment system
(FPS) technology, in delivering faster, cheaper, and more transparent services. Our
goal is to create a standardized payment platform that potentially serves as a global
infrastructure, not just a closed-loop regional platform. This year we also have India
joining and look forward to others participating in this initiative as well.
Likewise, we participate in Project mBridge to explore the potential of distributed ledger
technology (DLT) in enabling instant cross-border payments and settlement, with an
aim to solve some of the key inefficiencies in cross-border payments, including high
costs, low speed and operational complexities.
2. Local Currency
On the rationale of local currency initiatives, it simply aims to provide the flexibility in
terms of trade settlement. 60% of Thailand's cross-border trading activities occur within
our region, with 8 out of 10 top trading partners being Asian countries. Therefore, it is
our job to facilitate those activities both in normal times and in uncertain times.
We are aware that the volatility of major currencies can have significant impact on local
players. Therefore, the Bank of Thailand promotes the use of local currency as one of
the foreign exchange hedging mechanisms, acting as an alternative settlement or
payment option for local businesses under circumstances of USD volatility. I am
pleased that today my colleague, Mr. Sakkapop will share our local currency journey in
the afternoon session.
Distinguished guests, ladies and gentlemen,
This brings me to the end of my remark. As we draw this session to a close, I want to
share with you one final thought. As a regulator of the financial sector and a guardian of
financial stability, we have the duty to continuously learn and adapt ourselves to
embrace the emerging trends and innovations. While each of us may spend most of the
time coping with challenges at home, we must not lose sight of the potential
collaboration we could build, to help us navigate through the complexity of these
contexts. I hope the insights and connections we have forged here will plant the seed
for future collaboration as well.
Thank you for your attention, and I wish you all a thought-provoking and fruitful seminar
1
Figures from IMF Fiscal Monitor and World Economic Outlook April 2024.
2
Among the central banks in the world, Bank of England and the Bank of Thailand are the only two
central banks that issue the Open Letter, while other central banks use press release or input such
information in Monetary Policy Report.