Prasarn Trairatvorakul: Managing the economy at a crossroads
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Foreign
Correspondents' Club of Thailand (FCCT), Bangkok, 3 July 2014.
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Distinguished Guests,
Ladies and Gentlemen,
It is my pleasure to be here once again, to address the oldest press club in Southeast Asia. I
congratulate you for the outstanding works in Thailand over these years. Journalism is
indeed a special profession, one whose status is sometimes hailed as "the fourth pillar of the
state" alongside the legislature, the executive and the judiciary. Such privilege comes with a
somber weight of commitment to accurate reporting and balanced viewpoints. These
qualities are needed more than ever today, as there is much public demand to understand
the implications of the recent political development. I will share with you today my early
assessment from a policymaker's standpoint, regarding the latest economic outlook and key
challenges to public policy lying ahead.
Current economic assessments
First, let me give you a brief summary of where we are. The buildup of political tension
late last year came at an unfortunate time for the economy. The economic activity was
already hampered by weak domestic demand amid high household debt and a lackluster
global economy. As the political uncertainties persisted, the repercussion on consumer and
business confidence grew, denting private consumption and investment. The lack of a
functioning government early this year also curtailed public finance capability, subjecting
infrastructure investment to further delay and putting 2015 fiscal budget at risk. Tourism, a
shining sector in 2013, was increasingly weighed by security concerns. A tepid recovery in
exports offers only a partial offset to softening growth, and could not prevent the overall
economy from contracting in the first quarter.
It is under this backdrop that the end to political stalemate in May provided some
cause for short-term optimism. The first relief comes from a resumption of
government spending. The presence of a fully functioning government ensures that the
budget for 2015 fiscal year could be prepared on time, eliminating the risk of a Thai-style
"fiscal cliff". An acceleration of public disbursement in the short-term is also providing a
welcomed boost to the economy. Plan for public investment in infrastructure is now back on
track, and there have been renewed efforts to maximize the efficiency of these projects.
A resumption of effective fiscal policy, in turn, lends support to domestic demand
recovery. Repayment of overdue debt to farmers, approvals of backlog projects by the BOI,
and fresh loans to the SMEs provided quick relief in and of themselves, but the combined
multiplier effects could also be meaningful. By shoring up income and improving overall
sentiments, these measures constitute an important effort to revive private spending. Fast
indicators already suggest that private consumption and investment are stabilizing, and
private confidence improving. We expect the recovery of domestic demand to gain more
traction going forward, especially in the second half of this year.
In light of these recent events, our latest growth projection for this year has been
revised upward to 1.5 percent. While this figure may be much lower than long-term
potential growth of around 4 to 5 percent, it is chiefly dragged down by the first-quarter
contraction - bygones if you like. From this quarter onwards, we anticipate a clear pickup in
growth and a V-shaped recovery. Many independent forecasters are currently holding a
similar view, and most have revised up their growth projections after the political turning point
in May.
This brighter economic outlook is not without risks, however. Exports of goods in
particular have underperformed thus far this year, despite their insulation from
domestic political turmoil. A number of factors are at play, some temporary, others more
secular. Weaker economic growth in regional trading partners, including China and ASEAN,
has been one cyclical hindrance. Global trade also appears to be lagging global growth,
limiting scope for emerging economies like Thailand to leverage on advanced economies'
recovery. More deep-rooted structural issues at home may also be responsible, as segments
of the manufacturing sector are not integrated into the modern global supply chain. For these
reasons, exports may play a less active role in its contribution to growth this year.
On the financial stability front, we remain cautious but optimistic. Domestically, the
prolonged period of economic slowdown has subjected indebted households and smaller
businesses to financial strains. Loan quality for weaker borrowers has deteriorated
somewhat as a result. The good news is that these risks have been confined to specific
sectors, and the banking system remains strong and has weathered the slowdown very well,
owing to their prudent risk management policies. Externally, we also cannot rule out further
episodes of volatile capital flows owing to shifts in monetary policy abroad. Our economy has
proven resilient to such shocks in the recent past, thanks to strong macroeconomic
fundamentals and robust policy framework. We will closely monitor the adjustment process to
ensure that risks to financial stability continue to be contained.
To summarize, the economy seems to be at an inflection point. The outlook for growth
has improved following the political event in May. But a new set of challenges has also
emerged. Now that political uncertainties have waned, what should be the priorities for public
policy? What are key areas of needed "economic reform", and what should such agenda
entail? This brings me to the second topic of my talk, that of challenges to public policy
management during the current period of transition.
Challenges to public policy management
The agenda for economic reform under discussion today is wide-ranging and may at times
seem confusing to the public. To organize one's thoughts, it might be helpful to revisit
the basic role of government in a modern economy. At its most basic level, the
government exists to provide services that otherwise cannot be carried out by private market
- things like infrastructure, law enforcement, or national defense. Public policy may also
pursue social welfare objectives in accordance with its citizen's wills, for example to promote
income equality or access to health care and education. Finally, but no less important, public
policy must provide a stable environment for the nation to prosper, and avoid being the
cause of malaise itself.
Based on these basic tenets, the present challenges for Thai policymakers are
twofold. Public policy must first aid the private sector in overcoming structural bottlenecks
and lift the economy's potential growth by addressing areas where market has failed.
Secondly, the policymakers must restore and maintain macroeconomic policy credence, and
lay a stronger foundation for the economy to grow on a sustained basis. Let me take each of
these in turn.
1. Structural policy to boost potential growth
The Thai economy is growing at a pace well below what a typical country with the same level
of income should be able to attain. Failure to sustain a higher pace of growth over an
extended period, even when demand pressure has eased, suggests that part of the problem
could be from the supply side.
It is no secret that infrastructure in Thailand needs an overhaul. Indeed, very few would
dispute the merits of large-scale public investment. The challenge is to strike a balance
between timely implementation and rigorous cost-benefit analyses, as well as efforts to make
the most efficient use of public resources. Focusing on those projects with the greatest
potential for "crowding-in" private investment should also be encouraged. Multiplier effects
would provide additional lift to potential growth at no public cost, and would be the very
evidence that public policy has served its function of aiding the private sector.
Current supply constraints are not limited to physical capital, but extend to human
capital as well. In 20 years, Thailand will be among the first ASEAN countries to enter an
aging-population phase, with share of senior citizens rising from 15 to 27 percent of total
population. Early symptoms have already been felt in some industries, whose capacity to
produce and invest is stifled by the lack of qualified labour. Tight labour market is also
indicative of labour shortage at the lower end of the skill spectrum. Market forces have failed
to resolve these issues. Education policy, tax incentives, minimum wage, and migration
policy all have bearings on the labour market dynamics. The long-term growth implications of
these policies should be incorporated into the policymakers' considerations.
Implementing a comprehensive set of economic policies to lift potential growth, while
pursuing other public policy objectives, is not an easy task. It requires a close
coordination among various policy authorities. It also takes immense skills to introduce the
right sequencing of policies at the right time. These prerequisites must also be backstopped
by strong policy credibility, the second area of priority.
2. Maintaining macroeconomic policy credibility
In its quest to provide public services, the policymakers must avoid being the source
of harm. International experience is filled with cautionary tales of how a lack of policy
discipline could lead the economy awry. Over-bloated and inefficient government increases
risks of unsustainable public finance, and can sow the seeds for political conflicts. Lax
monetary discipline is associated with hyperinflation and financial instability. Maintaining
macroeconomic policy credibility and discipline must be an integral part of economic reform
in Thailand.
Policy credence is not an independent choice, but is shaped by the overall
institutional setup. Institutions are the set of rules and norms that governs the incentives of
economic agents and constrains their behaviours. Political developments, strength of the
legal system, property rights enforcement, quality of workforce, degree of corruption are but
some aspects of the institutional environment. They all interact with the policymakers' ability
to pursue their objectives credibly.
Institutions evolve via a mixture of history, will power and luck. A combination of factors
at critical junctures can determine the path of institutional change. Thailand must seek to
make the most of the current windows of opportunities, to build on reform momentum, and
promote a virtuous circle of institutional development. The ultimate goal is to have a political
setup that is in accordance with international standards, with a stronger institutional
framework to promote a credible and effective public policy.
Monetary policy
Let me now devote the last few minutes of my talk to discuss how the current monetary
policy fits into the overall public policy directions.
Monetary policy's legal mandate is to preserve price and financial stability.
Throughout the last couple of years, the Monetary Policy Committee has maintained
an accommodative policy stance to support the economy. Weighing risks to financial
stability against downside risks to growth, the Committee carefully adjusted the degree of
policy accommodation to ensure sufficient support to domestic demand. The last policy rate
cut took place in March this year, as lower risks to domestic financial stability and subdued
price pressure opened room for monetary easing in light of higher risks to growth.
In our latest meeting in June, the Committee voted unanimously to maintain policy
rate at 2 percent. The Committee was encouraged by reduced political uncertainties and a
resumption of functioning government. We also deemed recent fiscal actions and prevailing
monetary policy accommodation as lending adequate support to recovery. The Committee
will continue to monitor the situation, and ensure that the ongoing recovery gains traction, in
the context of price and financial stability consistent with our mandate.
The Committee has been able to maintain policy credibility and adhere to our mandate
thanks to our operational independence. The institutional setup must continue to protect
this independence, so that monetary policy can remain a cornerstone of Thailand's
macroeconomic stability. The MPC is aware that our operational independence would mean
little in the absence of public trust. We are determined to continue exercising prudence,
impartiality, and balanced judgements in deliberating monetary policy. That is ultimately the
very source of our credibility.
To close my remarks this evening, I hope the FCCT will continue to promote the professional
interests of foreign correspondents working in Thailand, and initiate lively and insightful
discussion as it has done for the past sixty years.
Thank you.