Global Risks and Thailand's Economic Outlook
Veerathai Santiprabhob, Governor of the Bank of Thailand
Fitch Ratings Thailand's Annual Conference 2018
October 2, 2018
Ladies and gentlemen,
I am delighted to be here with you this morning, and I would like to thank Fitch
Ratings (Thailand) for inviting me to speak at this event.
When I was asked to deliver the opening speech for this event, I thought, what
would be the most important message I can share with you as a central banker? I
thought that, in many ways, the job of the central bank and that of a credit rating
agency are similar. We both need to look far ahead into the future; we both need to
be conservative; and we both need to assess risks to the economy. With this in mind,
I would like to share with you my thoughts on the risks that the Thai economy is
facing, where Thailand stands in terms of dealing with those risks, and how we can
ensure a solid footing going forward.
Ladies and gentlemen,
As evidenced by vulnerable fund flows and sharp currency movements, there is no
denying that the global financial markets have become increasingly turbulent. The
complex financial network that has helped facilitate efficient flows of fund across the
world could, in times of turbulence, become a contagion linkage that disrupts
economic activities. As a part of this interconnected financial network, Thailand is no
exception. Today I would like to highlight four key risks that could create more
turbulence in the short- to medium-run: the tightening global financial conditions,
growing trade disputes, geopolitical risks, and domestic financial stability risks
resulting from the prolonged period of very low interest rates.
Soon after the Global Financial Crisis, Thailand's economy-like that of other
EMEs-felt the unintended consequences of advanced economies' unconventional
monetary policy stimulus. Large capital inflows in search for higher yields caused
significant upward pressure in asset prices as well as on EMEs' currencies and
corporate debt. It is inevitable that the reversal of that extreme measures-i.e.,
monetary policy normalization-would have the same sizable effect on EMEs as
well, and this constitutes our first source of risk. In addition to the Fed, more central
banks are expected to normalize their monetary policies in the coming years. As
excessive liquidity unwinds, higher yields will drive up costs of capital faced by
firms and governments, while EMEs with vulnerable external conditions and weak
currencies will also face with increased external debt liabilities measured in local
currencies. Moreover, according to the Institute of International Finance,
approximately 2.7 trillion US dollars of EME bonds and syndicated loans are due by
the end of 2019, with approximately a third of that amount denominated in foreign
currencies. Weaker currencies and high correlation of EMEs' long-term bond yield to
the US Treasury yield could reduce the ability of EME firms to service debt and
could undermine economic stability. We have already seen some EME countries
with idiosyncratic factors such as Argentina and Turkey experiencing these
pressures.
The second source of risk is headlined almost daily in the news: the escalating trade
protectionism and especially trade tension between the US and China. The
back-andforth between the two countries and the unpredictability of the outcome have driven
much of the macroeconomic as well as financial volatility in the past few months. Up
until now, the impact of the announced tariffs between the two countries on global
trade has been limited since it takes time for the effect to be fully passed through.
Nonetheless, the full impact of the ongoing trade war is expected to come next year,
and the series of trade disputes could be far from over. If further tariffs were carried
out, supply chain and production networks across the region could be disrupted.
While the trade volume would certainly be directly affected, perhaps the more
serious casualty is private investment, which-as we have seen in our recent past-
decline under uncertainty. To the extent that uncertainty brings about reduced
investment, prolonged trade war will reduce the productive capacity for future
growth and delay technological upgrading for firms.
Along with the growing trade disputes, the escalation of geopolitical risks-the third
source of risk that we are facing-is one of the most pronounced trends of the past
few years. In addition to long-standing issues that are awaiting resolution such as
conflicts in the Middle East, tensions in the Korean Peninsula, and Brexit, new
sources of potentially abiding fragility keep adding on to this list. The US-Russia
conflict, Iran nuclear sanction, the militarization of the South China Sea, and the
increased cyber-attacks by both state- and nonstate-actors, are some of the issues that
have emerged over the past few years.
While heightening geopolitical risks have not led to a serious market correction or
slowdown in global economic activities, persistent geopolitical risks still warrant
close monitoring, as these could heighten volatility in the financial market and
commodity prices, especially that of oil.
The last source of risk that I would like to highlight is on the domestic front. While
financial stability remains sound overall, there are some pockets of risk that might
pose vulnerabilities to financial stability going forward. The prolonged period of low
interest rate environment leads to search-for-yield and underpricing of risks. This is
especially challenging in a multi-regulator environment, since increased regulations
by one agency is likely to simply push the potentially risky financial activities out of
the agency's regulatory umbrella. The evidence of this is presented by risk areas that
span across all regulatory bodies' responsibilities: delayed deleveraging of
household debts; large expansion of foreign investment funds with high
concentration in some emerging economies; saving cooperatives' rapidly growing
deposits; maturity mismatch of corporate borrowers; and rapid growth of corporate
bonds, especially unrated bonds. More recently, we also notice an upward trend in
mortgage loans to homebuyers who search for rental yield and capital gain, driven
partly by high LTV ratio for mortgage loans offered by the intense competition in the
financial sector. Furthermore, mortgage loan NPLs, especially among second- and
third-home buyers have continued to rise.
Ladies and gentlemen,
I have outlined for you the four sources of risk that we are currently facing. Even
though I talk about them separately, the interplay between these risk factors make it
so that the slightest change in circumstances could have a huge effect on an
economy. The latest market turbulence in Turkey speaks volume about how markets
can sometimes overreact, leading to a sell-off in a general risk-off mood. Closer to
home, we have seen some of our Southeast Asian neighbors faced with difficult
financial market conditions despite their robust economic growth. Lastly, in addition
to the four risks I mentioned, there are other developments that could at some point
become one of the key risk factors, such as the rapid technological advancement that
could disrupt traditional business models, or the effects of climate change that are
projected to intensify in the coming years.
With all these risks in mind, there comes a question: where does Thailand stand
amidst these risks?
If we look back over the past few years, we would notice that Thailand's growth was
filled with imbalances. While exports of goods and services expanded robustly, the
growth of domestic demand continued to register well below historical average,
creating the so-called "two-speed economy." However, concerns over the economic
recovery have lessened over the past few quarters, as the economy has shown signs
of a more balanced growth. We begin to see that the growth in export sector started
to spill over to other parts of the economy, particularly private consumption and
private investment. According to our projection, private consumption was projected
to continue its solid expansion, as the underpinning factors such as employment and
consumer confidence continued to show signs of improvements. Private investment
continued to expand with additional supports from public investment projects as
well as heightened overall confidence. In our latest forecast, the economy is
projected to grow at 4.4 percent this year and 4.2 percent in 2019-the strongest
twoyear performance since 2008.
Nonetheless, in this multidimensional nature of financial and economic
development, bounded by the tight-knitted inter-country financial linkages, a strong
domestic economy alone may not be enough to safeguard itself from external shocks.
Thus, the best thing a country can do to protect itself is to build immunity and
resilience for the economy.
Against external volatilities and volatile fund flows, our flexible exchange rate
regime has served as the first line of defense, with foreign exchange interventions
being used to calm disorderly markets. Our international reserves are around 3.2
times short-term external debt (compared to only 0.7 during the Asian Economic
Crisis in 1997). Our current account surplus has been running in the positive for 4
years and is projected to be at 35.4 billion USD for this year, or 7 percent of GDP.
Moreover, Thai corporations and banks rely mostly on domestic funding and thus
carry with them low currency mismatch. These factors provide us with particularly
strong cushions and allow us to exercise our domestic monetary policy with
autonomy. In conjunction with these buffers, a range of policy tools are also
available to be deployed should the need arise, including macroprudential
measures.
In addition to building immunity against external volatilities, the Bank of Thailand
also puts great emphasis on maintaining financial stability on the domestic front
which is necessary for a sustainable growth. As mentioned earlier, the
search-foryield behavior under the prolonged period of low interest rate environment poses
vulnerabilities to financial stability. In response, the Bank of Thailand strives to
mitigate impacts from these underpricing of risk behaviors. We continually monitor
warning signs of the aforementioned risks and address them accordingly. Last year,
we tightened credit card regulations as well as uncollateralized personal loan limits
to mitigate household debt problems. We will soon conduct a public hearing on
mortgage lending standard to curb underpricing of risks in the mortgage market.
Financial stability is also engrained in the Bank of Thailand's monetary policy
conduct. It is our view that macroprudential measures alone is not sufficient in
preventing potential risks in the financial system. Monetary policy must be
conducted with caution as to not contribute to further build-up of financial
vulnerabilities. Furthermore, amidst the prolonged period of low interest rate and
the increasing search-for-yield behaviors, it is our view that supervisory
coordination is increasingly imperative for effective risk monitoring to make sure
that the regulations across different regulators are broadly aligned and that financial
activities cannot simply move from a regulated to an unregulated umbrella. This is
reflected through our close collaborations with other regulatory bodies such as the
Securities and Exchange Commission (SEC) and the Office of Insurance Commission
(OIC).
Ladies and gentlemen,
While we have adequate external buffers to withstand short-term vulnerability in the
global market, what would ensure the economy's stability and resilience in the
longer-run are productivity-enhancing infrastructures and ecosystem. This is crucial
for the country's competitiveness in the years to come. I am delighted to say that we
are on the path of productivity improvement. With the limited time I have, it is
difficult to do justice to all the projects that have been initiated. Some of the most
notable examples are the Eastern Economic Corridor (EEC) and transportation and
digital infrastructure projects that have been long-overdue.
On our side, the Bank of Thailand is doing its part to develop infrastructure and
ecosystem needed for the ongoing transition towards the digital economy. Under the
e-Payment Masterplan, we, together with the Ministry of Finance and the Thai
Bankers' Association, launched PromptPay, which has allowed real-time fund
transfers among individuals and businesses. This has significantly reduced
transaction costs for all involved and has the potential to generate significant growth
in Thailand's e-commerce sector, as well as radically change the way government
welfare payments are distributed. To date, more than 44 million PromptPay
accounts have been registered with more than 100 million transactions per month,
and we expect to see a continual growth in these numbers as more people, especially
business sectors, utilize the system. With systematically recorded e-payment data,
banks will be able to evaluate potential SME borrowers and make it possible for
SMEs with little credit history or collaterals to get credit. Electronic payments will
help transform the ecosystem for SME finance, from collateral-based lending to
information-based lending.
In addition to the development of electronic payment systems, we are investigating
the use of blockchain technology in the finance industry. The Thailand Blockchain
Community Initiative, a collaboration between 14 Thai banks and 7 leading
businesses and state-owned enterprises, started a pilot project to offer
blockchainbased letters of guarantee. The Bank of Thailand has initiated two other projects. The
first project is scriptless bond issuance using distributed ledger technology, which
would significantly speed up saving bond allocation to retail investors from 15 days
to only two days as well as granting more flexibility for bond issuers. Another
project in the pipeline is "Project Inthanon", an experiment on a new way of
conducting interbank settlement using wholesale central bank digital currency.
These efforts should pave way for faster and cheaper transaction and validation,
making the entire system more efficient.
Let me now turn to the legal side of our financial infrastructure. Regulations must
keep up with the fast-moving financial innovations. To create an environment
inducive to financial innovations, the Bank of Thailand introduced a regulatory
sandbox framework which allows financial institutions to test new financial
technologies in a limited scale to ensure that operational risks are contained, and that
proper regulatory framework is put in place before the technology is deployed to the
public. In addition to the regulatory sandbox, regulatory guillotine is another
approach the Bank of Thailand has adopted to revise and, in some instances, revoke
laws and regulations to make them relevant in today's context and reduce
unnecessary legal costs for everyone.
I should also note that in April of this year, the new Payment Systems Act became
effective. The Act unifies previously fragmented payment laws and regulations and
enables us to oversee the development of Thai payment systems in a manner
conducive to new payment innovations. On the external front, we introduced the
Foreign Exchange Regulation Reform to make cross-border financial transactions
more flexible and efficient. We have also made arrangements with regional central
banks to support the use of local and regional currencies in trade and investment.
These initiatives will help reduce transaction costs and mitigate exchange rate risks
in today's volatile financial market.
Ladies and gentlemen,
In this challenging global landscape, complacency is costly and could be dangerous.
We-the central bankers, credit rating agencies, and everyone in this room-must
continue to be vigilant. We must maintain good buffers and build immunity. Despite
many immediate challenges ahead, we also need to look at our long-term goals.
Let me end by talking about something I like to do when I have some free time:
hiking. There are two types of hiker. The first likes to admire the scenery, birds,
trees, and the majestic mountain range far beyond, while the second only focuses on
the path in front. The first inevitably trip on rocks or fallen branches, and the other
sometimes looks up to find themselves lost. We cannot complete our journey only
looking up or only looking down, and we need to pay as much attention to the
short-term risks as we do to our long-term aspiration.
I wish you all a fruitful conference this morning.
Thank you very much.