Prasarn Trairatvorakul: Perspectives on Thailand's economy
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Global Macro
Conference, Hong Kong, 27 January 2015.
* * *
Distinguished guests, ladies and gentlemen,
It is a pleasure for me to share with you my perspectives on Thailand's economy in these
times of growing concerns about global financial markets and economic recovery. I would
like to thank Goldman Sachs for arranging this platform for policymakers like us (the Bank of
Thailand), senior global leaders and investors to exchange information and ideas. And, it is
very important, at this juncture, to foster constructive dialogues between policymakers and
industry specialists.
I would like to first share with you my thoughts on Thailand's recent economic development
and the direction in which I see the Thai economy is heading.
Update on economic activity
Last year marked a bumpy ride for Thailand's economy. In the first half of the year, the
economy was stagnant due to a combination of low domestic demand and external
challenges. In the second half of the year, clarity of political situation boosted private sector's
confidence, which in turn encouraged a turnaround in private consumption and a pick-up of
private investment in some sectors, such as telecommunication. With the resumption of a
functioning government, public spending resumed somewhat, although not as much as we
had hoped. Throughout the year, low interest rates made the overall financial condition an
accommodating factor. Despite occasional challenges, the financial and the real sectors
remained resilient. We are currently awaiting the official figure, but project that the economy
in the second half of 2014 to have grown by 1.7%, which translates into an annual growth of
0.8% for 2014. (Slide 1)
Prospect for 2015 and projections
As for 2015, we project that the Thai economy will continue to recover at an annual
growth rate of 4%. Let me briefly highlight a few key points underlying this projection.
First, we anticipate that the growth momentum is carried forward from last year's
second half. The economy should show stronger signs of recovery. Private consumption,
investment and government spending will be the main drivers of growth. Lower oil prices
certainly have also given consumers a hand in the recovery process. Exports are also
expected to grow, but at a slower pace than we have seen in the past.
Second, our estimate of exports is conservative. We project merchandise exports to grow
mere 1% this year compared to 3-4 % expected by the market. Demand growth from our
trading partners is still slowly recovering, especially in the euro zone and Japan. While the
US economy is picking up its growth momentum, the risk of global growth and lower
commodity prices has undermined many Asian countries' exports including ours. With regard
to exports of services, particularly the tourism sector, things are however somewhat brighter.
With tentative signs of improvement, we project tourism to grow approximately 10%
compared to last year.
Third, there are critical assumptions in this projection, which hinges on government
spending. As we all know, there are many uncertainties when dealing with an assumption of
political nature. And, for this year in particular, our forecast team had a hard time making
fiscal assumptions. On the one hand, the government is trying to accelerate budget
disbursement and push through infrastructure projects. On the other hand, the country is
undergoing structural reforms in many areas. Some on-going reform processes, such as
those related to fighting corruption1, cannot help but delay government spending and
investment. This is dynamism of the current reform period. Some measures incur "short-term
pain" but are necessary to create "long-term gains". (Slide 2)
Underlying fundamentals and medium-term outlook
Ladies and gentlemen,
Despite headwinds and disappointing growth last year, the underlying fundamentals
that have been attracting investors to Thailand are still in place. The country's overall
economic stability remains sound against a backdrop of low unemployment, well-anchored
inflation and a strong current account position. (Slide 3)
Thanks to the painful lessons of the crisis back in 1997 and the adjustment thereafter, the
main sectors in the economy (be it banks, corporate, households or government) have also
kept their leverage in check. The banking and corporate sector had undergone a dramatic
change and now possesses a fairly healthy structure. NPLs of the banking sector dropped
from 43% during the crisis, to 2.3% in 2014, while debt-to-equity ratio in the corporate sector
declined from 5.1 in 1997 to 1.3 in 2014.2 As for the household sector, even though the level
of debt had risen somewhat in the recent years, approximately 85% of GDP last year, the
decelerating growth provides us a relief. The transparent and prudent macroeconomic policy
frameworks, used for both fiscal and monetary policy, also command trust from investors and
the public. For these reasons, the reputable credit agencies have still reaffirmed their positive
assessment of the Thai economy.
Indeed, the recent economic conditions have underscored the importance of
preserving sound macroeconomic fundamentals in order to create resilience in the
face of unexpected shocks. Domestically, the recent economic slowdown has put some
small businesses and indebted households under financial strains. Loan quality has
deteriorated somewhat, with NPL increasing slightly as a result, but these risks have been
contained to specific sectors. The banking system and corporate sector remain strong and
have coped with the slowdown well, owing to their improved risk management policies.
Externally, like many emerging markets, Thailand faced a couple episodes of capital
flow volatility in recent years. The economy, however, has withstood these challenges
reasonably well. For instance, during the "Taper Tantrum" in May 2013 and our own political
unrest towards the end of 2013, Thai baht had swung by more than 10 percent in a year,
fluctuating from 30 baht per US dollar to 28 and back to close to 33 baht. Despite this
volatility, market reactions (in terms of outflows) have been relatively dampened. Foreign
participation in the Thai bond market decreased from a peak of 13 percent to the current
level of around 10 percent of total outstanding public sector bond. The strong local
institutional investor base was able to pick up from where foreigners left. Despite foreigners
exiting the Thai bond market, total portfolio outflows last year (2014) amounted to a mere
1 percent of our international reserves.
A flexible exchange rate, a relatively balanced external position and a modest external
exposure, altogether acting as the first line of defence, contributed to the success. The Bank
of Thailand is also equipped with comprehensive policy tools, along with ample international
reserves, that can be used as a backstop to deal with disruptive capital flows and to
safeguard financial stability. In fact, these are our multiple lines of defence available at our
disposal.
Ladies and gentlemen,
We, should not be under the illusion, however, that good fundamentals can be taken
for granted. In fact, the slowdown of economic growth in the recent years pinpoints to
structural problems, holding back the economy. Chief among these are supply bottlenecks
such as a shortage of labour and public infrastructure, eroding competitiveness and
productivity, and corruption. If not properly addressed, these could restrain the country's
growth potential in the medium term.
The good news is that ongoing developments in Thailand are constructive. The
current reform agenda holds promises for moving the country forward. The National
Reform Committee, along with other task forces, has been founded to push forward
muchneeded measures. (Slide 4) The Bank of Thailand is currently involved in the reform of
stateowned enterprises, as this sector includes 8 State-Owned Financial Institutions (SFIs),
whose asset size accounts for approximately a quarter of total assets in the Thai banking
system. Starting from this year, we at the Bank of Thailand are appointed to be a "regulator"
for such financial institutions, whilst the Ministry of Finance remains a "policy-maker" and an
"owner". This is one of the reform attempts to clearly separate the roles among those
involved, in order to avoid potential conflict of interests and to ensure that SFIs are subject to
a proper supervision akin to that of commercial banks. (Slide 5)
While the reform efforts are welcome developments, to what extent reform plans will
be put into action remains to be seen. One of the main challenges will be keeping the
reform momentum going, as certain reforms may take years to complete. I think of
sustainable reforms as running a marathon. You have to keep going steadily, slowly but
surely. It's not sprinting as fast as you can for 100 meters until the finish line. If you told me
today to run a full marathon tomorrow, I could not make it. But, if you gave me time to
prepare and get fit, I would be in the run.
Monetary policy
Let me now devote the last few minutes of my talk to update you about our monetary policy.
Throughout the last couple of years, the Monetary Policy Committee has maintained
an accommodative policy stance to support the economy. Mindful of downside risks to
growth, the Committee carefully adjusted the degree of policy accommodation to ensure
sufficient support to domestic demand and to shore up confidence. Since May 2013, the
policy rate was cut three times, as lower risks to domestic financial stability and subdued
inflation opened room for monetary easing. Nonetheless, since the interest rate has been low
for a prolonged period, we continue to be vigilant in monitoring any risks to financial stability.
(Slide 6)
Ladies and Gentlemen
This year marks the 15th anniversary of Bank of Thailand's adopting of the "flexible
inflation targeting' monetary policy framework. Thus far, this framework has served us
well and resulted in a satisfactory record of price stability, which is a remarkable
improvement from previous decades. (Slide 7) The headline inflation rates were on average
2.6% since 2000 under inflation-targeting, while they were more than 4% prior to that
(15 years during 1985-1999). Equally important is that, inflation targeting has helped restore
credibility and has brought transparency to the monetary policy deliberation process.
To continue improving communication with the public, the Committee has decided to
change the inflation target from core inflation to headline inflation starting this year.
The new headline inflation target of 2.5 ± 1.5 percent aims to better reflect the cost of living
and public inflation expectations. In practice, however, the monetary policy framework and
deliberations will remain the same, irrespective of the choice of the target.
Conclusion
Allow me to conclude,
Key takeaway of my talk is that the growth outlook for this year is more positive than last
year's growth. Due to the Thai economy's strong fundamentals and resilience, we remain
optimistic about the near future. But, it is important to see through much-needed reforms,
which would strengthen the country's foundation for the medium and long term.
Thank you very much!
Slide 1
Dynamism During the Reform Process
Anti-corruption
Dovernment pushing
measures delaying
infrastructure and
government spending
investment projects
and investment
3
Slide 3
Thailand Profile
1997 2014E
2005
5.6% 4.5% 1.9%
Inflation
Current Account
9.3 -7.6 8.6
(Billion USD)
NPL
2.3%
42.9% 10%
(% of total loan)
D/E Ratio of corporate sector 5.1 1.3 1.3
Household Debt
n/a 54%
85%
(% of GDP)
Public Debt
42% 51% 46%
(% of GDP)
Reform Efforts: National Reform Council
EQUALITY DECENTRALIZATION
INTRA-REGIONAL
ANTI-CORRUPTION
COaPLEaENTARITY
Slide 5
State-owned Financial Institutions (SFIs) in Thailand
Ministry of Finance Bank of Thailand
Policy-maker wegulator
hwner
SFIs
Slide 7
15 Years of Inflation Targeting (IT)
%
Headline Inflation
10
4.4% 2.6% Transparent Clear target
8
Pre-IT Post-IT deliberation Independence
6
process
4
2
Policy
0
Credibility
-2
1985 1990 1995 2000 2005 2010
Monetary policy target for 2015 :
Headline inflation 2.5 ± 1.5% (annual average)