Prasarn Trairatvorakul: Global risks and the outlook for Thailand
Address by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Fitch Ratings
(Thailand)'s 10th Anniversary Annual Conference, Bangkok, 1 September 2011.
* * *
Distinguished speakers and panelists,
Ladies and Gentlemen,
I would like to thank Fitch Ratings (Thailand)'s for inviting me to give an opening address at
this year 10th Anniversary Annual Conference. I also like to say that the conference theme
"Global Risks and Outlook for Thailand" is most timely and should stimulate quite active
discussion among the distinguished audience in this room. I am sure that the conference will
help bring new insights on how we should look at the world, advanced, and Asian economies
in the period ahead underlined by great uncertainties. For my part, I would like to highlight
some key issues that can have potentially significant policy implications. I will touch briefly on
three areas, namely the prospects of the advanced and Asian economies, Thailand's
economic outlook, and finally the key policy challenges going forward.
At the outset, it is fair to say that prospects of the global economy could be quite murky over
the year ahead. There are greater uncertainties with regard to the speed of recovery and
additional policy actions in the US and Eurozone economies, and the risks of misforecasting
are high. Worldwide, policymakers and markets have anticipated that the US sluggish
recovery could face further downside risks as US fiscal and monetary policies could run out
of "bullets" to provide the much needed stimulus. For the Eurozone, doubts on the potential
contagion of sovereign debt crisis to other European countries remain, reflecting the
ineffective impact of domestic policy on the economic recovery in these economies. Looking
ahead, a more positive sentiment on the Eurozone is contingent on the growth performance
of Germany and France in particular. But, recent signs of economic weakness in external
and domestic demand in these countries have been somewhat worrisome, and new data
release could either calm or jerk market sentiments.
Despite these rather gloomy prospects in advanced economies, I remain cautiously
optimistic on the performance of Asian economies for the rest of this year. My assessment is
conditional on the ability of Asian economies to maintain economic resilience and pursue an
appropriate policy mix to preserve economic and financial stability. Evidenced since the 2009
US crisis, major economies in Asia have been able to cushion the adverse impact of global
economic roller coaster by expanding domestic demand, supported by expansionary fiscal
policy and monetary accommodation.
Once world trade has resumed growth after the initial contraction in the aftermath of 2008 US
crisis, Asian exports have continued to grow robustly on the back of regional trade expansion
and strong growth in Asia, particularly China and India. Notably, some studies have shown
that the ratio of Asian exports for final consumption within Asia has risen, though varying
among individual countries. For example, approximately 70 percent of Indonesian exports to
China are for final consumption in China. Such ratios for Singapore and Korea are 50 and 40
percent, respectively. That said, it is wise not to jump quickly to conclusion because Asian
economies and trade remain critically linked to the G3 economies.
While this negative spillover from advanced economies to Asian economies could be partially
cushioned on the trade side, I have greater concern on the potential spillover through
volatility in international capital flow and financial market movements. In addition to the risk
aversion in time of market stress, emerging market economies have tried to live with spillover
from exceptionally easy monetary policy in advanced countries. Such practices have created
excess global liquidity leading to volatile capital flows into emerging market countries
including Thailand. Moreover, excess global liquidity has been an important factor behind the
rapid rise in oil and other commodity prices.
Unless the advanced economies manage to get themselves out of sluggish growth path, all
of us have to be vigilant and cannot rule out the possibility that the US may need to find
creative policy actions to stimulate its economy. And the impact of these efforts on emerging
markets can be quite unpredictable and inconsistent with economic theories, due to the
international currency status of the US dollar and the safe haven status of US dollar
investment.
Distinguished audience,
Against the background of quite an unpredictable external environment, I believe that the
Thai economy would still turn in reasonable growth rate for the year 2011. On the demand
side, I see consumption and investment continuing on the rise. Consumer spending is
expected to benefit from a high level of farm income from rising output and agricultural
prices, high employment, and good consumer confidence. Meanwhile, investment by the
private sector is also expected to grow, though at a slower rate than the periods following the
crisis recovery. Currently, business sentiment and future investment plans are still showing
an improving sign. And, public investment spending remains a key factor to keep demand
momentum going forward.
What we need to assess more cautiously is the future export performance. Of course, our
export sector would be affected by the slowdown in the global economy to the extent that a
large proportion of final demand for Asian and Thai exports remains in G3 economies.
Having said that, I believe that exports will continue to grow along with world trade as long as
the US and EU growth slowdown does not cause another global recession. I also want to
stress that the process of export diversification in Thailand has advanced continuously in
terms of markets and products. Today, the proportion of Thai exports to non-G3 countries
growing significantly higher, particularly to China, and ASEAN. In parallel, the share of G3 in
Thai exports has declined from more than 50 percent in 1995 to less than one-third.
Ladies and Gentlemen,
Turning to the final part of my talk. As a central banker, our challenge is to constantly weigh
the balance between risks from global slowdown on our economic growth versus rising
domestic inflation pressure. Despite more downside risk on growth at present, the central
bank assesses that the Thai economy is growing at around its potential and demand
pressure could transmit readily to higher inflation outcome as well as expectations. To this
end, the Monetary Policy Committee has been raising the policy rate to normalize monetary
policy and bring the real policy rate closer to the positive range, yet remaining sufficiently
accommodative to cushion the downside risk on growth.
With many uncertainties ahead, it is wise to keep the inflation rate low to ensure that the
economy remains competitive and to minimize pockets of instability, whether through
excessive growth of bank credits, fiscal spending, or asset price bubbles. Low inflation helps
keep the health of the economy in check and preserve the purchasing power or real income
of all segments of the population. This is especially important for salary earners and the poor,
whose real income could easily by eroded by higher inflation. Worse is to allow inflation
expectation to run away because it will be costly to get expectation well anchored again.
Worth noting is that, similarly to Thailand, many Asian economies have also capitalized on
the opportunities to lessen monetary policy easing during the period of good economic
performance since the latter part of 2010. The main objective has been to preserve fiscal and
monetary policy space for potentially more difficult times ahead. For Thailand, I believe that
our policy space remains appropriate. But, any higher public spending should be done with
special care. At this juncture, the need to increase government consumption is less urgent
and the fiscal focus should be put on public investment to expand our potential output.
Therefore, the stimulus should be prioritized and carefully planned to leave some policy
space for future needs.
Ladies and gentlemen,
I would like to end my talk today by stressing that we now live in a different and difficult
world. Current global risks from the slowdown in advanced economies have clearly
heightened. Given good economic fundamentals, the Thai economy should be resilient
enough to cope with such risks. I would like to urge investors not to swing between over
pessimism and over-confidence and behave in a herd-like manner. Instead, all parties, public
and private, should be cautious and prepared for the global risks in moving the country
forward. It is my firm believe that protecting domestic purchasing power and let everyone
have equal chance to benefit from the economic growth can strengthen the future well being
of the Thai economy in a sustainable manner in years ahead.
Without further delay, may I officially open the Fitch Ratings (Thailand)'s 2011 10th
Anniversary Annual Conference and wish everyone a fruitful deliberation.
Thank you for your attention.