Tarisa Watanagase: Changes in Thailand's economic dynamism after the 1997
crisis
Speech by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the International Symposium
"Ten Years After the Asian Currency Crisis: Future Challenges for the Asian Economies and Financial
Markets", hosted by the Center for Monetary Cooperation in Asia (CeMCoA), Bank of Japan, Tokyo,
22 January 2007.
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At the outset, I would like to thank Governor Fukui and the Center for Monetary Cooperation in Asia,
Bank of Japan, for inviting me to speak at this special international symposium and for the excellent
arrangements made. It gives me both a great honor and pleasure to meet with many people who are
genuinely interested in our ASEAN economies.
In this first session, I have been asked to speak on changes in Thailand's economic dynamism after
the 1997 crisis as well as the Bank of Thailand's view on where the Thai economy is heading.
Due to the time constraint, I will limit my talk to only three key points.
The first is that the Thai economy is now back on a firm growth path and has become more resilient.
For nearly five years after the 1997 crisis, the Thai economy went through a period of substantial
adjustment. The tough adjustment was unavoidable because the crisis had inflicted a deep wound on
the economy. During 1997-1998, we underwent a severe economic contraction, thousands of
companies went bust, hundred thousands of people became unemployed, and the amount of
nonperforming loans in the financial system skyrocketed. The economy staged a rebound in 1999 and
2000. But the recovery was cut short by the global economic downturn in 2001, when growth that year
registered merely 2.2%.
Things then started to turn in 2002. Despite the continued global slump, the Thai economy expanded
5.3% that year and has since been on a firm growth path. The resiliency of the economy is evidenced
by the fact that during the past two years Thailand has weathered several economic storms - the
Tsunami, avian flu, political uncertainty, and the recent oil shock - with only a moderate slowdown in
GDP growth.
The key driver behind the current economic expansion has been a combination of domestic demand
and exports. The latter, in particular, has always been our main engine of growth. One reason for this
is that our export structure has become more diversified, both in terms of product and destination. For
example, over the past twelve years, Thailand's exports to ASEAN + China as percent of total exports
has increased from 25 to 30% whereas those to G3 have declined from 51 to 42%. This allows us to
reap benefit from the growing intra-regional trade, particularly China-related.
But perhaps more important from the point of view of the Bank of Thailand is that the current growth
has been accompanied by a good degree of both internal and external stability. On internal stability,
despite the recent surge in oil prices, inflation remains well in control. Core inflation, which is the Bank
of Thailand's policy target, is comfortably in the target range of 0-3.5%.
And the unemployment rate, which shot up after 1997, has now returned to the level comparable to
the pre-crisis period.
On external stability, international reserve is now at a historic high of 67 billion USD and covers 3.4
times of short-term debt. In dollar terms, total external debt now stands roughly at half of its peak in
1997. Part of this rundown has been supported by the current account which has been in surplus in
eight of the nine years after the crisis. It is worth noting however that external debt has picked up
recently, and is being monitored closely.
At the micro level, eight years after the crisis we see a strengthening in several aspects of corporate
financial performance. Returns on assets of listed companies are now about twice its pre-crisis
average while the average debt-to-equity ratio has fallen to about one-to-one. Higher returns and
falling leverage have contributed to the interest coverage ratio of about 7 times. Nevertheless, the past
two years have witnessed a squeeze in firms' gross profit margin as a result of increased competition
and the appreciation of the baht relative to other regional currencies.
And as for the banking sector, which was at the center of the crisis, painful financial restructuring has
now bore fruits. The banking sector has gained strength, with stronger profitability. The level of
nonperforming loans has been cut down by four-fifth from its peak in 1998 to about eight percent in Q3
2006. And with the BIS ratio of nearly 15%, the banking system appears well cushioned to unexpected
shocks.
Finally, the fiscal sector benefits greatly from the economic upturn. Increasing corporate profits and
consumption spending have resulted in higher tax revenues, allowing the government to strengthen its
fiscal position significantly. Public debt to GDP has declined and is currently at only 41% of GDP.
Ladies and gentlemen, I hope my account of these selected developments has shown you how far the
Thai economy has come since 1997. The improvement was not due to luck or natural recovery
process. It took a concerted effort by both the public and the private sectors to enable this turnaround.
A natural question that follows then is whether this renewed dynamism will be sustained and this leads
to my second point.
That is, despite important challenges both domestically and externally, the medium-term outlook of the
Thai economy remains positive.
In the medium term, the most important challenge for the Thai economy is how to cope with a
slowdown in the world economy and a volatile global financial market. Thailand, like many emerging
market economies with a small and shallow financial market, is particularly vulnerable to fast-moving
international capital. Such rapid movements of capital flows can cause exchange rate to be vastly out
of line with the underlying economic fundamentals and have negative impacts on the export or the
import sectors depending on the direction of exchange rate movement. In our case, the recent surge in
capital inflows has caused a one-way appreciation of the baht relative to regional currencies to the
point that it may have become detrimental to both competitiveness and the ability to adjust of the real
sector.
Sustaining the growth momentum in such an adverse external environment is not an easy task. The
key is to ensure that the baht does not move further ahead of other regional currencies. But this alone
will not be enough. We also need help from domestic demand which has been somewhat soft due to a
number of domestic and external factors during the past year.
Whether we shall see a turnaround in domestic demand will depend on a number of factors. Some of
these are fortunately on our side. First of all, oil prices, which hit the economy very hard this past
couple years, appear to have settled down around 55 USD. While we cannot rule out another surge in
oil prices, the possibility of that happening is at the moment not very large. Furthermore, given a high
base, the relative impact of a price increase will be smaller this time around.
A potential factor to support Thailand's medium-term expansion will be a pickup in private investment,
expected in the second half of this year. Although Thailand's investment share of GDP has expanded
gradually since the economic recovery, it remains well below pre-1997 level and thus room for more
investment. At the same time, the capacity utilization rate has steadily climbed up to the point that, if
left to their own accords, firms will soon need to make new investments in order to meet demand.
Facilitating the pickup of private investment growth will be bank's improved ability and willingness to
lend as the banking sector's NPLs are expected to decline to a low single digit this year. This further
strengthening of banks' balance sheets will allow banks to lend at lower carrying costs. Furthermore,
the ongoing preparation for the sector-wide adoption of Basel II at the end of 2008 will help ensure the
quality of the new private credits.
An additional economic stimulus will come from the fiscal side. With a strong fiscal position, the Thai
government this fiscal year has opted for the use of a budget deficit to support economic growth. Key
infrastructure investment projects include the expansion of mass transit network in Bangkok, water
resource management, and an integrated logistic system. These public investments will partially take
up the slack in the first half of the year as well as speed up private investment through a crowding-in
effect.
Of course, there remains the issue of political incidents which can still make things less rosy. This
would not be under policymakers' control; the government, however, is doing its best to take
necessary safeguard measures in order to assure people of the state of security.
Ladies and gentlemen, being confident of the medium-term outlook does not mean that we will be
complacent. After all, we are in an environment of an ever-increasingly competitive global arena, more
integrated financial markets, volatile capital flows, more inter-linkages between economies, and
increasing trends toward liberalization. For policymakers, this means that the conduct of policy will
become more demanding in the periods ahead.
This leads to my third and final point. That is, to ensure that growth and stability are sustained in the
long run, we need policy tools and persistent reforms going forward.
From a long-term perspective, the critical challenge for the Thai economy is how to continuously
improve its flexibility, efficiency, and competitiveness. In this respect, a crucial policy effort is a
combination of financial and real sector reforms and policies that promote a sound and stable
macroeconomic environment.
To mention a few, infrastructure building will continue to be strengthened particularly through
amendments and introduction of a number of legislation. The Financial Sector Master Plan (FSMP) will
move onto its second phase, with the review of the plan and emphasis on increased competition and
consideration on potential entry of new players to further enhance efficiency and resiliency. As a tool,
the macro-prudential and risk assessment framework which includes development of an early warning
system model to bolster our financial stability analysis in order to make pre-emptive policy responses
when appropriate has also been put in place.
With regards to real sector reform, significant attempts have been made to raise real sector
productivity, promote transparency, and strengthen governance. Nevertheless, there remains more to
be done on this front. The most important issue here is to keep pressing on with the reform effort and
not to let reform fatigue get into our way.
The adoption of a full-fledged inflation targeting regime in 2000 eliminated the inconsistencies among
monetary policy, exchange rate policies, and capital flow policies that had contributed to the 1997
currency crisis. This framework has served us well, with enough flexibility to accommodate other
important policy objectives such as output stabilization, provided that inflation remains in check. In
fact, the consistent improvement in our monetary policy mechanism and thus its efficacy have given
me reasons to be optimistic about the prospect of our present regime. Seeing less inflationary
pressure, the Monetary Policy Committee this month turned to an accommodative stance to ensure
that the economy continues on a satisfactory course.
Recognizing that inflation targeting is not a panacea, the Monetary Policy Committee has
supplemented the framework with a regular monitoring and assessment of seven key areas of
financial imbalances, where buildup may threaten the macroeconomy and price stability. These seven
areas are the country's external position, the real estate sector, bank credit, household and corporate
financial positions, the financial market, and the fiscal position of the Government.
Ladies and Gentlemen, despite all these reform efforts and the stronger foundation the Thai economy
now has, we have to remain vigilant. Today, the change of pace in the global economic environment is
simply unprecedented. Some of these changes, if left unchecked, may have significant implications on
a country. While the new global dynamics represents an opportunity for a country like Thailand to leap
forward, it also entails increasing risk of economic instability. The evolving complexity of the global
economy means that conventional thinking and approaches to deal with economic problems may, at
times, need to be adapted. The 1997 crisis highlighted this point. Back then, the conventional wisdom
for a crisis-ridden country is to adopt restrictive monetary and fiscal policies. As we all now know,
overtightened stance aggravated the already fragile situation and created many unnecessary pains. Only
when the crisis contagion spread to several countries was it evident that such measure was a wrong
medicine for Asia, which ultimately led to the abandonment of some of these measures.
Today we are faced with the major problems of global imbalances and large and volatile capital flows.
Yet, the conventional wisdom remains an adherence to market mechanisms. This has proved to be
inadequate, with Thailand's very recent experience in dealing with the one-way momentum of the baht
appreciation. After a number of unsuccessful conventional measures, we had to resort to the
unconventional measure of imposing a reserve requirement on capital inflows, as you all know, to put
a brake on the one-way momentum. A measure like this, by nature, is short-lived. I believe that in
order to come up with more sustainable solutions, international policy dialogues such as the
Fundinitiated Multilateral Consultation would need to be strengthened. Short of a regional or
globalcoordinated efforts, some unnecessary and painful adjustments may have to be introduced no matter
how strongly committed we are to the conventional market mechanism.
Ladies and gentlemen, to quickly summarize, the Thai economy is now doing much stronger in terms
of growth and stability with a moderately positive medium-term outlook. Yet we recognize that risks to
the economy evolve continually and come in many forms. We therefore put a strong emphasis on
managing potential risks that could take away our current economic dynamism. This includes
proactive oversight, strengthened stability framework, persistent reforms, and vigilance in dealing with
complex challenges. In doing so, we hope to translate the current momentum into long-term
sustainability.
Thank you for your attention.