Tarisa Watanagase: Thailand's economy and resiliency - 2008 and the
road ahead
Address by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the American and
Thai-Canadian Chambers of Commerce Luncheon, Bangkok, 26 September 2007.
* * *
Distinguished Guests,
Ladies and Gentlemen,
Good afternoon. I am delighted to join you at this luncheon gathering of prominent members
of the American and Thai-Canadian Chambers of Commerce and business community in
Thailand. After a sumptuous lunch, allow me to present you more food - for thought - on the
prospects and challenges of the Thai economy going forward. And since most of you know
Thailand and our economy very well indeed, I would like to take this opportunity to share with
you my perspective from the policy making and implementation side.
For policymakers, our bottom line is to best balance short-term pains and long-term gains. To
ensure the sustainable progress of economic development, we cannot afford to misplace
focus on short-term concerns but must instead weigh the short-term and long-term objectives
very carefully. Moreover, the sustainable development progress is made up of numerous
elements, of which I would like focus on three things today. First is maintaining the economic
growth momentum together with internal and external stability. Second is building the
economy's resiliency to withstand volatilities and shocks. And, third is strengthening the rules
of the games for trade and financial integration, including the international best practices for
financial institutions.
Distinguished Guests,
Let me first talk about the growth momentum and economic stability. In spite of the
political transition over the past year, the Thai economy is expected to turn in a satisfactory
growth rate in the range of 4-5 percent in 2007. This year, the main growth driver has
continued to be exports. Domestic demand has however been affected by dampened
consumer and investor confidence, linked primarily to political uncertainty. In July, private
consumption remained close to the level recorded in the first half of the year. I am hopeful
that once the general election date is scheduled and the cloud of political uncertainty has
lifted, consumer confidence would rebound.
Investment has shown signs of improvement during the second quarter of this year. There
also appears to be a pent-up appetite for investment in view of the continued high capacity
utilization of 75 percent as of July. Moreover, investment promotion applications to the Board
of Investment have also pointed to a pick-up in investment once the investment climate
becomes more favourable. I also expect investment to play a stronger role as growth driver,
in line with the consumption recovery. This will be a welcomed development to promote a
more balanced economy.
The slower domestic demand has also been mirrored by moderate growth of private credits.
Nevertheless, the banking system is strong, with the BIS ratio of 15 percent at end-July
2007, while net NPL amounted to 4.4 percent of total loans. The return on asset which stood
at 1.3 percent during the first quarter of 2007 fell to 0.7 percent for the first half of the year,
reflecting provision in accordance with IAS39, the new accounting standards as you know, to
strengthen the capital base. Meanwhile, qualitative improvements have resulted from much
tighter board of director oversight and accountability, as required by the Bank of Thailand.
On the non-bank side, non-bank credit card companies have been competing more strongly
for market shares. To prevent default risks and NPL, and to safeguard against the overall
financial stability, we have strengthened efforts to communicate to and raise awareness with
the general public on this issue. Regulatory measures were also put in place to ensure that
consumers were protected and well-informed, including the prescription of rules, procedures,
and conditions for credit card business, including interests and service fee charges as well as
debt collection.
macroeconomic
Turning to stability, latest data for August showed headline inflation at 1.1
percent and core inflation at 0.7 percent. On the exchange rate, while the baht movement
has reflected largely external developments, there have also been internal drivers, which
include large surplus in current and capital accounts. During the first 7 months of this year,
the balance of payments recorded a surplus of 5.9 billion US dollar in total. Overall,
international reserves rose to over 74 billion US dollar at end-August, close to 3.6 times of
short-term external debt.
In the absence of pressure on internal and external stability, monetary policy has become
more accommodative. The Monetary Policy Committee cut its policy interest rate in total by
175 basis points since the beginning of this year. The aim is to stimulate domestic demand to
offset moderating export growth in light of the slower US economy and baht appreciation.
Nevertheless, exports would still remain an important driver of growth for next year. And, the
latest economic forecast projects the Thai economic growth to lie between 4.5-6.0 per cent in
2008, while core inflation is expected to stay comfortably around 1.0-2.0 percent.
Ladies and Gentlemen,
Now allow me to turn to the second part of my talk. This relates to strengthening the
Thai economy's resiliency going forward. While the global economy is expected to record
a higher growth rate in 2008 than in 2007, notwithstanding the slower US expansion, the
risks on financial stability have not declined. Even though the latest US monetary policy
easing could have a far-reaching impact insofar as it impacts the prospects of the global
economic growth, I fear that the US policy has not helped much in terms of lessening
financial volatilities that may likely mount as the global imbalance unwinds, and with it the
impending correction of the US dollar.
Ironically, during this adjustment period, small open emerging markets, Thailand included,
have to manage the swings that will occur in their capital accounts. One fine day we can see
hot money flowing into the country on account of foreign investors' confidence in our
economic growth prospects. Not long after, we can easily witness a reversal of such flows
simply because investors have become more risk averse on emerging markets overnight.
Such volatilities are not conducive to a stable development of any economy, and greater
exchange rate flexibility alone is not a universal cure. Indeed, the risks and volatilities that
accompany financial globalization, which small developing economies face today, are of the
unprecedented scale that advanced economies never had to face in their early stages of
development.
To withstand volatility and safeguard against financial instability that may eventually disrupt
real sector activities, Thailand requires stronger resiliency for the domestic economy. This
means the significant ability of the domestic economy to adjust flexibly in keeping with
changes in the financial environment. This also implicitly means that the economy should be
able to depend more on domestic demand as growth driver. Meanwhile, policy and regulation
must also be designed in such a way that can help foster better risk management, deal with
market excesses, and reduce distortions and unproductive risk-taking behaviours in the
economy. Over the longer term, competitiveness must come from productivity growth so that
increases in wages and employment can be sustained.
What I have said are the key components of an ideal economic policy package not just for
Thailand but also for any emerging market economy. In reality, however, we all know that the
nature of the problem of achieving such an ideal solution is as much political as it is
economic. And nowhere is this tension more palpable than it is in the realm of exchange rate
and capital account regimes. There are strong and vocal constituencies that are averse to
currency appreciation and part of them averse to variability in the exchange rate itself.
political economy
Not unlike today's in advanced countries, emerging market politics also
risks being less favorable to openness, but more partial to protection of selected industries or
protectionism in general. In emerging markets, the political economy and policy tension are
even more complex because our markets and institutions are still developing. Hence, the
struggle between financial integration and financial stability requires from us a deft balancing
act. As such, I hope you appreciate that, when it comes to policy, there is risk in change as
well as in inertia. I hope that you also appreciate that if advanced countries pursue more
protectionist stance, emerging markets would likely follow suit.
One might ask: How then has the Bank of Thailand handled this tension and what is
our strategy going forward? My answer to you is that we make every effort to get the
economic fundamentals right and strengthening them. But as our financial and capital
markets are small, thin, and still developing, we have adopted a balanced approach to
managing capital flows under flexible exchange rate. This balanced approach seeks to
optimize synergies between monetary policy, foreign exchange intervention, and capital
account policy. Allow me to elaborate.
Our monetary policy, under the current inflation targeting framework, can take care of
exchange rate as long as there is no conflict with inflation. And, foreign exchange market
intervention is conducted only to smooth excessive volatility in the market. As for the capital
account policy, I firmly believe that key is the right pacing and sequencing of capital account
liberalization, with a view to ensuring a more balanced structure of capital flows into and out
of Thailand.
On the capital inflow side, we are still maintaining the URR or unremunerated reserve
requirement for the time being. This capital control measure has proven a useful tool for
reducing the chance of prolonged financial misalignment with economic fundamentals,
especially on occasions when most market participants are offside in the same direction. As
for the outflow side, we have further liberalized our capital account during the last two
months. These measures included the relaxation of FX holdings by juristic persons and
individuals. In fact, at the beginning of this year, we also expanded the limits of Thai direct
investment and portfolio investment abroad.
Even though we all agree that financial openness is needed for long-term economic
efficiency, going forward, the appropriate degree of opening or pacing through time will
remain an issue for controversial debate.
Ladies and Gentlemen,
The third part of my talk today focuses on "international rules of the game". On trade
and financial integration, we all have to wait for the resolution of WTO negotiations. In the
meantime, Thailand and ASEAN have made progress on a number of free trade
arrangements with Japan, China, Korea, Australia, and New Zealand. Within ASEAN, more
progress on the ASEAN blueprint, which lays out the strategic plan to achieve further trade
and financial integration within 2015, is in the pipeline.
On this topic, I also like to share with you an observation that Asian emerging markets, in
general, rely increasingly more on trade integration because it is judged to be a safer mode
of risk-sharing with the world. While benefits from trade integration are universally
appreciated, net benefits to overall economic development from the international financial
integration have not been so apparent in Asia. As a result, while the pace of financial
integration has far outstripped trade integration in advanced economies, it has only managed
to keep pace with trade integration in emerging markets.
Turning to the financial sector side, nowhere are the international rules of the game
closer to my heart than the international standards for banking supervision. Early this
year, the Bank of Thailand's capacity and performance in supervising financial institutions
has been assessed against international best practices in the context of the joint IMF/World
Bank Financial Sector Assessment Program or FSAP. This FSAP assessment confirmed the
strength and capacity of our supervisory process, which have been significantly strengthened
over the past decade. Moreover, the FSAP assessment also strongly supports our goal to
ensure that our regulatory and supervisory responses keep pace with the financial
intermediaries and the products they offer. In this endeavor, the Bank of Thailand has put
emphasis on robust stress testing, enhanced counterparty risk management, and safe and
efficient market infrastructures.
Our financial and legal infrastructures will continue to be strengthened particularly through
the introduction of a number of legislations and amendments. The new Deposit Insurance
Act and the Financial Institutions Business Act are in the pipeline. Specifically, the Financial
Institutions Business Act will stipulate prompt corrective action and grant the Bank of
Thailand power to conduct supervision on a consolidated basis. In addition, it will also foster
supervisory independence and the ability to supervise a broader set of systemically important
institutions, including non-banks, as well as provide the central bank with a clear and
transparent mandate on consumer protection.
On financial sector development policy, as you may already know, our current Financial
Sector Master Plan (FSMP) will move into its second phase. This second phase will put
emphasis on increased competition and consideration on potential entry of new players to
further enhance financial efficiency and resiliency. Our accession to the Basel II accord will
upgrade the risk management of banks to the best standard and will further enhance
financial sector stability Distinguished Guests,
I believe that the continued growth momentum for 2008 and strengthening resiliency, which I
have mentioned, will create a favourable environment to enhance trade and investment
dynamics between Thailand and the United States and Canada. Till this day, the US still tops
in terms of market shares for Thai exports, though the market share has been declining as
Thai exporters have benefited from new market penetration and the growth of intra-regional
trade. Since 2000, the US ranks fourth in terms of the size of foreign direct investment into
Thailand. Your investment participation has been mostly through holding companies, trade,
as well as real estate. Indeed, US FDI has maintained the momentum, accounting for about
12 percent of total inflows of foreign direct investment annually.
Looking forward, the American business community will continue to be an important player in
our economy. You can help us build the real sector that adapts to the shifting winds of global
competition. And, this cannot happen without the investment in the best technology and
capacity to use that technology efficiently. To support real sector development, you also have
a role as investors in our financial and capital markets, who provide different views and risk
appetites to ensure that our markets and financial system will expand while preserving their
health through constant self-correction.
The road ahead may not always be smooth as financial globalization has yet to unveil its full
impact on the global economy and emerging markets. But this should not prevent us together
from having a pleasant journey towards the more prosperous future.