Bandid Nijathaworn: Global markets outlook
Opening speech by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at the Global
Markets Outlook Conference Series 2007, organised by Deutsche Bank, Bangkok,
8 January 2007.
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Thank you very much and good morning,
First, let me thank Deutsche Bank for inviting me to give the opening remark this morning. Last
year, I was also honoured with the same opportunity, so I am very pleased to be back doing this
again this year, addressing this important conference.
A lot of things have happened to both the global markets and to Thailand since the time we met last
year. And compared to last year, to be speaking on the economy and the markets this year, I think, is
much more challenging. At this time, although the mood in the markets is positive, I think considerable
uncertainty still looms in the global economy to the extent that even the best of our analysts still do not
seem to be coming to a common view on the key issues. For example, the pace of global slowdown
and how much further would the US dollar need to adjust. But, this is, in essence, the nature of
markets, and a variety of views will provide the markets with the needed latitude and balance for its
continued growth and stability. So, I very much look forward to today's conference, and to the
presentation on some of these issues, as well as on this year's outlook.
As for my part this morning, given the limitations of time, I want to share with you my thoughts on a
few issues that I think will be important for the global economy and for Thailand this year. These are
my own views on the global outlook and the implications for Thailand.
First, the global economy.
Conventional market view at this time is for the global economy to slow somewhat from last year,
growing at about 4.9 percent compared to a growth of 5.1 percent last year. So, as the numbers
suggest, the current view is for a moderate slowdown, reflecting for the most part a slower pace of
expansion in the US. This is essentially a soft-landing scenario in the sense that the US will
experience only a moderation in growth without major adverse impact on asset prices.
From Thailand's point of view, the slowing of global growth will have important implications for our
export sector. Exports, particularly last year, have been the key driver of Thailand's performance.
Therefore, for the economy to continue to maintain its momentum, it is important that we see in
Thailand this year a stronger turnaround in domestic demand, especially in private sector investment.
For the global financial markets, I think three important implications are likely to emerge from this
year's slower growth.
First, inflation is likely to be less of a policy concern across the major economies compared to last
year. This means liquidity should continue to be ample as monetary policy in the major economies
need to focus less on inflation. Ample global liquidity, therefore, will be a positive factor for financial
markets this year.
Second, structurally, the US dollar may need to stay with its softening tone on account of the
moderated US growth and the possible narrowing of interest rate differentials that used to benefit the
US dollar. This is a conjecture consistent with the current market's fundamental view.
And third, because of ample liquidity, cross-border capital flows look to gain further momentum this
year as international investors continue to search for yield and move further ahead on asset
reallocation and diversification.
This last implication is important for the region, because it will mean continued flows of capital into
Asia, putting pressure on the region's exchange rates and asset prices. Therefore, managing the
macro implications of persistent capital inflows, as well as the risk of volatile and abrupt capital
outflows, will be, in my view, an important policy challenge this year.
To me, the context underlying these implications relates very closely to the process of the unwinding
of global imbalance. Such unwinding, as we know, requires a weaker path of the US dollar and higher
US interest rates. A weaker US dollar is something that we have been seeing. As for interest rates,
going forward, it is not yet certain whether the US long rates would need to rise in order to facilitate the
financing of the US current account deficit. This would depend essentially on the relative ease with
which the US deficit can be financed. So, I think we need to watch these developments closely
because financial markets can adjust much more rapidly than the real side of the economy.
Turning to the Thai economy.
Last year, the economy showed considerable resilience, notwithstanding many adverse shocks
affecting it, especially the higher oil price and political uncertainties at home. Growth, estimated at
about 5 percent last year by the market, is satisfactory while the second round effects of the oil price
increase on inflation were well contained. Overall, the economy's fundamentals remain sound with
economic stability intact.
Last year, monetary policy in Thailand was focused on limiting the second round effects of the oil price
increase on inflation. That focus I think was well met. Policy rate has been held steady from midyear
last year, and since then, inflation pressure looks to be moderating. Latest data show a further
consolidation of inflation in December. So, under the current softening trend, baring no surprises on
the oil price, there is also a possibility that, in Thailand too, inflation could be less of a policy concern
this year. Under this scenario, therefore, there could be greater room for monetary policy to aim for a
balance between growth and inflation.
I noted earlier that, to ensure continued momentum of expansion, what we need to see in Thailand
this year is a stronger turnaround in domestic demand, especially in private sector investment. This is,
in a way, the most important must-have macro development for Thailand this year.
Financial environment supporting private sector investment, I think, is very positive and conducive this
year, with lower oil prices, easing domestic inflation, ample liquidity, and a more stable interest rate
environment. But to substantially lift investment, what we need to see in Thailand is a continued
improvement in business sentiment and confidence. Here, therefore, lies an important issue for policy.
On this, I am quite confident that the ongoing efforts by the Government to promote growth with
stability will successfully lead to continued improvements in business sentiment and confidence, which
will be positive for our investment going forward.
I want to end my brief remarks this morning with a few year for our domestic banks and financial firms
as they continue to support the economy while preparing for a number of important regulatory changes
that are set to take place this year.
Beginning this month, Basel II will be launched in the G7 economies. For Thailand, this means we will
have less than two years to prepare for our own eventual adoption of Basel II, which has been slated
for end 2008. At this time, most banks in Thailand have already decided on using the standardized
approach for the calculation of minimum capital. And to prepare for Basel II, we will be asking our
banks to begin reporting their capital under the new standardized approach from the third quarter of
this year onwards, in parallel with the usual calculation under Basel I. This, I think, will be an important
exercise for our banks before we formally begin Basel II at the end of next year.
This year will also see financial firms in Thailand adopting the IAS39 accounting rules for the valuation
of collaterals, which will affect their loan provisioning. We will see the Bank of Thailand implementing
consolidated supervision, and we will see the whole financial system going through a formal FSAP
assessment with the IMF. All these will happen this year, and all these will be positive developments
for our financial system.
So, 2007 should be another active and positive year for the global markets and for Thailand. But given
the uncertainties that still loom in the global markets, I think maybe we should move to meet the
optimism and the challenge of this year cautiously. But this is the words coming from a central bank,
which probably and usually sounds too careful. So, I guess now you may want to hear something
different from Michael Spencer and his team. So, on this note, let me end my brief remarks and wish
you all a successful conference.
Again I want to thank Deutsche Bank for the invitation, and a happy new year to all of you.
Thank you.