The Thai Economy: The Current State and the Way Forward
Dr. Sethaput Suthiwartnarueput, Governor of the Bank of Thailand
Japanese Chamber of Commerce (JCC) Thailand, 15 March 2022
JCC President Kazuo Hidaka,
Distinguished members of the JCC,
Distinguished guests.
It is a great pleasure for me to be here. One of my first speaking engagements when I first took
on this job was to come to speak to the JCC last year, a reminder of how quickly time flies as it has
already been one year. What I would like to do today is to share with you some thoughts on the Thai
economy, discuss where we are, how we got here, and what is next or what we can expect. Then, I
would like to conclude by offering you some thoughts about going beyond, not only about some of the
things that we see in the financial sector but also more broadly about the Thai economy and how it
might fit in with you and your strategy in the region.
Part 1: The Current State
How we got here
Let me start by discussing a few points about where we are today, but before I go there, it is
important to talk about how we got to where we are today. The first point is that we were hit very hard
by Covid-19, much harder than other countries in the region, because the Thai economy highly depends
on tourism. The sector contributes about 12 percent of GDP, but more importantly, it represents about
a fifth of our total employment, so we got a very hard hit in terms of income and employment to our
labor force. The slow recovery of the tourism sector explains why our recovery will be slow going
forward and probably slower than other countries in the region.
While things were difficult back then, we saw a GDP contraction of over 6 percent in the first
year that Covid-19 hit Thailand, and we grew by only 1.6 percent last year, but things could have been
in terms of the Covid-19 impact on the economy. Without the large policy response by
much worse
the government, both on the fiscal and monetary side, things could have been much worse. We estimated
that the economy could easily contract up to 9 percent instead of 6 percent without the fiscal stimulus
in 2020. Last year, instead of growing at 1.6 percent, we would have seen a contraction instead of
growth. We got hit very hard, but it is helpful to keep in perspective that things could have been much
worse, but they came out better than they otherwise would have. We are where we are today was due
to the substantial, and for the most part, largely effective policy response.
I spoke a bit about the response on the fiscal side at the Ministry of Finance in stimulating the
economy. Let me also talk about what we did from the Bank of Thailand side to cushion the impact of
the crisis. When the crisis hit, the top priority for us back then and still going forward, was to ensure
that the financial and the banking sector functioned as close to normal as possible. We did not want to
see that the banking sector acts as a shock amplifier instead of a shock absorber because when the
economy got hit and contracted, we would see a contraction in credit. Instead of extending loans, the
banks would tend to call back their loans, and it would trigger a downward spiral along the lines of what
we saw during the 2008 global financial crisis or the 1997 Asian financial crisis for Thailand. Our
priority was to ensure that the banks still functioned in extending credit to the economy. I would say
we were reasonably successful in keeping credit growing as the overall credit grew at about 5 to 6
percent last year. The figure is higher than what we saw in other countries in the region, even though
Thailand as an economy got hit harder by Covid-19 than other countries in the region. I think this is a
testament to the policy response and to our friends in the banking sector that try to ensure that the credit
mechanism function, as well as one could reasonably expect.
It is not to say that the banking sector response was all that we wanted because there were still
some elements and gaps in the market response that we felt were inadequate. While overall credit grew
well and continues to do so, some sectors, particularly SMEs, did not receive the credits we wanted
them to get. The credit did not extend or reach out to the sectors hit particularly hard by Covid-19. Our
response is to design policy measures to supplement the market response, for example, what we initially
called a soft loan program. The program then started to have some obstacles because of the pricing of
the loan structure. Therefore, we came up with another emergency degree on Financial Rehabilitation
Measures, which in part established a loan facility for SMEs with a credit guarantee component from
the government. The measures were to encourage the banks to lend to those sectors which had not
received adequate credit by addressing the high credit risk that banks might experience from lending to
SMEs. As a result of the package that we put together on the SME front, we managed to see loan growth
in SME sectors. These measures are examples of the proactive response that policy authorities, both on
the fiscal side at the Ministry of Finance and us on the monetary side at the Bank of Thailand, try to get
the economy through this crisis, as well as it could be reasonably expected.
The other quality that helped make our things turn out well, aside from being very proactive, is
that we were also practical and flexible regarding the policy response. We adjusted our response when
things did not work as we would like them to be. An example is when the initial soft loan facility went
out. It had very low interest rates to ease the burden on the borrowers, but it was not very attractive
because the interest rates were not high enough to compensate banks for the credit risk. As a result, the
credit was not flowing through that channel. We responded and adjusted by launching the additional
measures I have discussed previously. I think that flexibility of response is another thing that helped get
us to where we are today.
Aside from expanding credit, another important measure that we put out recently is to address
the existing debt burden that the borrowers face. One important measure that we announced last year
was on long-term debt restructuring to encourage banks to restructure their debt on a more sustainable
basis. We had recognized our initial take on Covid-19 that the crisis would be very severe but short.
Therefore, the measures we came out with were blanket, broad-based, and very large. We then realized
later that Covid-19 would be staying with us for a very long time, and thus, the measures must be more
targeted and longer in terms of their response. Those policy responses bring us to where we are today
by being a cushion to the worst of the Covid-19 impact on the economy.
Where we are today
The recovery is there, and it is happening. We saw a GDP growth especially in the fourth
quarter last year mainly from exports, which have surprised us on the upside. The recovery will be slow
and uneven nonetheless. It will be uneven because, while certain sectors particularly manufacturing and
exports have done relatively well, services and tourism will be lagging. Households will be hit very
hard by the high impact of Covid-19 on tourism and unemployment that I have discussed previously.
That is the overall picture. We expect the growth path to be there, but it will not be a rapid or a V-
shaped recovery, and it will be slower than other places in the region.
Risk to the outlook
We had initially been expecting real GDP growth in the mid-three percent this year, but that
was before the situation in Russia and Ukraine. We will release a forecast later as our Monetary Policy
Committee meets towards the end of this month. As with many countries, we will be lowering our
growth forecast and increasing our inflation forecast for this year. We are still looking to see a positive
growth number this year and that the recovery will continue despite the substantial pickup in inflation.
But what are the risks to that recovery trajectory that we see gradually happening? I will point out two
but discuss only one in detail.
To be sure that we still recognize that this is a risk, the first risk is the next Covid-19 variant,
whatever comes after Omicron. Although the public health officials have indicated that we have a high
proportion of the fully vaccinated population and that the chances are that another variant might be
milder, we cannot be certain. Moreover, these Covid-19 variants tend to pop up during the winter
months, when they are the high season of tourism in Thailand. If another variant appears and derails the
tourism recovery that we expect to see this year, this will be a significant risk to our growth outlook.
The outlook that we are expecting to see is the number of foreign tourists this year in the range of 5 to
6 million, a big increase from last year but still very far off from the 40 million that we usually see.
These figures also give you a sense of why we think the recovery will be relatively slow in Thailand.
The second risk is the Russia and Ukraine conflict, and there are three channels by which it
can impact the Thai economy, and I will flag the most relevant ones.
The first channel is through the financial markets. When some unforeseen event occurs, the
financial markets get hit and become highly volatile, and there is a risk-off trade. It is when the investors
sell off assets that are seen as risky and return to safe assets. Typically, they sell off things in emerging
markets then move their money to safe things like the US Treasury. We see that happening today but
fortunately for us in Thailand, risk-off trade is not a very substantial risk because we are solid on the
balance of payments or the external front. We have a low level of external debt compared to our high
level of international reserves and are running large current account surpluses consistently in the years
preceding the crisis. Therefore, our overall external position is strong. Unlike other countries in the
region, which have lower international reserves or higher external debts, they are more vulnerable to
these swings in investor sentiment and resumption of risk-off trade. This transmission channel is thus
not very worrisome for us as we are in a good position to handle capital outflows given our external
strength.
The second channel is the impact on the real economy from trade and investment, both direct
and indirect. The direct channel is very small as the share of Thai exports to Russia and Ukraine are
only about 0.4 percent of total Thai exports, and the same applies to investment flows. The main issue
we are more concerned about is the indirect effects that the situation will lead to supply chain disruptions
or other impacts on the world economy that will have a knock-on effect on Thailand. From the demand
side, the global economy is going solidly in the major economies like the US and Europe in the period
leading into the conflict. We hence perceive that the recovery of the global economy is still quite strong
and intact. Although the Russia-Ukraine conflict will dampen the global economy, the situation is not
likely to derail the recovery. It is important to note that the Russia-Ukraine conflict is a huge supply
shock caused by commodity prices and certain selected materials that are important in the Russia and
Ukraine export space. Overall, it is still not a global economic or financial crisis. It may look like a
crisis in Russia, but the spread to other places seems to be limited, for example, the contagion of the
risk that it translates to a European economic crisis is not very likely. That is another reason why both
the direct and indirect impact of the Russia-Ukraine conflict on the Thai economy via trade and
investment will not be substantial.
The third and the main transmission channel of the impact of the Russia-Ukraine conflict on
Thailand is through inflation. The surge in commodity prices has resulted in a much higher inflation
outlook in Thailand. We will be releasing our public estimate of the headline inflation later after our
Monetary Policy Committee meets. Even though the headline inflation had jumped to 5.3% last month,
we view that it is still manageable in Thailand because it is concentrated in certain key segments, like
energy and raw foods. Therefore, inflation has not spread as broadly, and the likelihood of seeing
second-round effects to date remains relatively low partly because of the softness of our labor market.
That is the current state of the economy and the outlook, and so, what is the way forward a bit further?
Part 2: The Way Forward
policy challenge is to keep the recovery intact. "No cliff"
Immediate
Looking a bit further, the immediate policy challenge is to ensure that the recovery is intact.
We have to make sure that there are "no cliffs" or things that will interrupt our recovery path. What
kinds of things would cause this? Firstly, we do not want financial conditions tightening too early
because that would hurt the ongoing recovery path. In this case, we must do what is necessary to ensure
that the banking sector still provides credit facilitation to the economy and help keep the recovery going.
We also do not want to see an adverse impact on the Thai financial markets from the tightening in global
financial markets due to the Fed or the ECB policy normalizations. However, we are well-placed to
withstand the tightening, given our low external vulnerability. The other thing that would constitute a
cliff is the deteriorating financial conditions. For example, a sudden and sharp uptick in non-performing
loans could interrupt the banking sector and the credit intermediation channel. We would like to see
only a gradual increase in non-performing loans or a gradual decrease in credit quality, given the extent
of the crisis. We try to make sure that this is a gradual process and nothing unexpected or unforeseen
happens.
Next: lay the foundation for the longer term
Aside from an immediate task of keeping the recovery intact, the other thing we have been
doing is to lay the foundation for the longer term. Specifically, we try to ensure that our financial sector
responds well to the landscape post-Covid-19. It is hard to say how exactly the post-Covid-19 landscape
would look like, but there are at least two trends that will become significant in the future. Firstly, the
world will become much more digital, and secondly, there will be a much greater emphasis on
sustainability. On this, we have published the Bank of Thailand's financial landscape consultation paper
that put out our view about how we see things evolving in the financial sector. The paper indicates what
we want and do not want to see and what are the red lines in each of these areas that we regulate.
In the digital space, the first element of our plan is an open competition. For instance, the current
financial landscape in Thailand, as in many markets in the region, is dominated overwhelmingly by
banks. Nevertheless, we see that non-banks should play a more significant role going beyond, and thus
we are opening the market to new players like virtual banks and trying to ensure a level playing field.
Secondly, we are also to look at open infrastructure to make sure that the infrastructure is open and
accessible to players to get that level playing field. For example, as we have made significant
improvements in the payment landscape on the retail front, we are now trying to put in place a similar
infrastructure for SMEs. To do this, we have the Smart Financial and Payment Infrastructure program
that allows SMEs to access more digital solutions on finance, including invoicing and issuing receipts,
doing taxes, and on an end-to-end basis. We are also to introduce the retail Central Bank Digital
Currency (CBDC) and expect to put out a pilot program by the fourth quarter of this year. We have
done quite well on the wholesale CBDC, dealing with cross-border issues, and the next phase for us is
to implement the retail project by preparing ourselves through this pilot project. Since we see that digital
currencies are appearing and becoming popular very rapidly, we want to make sure that the public has
a safe option that is accessible to all and is for non-profit purposes. We thus see the retail CBDC as an
essential part of that open infrastructure component of our digital landscape vision. The third open is
open data because we realize that data will become an important asset. We have recently launched the
D-Statement program that allows people to use the information at one bank to apply for financial
services at another bank to improve access to services and competition.
The other key element in the new financial landscape is sustainability which comprises two key
components. One is the sustainability of the household debt. We have recognized that the household
debt is very high in Thailand at about 90 percent of GDP, and hence it is crucial to design measures that
attempt to put the household debt burden on a more sustainable basis. There is also another aspect of
sustainability which is on the green and environmental issues. We are putting in place key building
blocks that will be an essential part of the sustainability landscape. They include the green taxonomy
and better disclosure to measure progress in the sustainability area.
The last part of our financial landscape paper is about a more flexible regulatory framework. I
think that this paper is important because it lays out where we see things evolving in the financial sector,
and we would welcome your input. The paper is available on our website in both Thai and English.
And if we look beyond the financial sector?
I have talked about our policy responses to Covid-19 and then some of the longer-term issues
we are addressing on the financial front through the financial landscape paper. One thing I would like
to close on is to talk a bit more broadly about issues related to Thailand beyond the financial sector.
Firstly, I would like to start by saying thank you. Thank you in the sense that policymakers in Thailand
recognize that we are where we are today, largely thanks to our friends from Japan. Our success in
building an export-driven economy is owing to the large inflow of Japanese foreign direct investment
that came to us after the Plaza Accord. Over the years, such investment has contributed significantly
and substantially to the improved living standards in Thailand today, and again, thank you for that. I
think our partnership is something that we both benefited from as Thailand benefits from the partnership
with Japan, and Japanese firms have also benefited from being here in Thailand.
We recognize that things are different now, and the reasons that brought you here to Thailand
back then are probably not the same reasons that will bring in new investment today. Therefore, we
need to look a bit beyond and think about a new investment thesis for Thailand. Back then, we were a
rapidly growing economy in the years before the Asian financial crisis, growing at a rate close to 10
percent a year. People were talking about Thailand becoming a newly industrialized economy at that
time. That story is very different now, but I do think Thailand is still a good place to do business. I
talked a bit on this topic last year, but for this year, I would like to offer a different perspective of why
it is still a good place for Japanese firms to be in and invest.
The first point we can probably all agree on is that A lot of
ASEAN is a good place to be.
geopolitical turmoil today probably emphasizes that it is good to be in a place like ASEAN. If you
grouped all the ten economies as one economy, ASEAN would be the 4th or the 5th largest economy
in the world, depending on whether you use PPP or market exchange rates. It is a region that is
integrating and linking together in real terms, not just the rhetoric in terms of diplomatic cooperation.
Linkages are rapidly increasing as we have seen about a three-fold expansion of the intra-ASEAN trade
over the past 20 years. ASEAN also remains attractive in terms of investment since it accounted for an
increased share of global foreign direct investment, about 5 percent five years ago but increased to about
14 percent in 2020. I think that all of you would probably agree that ASEAN is a good place to be.
Thailand admittedly is not the largest market in ASEAN as we are about half the size of
Indonesia. We are also no longer the fastest growing economy by any stretch of the imagination as
Vietnam is growing much faster than we are. But if you buy the argument that ASEAN is a good place
to be, then Thailand is not a bad place to be to take advantage of the opportunities in ASEAN. Even
though we are neither the largest economy nor the fastest growing economy, in many ways,
Thailand
not from a financial standpoint but from a real standpoint.
is the most connected economy in ASEAN,
Let me share some thoughts on why Thailand is a very connected economy. What kinds of
things do we think of if we think about the well-connected economy? It has to have strong trade and
investment linkages, good logistics, a good production hub, and a high degree of labor access. If we
look at each of those dimensions, Thailand is still an interesting place to be.
In terms of trade, if we look at the share of intra-ASEAN exports, the top of the list is Singapore.
However, it is not entirely their export because roughly 40 percent of Singapore exports are
transshipment from other places, so let us exclude Singapore. Next on the list is Malaysia accounting
for about 20 percent of intra-ASEAN exports, but a large share of Malaysian exports goes to Singapore.
Thailand is next on the list at 18 percent. But if you ask which economy in ASEAN is the most closely
linked in terms of trade with other countries, and more broadly, in terms of diversity of products it
exported and coverage of the countries it traded with, it turns out to be Thailand. For example, Thailand
is the largest source of imports for seven of the nine ASEAN countries, excluding Thailand. The only
two countries, where it is not Thailand, are Brunei, where it is Malaysia, and Singapore, where it is
Malaysia, but if you are talking about links from a trade standpoint with other countries, it turns out it
is Thailand.
In terms of investment, the largest source of direct investment to the region is Singapore
contributing about 60 percent of total intra-ASEAN FDI flows in 2020. However, a large share of that
is not from Singapore itself, for example, when Taiwan firms invest in other countries through their
subsidiary in Singapore. Excluding Singapore, the next country on the rankings is Thailand contributing
about 24 percent of total intra-ASEAN FDI flows (about one-fourth). We can see that both trade and
investment linkages are very strong in Thailand.
Furthermore, if we think about a country as a good production base, one thing we might think
about is the degree of labor A place where labor from different places can move has the potential
access.
to act as a centralized production hub. Again, the country with the highest number of ASEAN migrants,
not surprisingly, is Thailand because we have a lot of workers from Myanmar, Laos, and Cambodia.
According to the United Nations in 2019, the number of intra-ASEAN migrants in Thailand is about
3.5 million compared to Malaysia, the second place, which is around 2 million.
The other thing that would be a requirement for a highly connected economy is good logistics.
According to the World Bank's International Logistics Performance Index, the country in ASEAN with
the best logistics is Singapore, but Thailand is number two. It is another indication that if you buy the
argument that ASEAN is a good place to be, and you look for a very well-connected place in ASEAN,
then Thailand is probably not a bad place for you to be.
I might be sharing my thoughts a bit beyond the responsibility of the Bank of Thailand to
convey appreciation for the good partnership that we have had with Japan through the years and hope
that partnership will continue. Going forward, I would like to emphasize that we cannot rely on the
same old investment or growth story that we had before when we were younger and were growing very
strongly. We are a different kind of economy today, but there are still sound reasons for our friends
from Japan to continue operating and investing in Thailand. With that, let me conclude the formal part
of the talk and turn it over to any questions you may have.
Thank you.