Prasarn Trairatvorakul: Global risks and the outlook for Thailand
Address by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Fitch Ratings
100th Anniversary Conference, Bangkok, 27 September 2013.
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Distinguished speakers and panelists,
Ladies and Gentlemen,
I would like to thank Fitch Ratings (Thailand) for inviting me to give an opening address at
this year's annual conference. Much has changed both at home and abroad since I gave an
opening address at this event two years ago. In retrospect, however, it is interesting to look
back over the past two years and notice how most global risks we talked about - for
instance, fiscal drag and political gridlock in the U.S., sovereign debt crisis in the Eurozone,
among others - are still with us today. Most of the risks have reduced in terms of magnitude
and urgency, but they certainly have not disappeared. In fact, each of them took turn to
appear in the media spotlight and became an object of market's obsession. Victor Hugo once
said, "No army can withstand the strength of an idea whose time has come." And that sounds
fitting for today's financial market, where obsession with one idea could have a far-reaching
implication for so many countries, at once, in an invasive way that is hard to shield against.
A. The state of indecisiveness that we live in
It has been almost six years since the beginning of the global financial crisis. But despite the
extraordinary policies in major economies, despite reassuring words of global authorities,
despite considerable reform efforts, the healthy state of full recovery seems to be constantly
pushed away from us. At this point in time, the world is still struggling in what I would like to
describe as the state of "indecisiveness".
First is the indecisiveness that we have about growth prospects. Mixed signals and
counteracting forces abound, and it has become less obvious how global economic forces
will -equilibrate. The talk of the two-speed or three-speed world, which was heard frequently
earlier this year, proves to be an oversimplication of a much more complicated reality.
Among advanced economies, the U.S. and Japan seem to have gathered some tangible
traction as of late. But one should be reminded that the impact of sequestration in the U.S. is
still yet to be felt fully. And one should also be reminded that for Japan, contradicting policy
objectives could lead to considerable trade-offs, coupled with the fact that the public debt
situation there could become more sensitive to possible rises in bond yields given that we
are already in the later stage of the global easing cycle. On the other hand, emerging Asia
continues to post relatively high growth compared to the rest of the world. But in the absolute
term, economic momentum seems to be losing some steam, and it is also possible that the
extent of the shadow banking problems in China could be underestimated.
Coinciding with uncertain growth prospects is the indecisiveness about the exit from
policy accommodation especially in the U.S. Global market sentiments since May have
turned with the expectation about the Fed scaling back its asset purchases. While all of us
know that the exit from the extraordinary stance in the U.S. is inevitable, and is actually
looming on the horizon, the timing and the pace remain uncertain and data-dependent. This
could actually continue to disrupt the process of global rebalancing for a while. Time and
again, taking away the punch bowl has always been a tricky task for central bankers. But the
impact has never been more global, given today's interconnected global financial market.
Inconclusive clues about the future world, after all, lead to increased sensitivity to new
pieces of information. Beliefs about the future world are shifting fast, and with that come
bouts of volatility due to successive rounds of reassessing and repricing risks. To some
extent, the recent episode also served as a stress test for emerging market economies, who
had to deal with sudden capital movements and volatile asset prices. It also served as a
reminder for these countries to ensure that their economic stability is safeguarded as they try
to benefit from the increased integration with the global financial market. And importantly, it
also served as a reminder for these countries to re-examine the robustness of their growth
strategy in the face of global headwinds and fickleness.
B. Thailand's outlook and BOT's monetary and financial policies
Ladies and Gentlemen,
Like the rest of emerging Asia, the Thai economy appears to soften in the near- term.
On top of export recovery that could be more delayed, the vital contribution from domestic
spending is also viewed to lessen. Part of this, of course, reflects a natural reversion to a
more normal pace of growth following unusually strong growth last year. More specifically,
the boost from the
first-car scheme dissipated sooner than expected. Household debt, which
has risen fast and is now in the ballpark of 80 percent of GDP, starts to weigh on durable and
semi-durable purchases visibly. And businesses also seem to postpone investment awaiting
better economic conditions at home and abroad. In light of these factors, the Bank of
Thailand projected GDP growth to be around 4 percent this year, a downward revision from a
more bullish view we had earlier.
But I would like to note that this is still a reasonable growth amid weak external
environments, coupled with the fact that consumption has become somewhat
overstimulated already. Looking ahead, fundamentals of the economy remain sound overall.
Monetary and fiscal conditions will continue to be supportive. And despite some delay,
contribution from exports is also bound to improve as the global economy gains a firmer
footing. Some concerns that I have about the outlook, however, are the possibility of
continued sluggishness in private demand, and the possibility that supply-side constraints
- both in the labor market and the production sector - could hold back the future potential of
investment and exports.
Through this turbulent time, the Bank of Thailand has been steering its monetary and
financial policies with prudence. The flexible inflation-targeting framework succeeds in
anchoring inflation expectation, thus fostering continued growth and stability. The managed-
float regime accommodates baht movements that are in alignment with fundamentals, with
policy instruments ready to curb excessive speculation and overshooting if needed. The
strong international reserves position, at the same time, helps cushion against sharp flow
reversals. Efforts have also been expended on financial liberalization and regulatory reforms
under the Financial Sector Master Plan. And for the banking sector, banks' capital bases
have been strengthened well above international standard, while granting new subsidiary
licenses for foreign banks will ensure that the future banking system stays competitive and
vibrant.
C. Lifting barriers to sustainable growth
Distinguished audience,
Sound macroeconomic and financial practices have been instrumental in safeguarding
economic stability and helping the country weather through numerous shocks that have
come its way. Sufficient policy spaces in monetary and fiscal policies provided buffers amid
intense headwinds and supports in the times of need - notably in the aftermath of the global
financial crisis and the flood devastation in late 2011. But now that the height of the global
crisis is behind us, and the need for short-term macroeconomic management less pressing,
a serious attention should also be given to the agenda of long-term competitiveness
and sustainable growth. This calls strongly for structural reforms of the supply side of the
economy, where the constraints are particularly binding and a large-scale upgrading long
overdue.
Pursuing demand management policies alone can only take us so far - somewhat akin to
stepping on the gas pedal without upgrading or modifying the car we drive. Pursuing
demand-side policies can also come with a steep price tag, especially when the policy
borders on the realm of populism. Such policy would add to micro-level risks by making
households undisciplined and addicted to "easy" money, while also add to macro-level risks
by stretching fiscal resources without enhancing competitiveness in any meaningful way.
The Bank of Thailand views the need to address structural issues to be very timely and
pressing. "Lifting barriers to sustainable growth" was indeed the central theme of
investigation of the Bank of Thailand Symposium this year, which was held at the Bangkok
Convention Center last week, and I hope some of you had a chance to participate in the
event. My comment today, however, is my personal view and is not intended to be related to
the Symposium.
Successful reforms, in my opinion, will need concentrated efforts on the following three
areas: relieving labor market constraints, engineering a "transformative" upgrading of the
supply side, and leveraging opportunities surrounding us. Let me elaborate on each of them.
(1) Relieving constraints in the labor market
Ladies and Gentlemen,
Moving the country forward requires taking a step backward to examine closely what is
holding us back at the moment. The first area that has been particularly binding is the
labor market - an issue that has been nagging us all along, but often fails to get attention
amid the clamor of short-term economic issues. Over the past decade, both the total
workforce and labor productivity have been growing very sluggishly. Another related problem
is that of skill mismatch, where workers with needed vocational training are in much shorter
supply relative to university graduates. These pose serious limits to capacity expansion and
innovation efforts of the private sector.
To alleviate the problems in the near term requires that distorted incentives be corrected.
Policy distortion such as the rice mortgage scheme and subsidy of other agricultural prices
should be kept to a minimum, for these incentives drive workers away from high value-
added sectors to the agricultural sector. To solve the problems in the longer term requires
educational reforms that tackle two major challenges: namely, raising the supply of
workers with vocational training in demand and ensuring labor productivity upgrades.
I cannot stress enough the importance of having a future generation of workforce that is
capable and flexible enough to accommodate changes in production technology. In addition,
fostering close collaboration with the private sector could also be an essential part of the
solution, and it is very encouraging to see more involvement from large Thai corporates in
the process of recruitment and training as of late.
(2) Engineering a "transformative" upgrading of the supply side
In addition to relieving constraints in the labor market,
the second reform focus I would
like to discuss is the urgent need for a "transformative" upgrading of the supply side.
Pursuing growth from labor-intensive activities is no longer a viable option, due to the fact
that Thailand would not be able to compete with lower-wage competitors, and also the fact
that such strategy is simply unsustainable from a long-term perspective. More importantly,
failing to upgrade now will cost us an inestimable amount in the form of missed opportunities.
Indeed, it was precisely the inability to engineer a large-scale upgrading, when the time was
ripe, that separated our path from peer countries like Taiwan and Korea that started out at a
relatively similar income position several decades ago.
By using the word "transformative", I mean that the upgrading process needs to go beyond
mere efficient use of workers and capitals. It has to support firms to move up the value chain
to higher value-added activities. It has to equip firms with to move toward higher
capability
product sophistication and to cater to changing global consumer demand. It has to
flexibility
nurture innovation, given that meaningful growth spurt tends to come from either new
products or new ways of producing and delivering them. The strategic focus is thus to
create the right environment and give the right incentive for firms to invest and
innovate.
Physical infrastructure is where we lack behind and suits to be the starting point.
Hightech, capital-intensive industries tend to benefit greatly from knowledge spillovers and
concentration of economic activities. Therefore, more specialized hubs and clusters - in the
spirit of, for instance, Singapore's Biopolis and Japan's Tsukaba Science City - are needed.
For industries with lower capital intensity, establishing industrial hubs and zonings of related
industries would be beneficial, so that these industries can reap localized benefits such as
the availability of specific inputs and better labor market pooling. Supporting these less
capital- intensive industries will also serve toward the agenda of inclusive growth, for these
industries contribute significantly to employment in rural areas. Last but not least,
wellintegrated and cost-efficient logistics systems are called for, in order to ensure connectivity
and efficiency of domestic production chains. Along with physical infrastructure
upgrading, "soft" infrastructure has to be upgraded. In addition to educational reforms
that I talked about earlier, improvements on the legal front are also needed. Protecting
intellectual property rights and minimizing regulatory burdens for businesses are the two key
areas that continue to require reform efforts.
I would like to note that several moves in the right direction are already in place.
Government's massive investment plan in water management and long-term infrastructure is
one of them. At the very least, the attempt has managed to elevate the urgency of
infrastructure upgrading to the status of a national reform agenda. On a related note, the
government also has the plan to push Thailand toward an innovation-driven economy. While
these are laudable initiatives, challenges still remain in the implementation phase, and more
work remains to ensure that we get the biggest bang for the baht and that fiscal discipline is
respected.
(3) Leveraging existing opportunities around us
Ladies and Gentlemen,
The third ingredient I would like to discuss today is the importance of identifying
Upgrading efforts that I spoke about
opportunities surrounding us and leveraging them.
at length should put the country in a better position to reap benefits from these opportunities,
which can make the route to prosperity less arduous.
The timing is still on our side. First is China's changing role in the international trade -
from a large manufacturer of export goods to a large import country of the world. Even with
signs of losing some steam, one should not forget that even a 6-to-7 percent growth of
today's Chinese economy still adds far more to global demand than the double-digit growth
of the past decade. Taking advantage of this opportunity wisely can benefit exporters
immensely.
The second source of opportunities is the upcoming regional economic integration. With
the advent of the ASEAN Economic Community (AEC), intra-regional trade volume will grow
given that more trade barriers are removed. With its geographical advantage, especially its
proximity to the vibrant CLMV countries, Thailand gets a head start in positioning itself as an
investment and production hub for the AEC, although this requires continued efforts on
minimizing regulatory burdens for businesses and increasing regional connectivity by
strategic investment in logistics and transportation systems. After all, combining the capital
and the technology of more advanced members with the cost advantage of newer members
will result in a synergy that benefits the region as a whole. It should be noted, also, that the
rising significance of intra-regional trade will serve the region well as an additional buffer
against weak global environments.
To support Thai businesses to seek investment opportunities abroad, the Bank of Thailand
continues to gradually relax capital flow regulations, initially on outward direct investment and
more recently on portfolio investment for Accredited Investors. On a related note, to facilitate
banking integration, ASEAN central banks are also in the process of negotiating the common
standard of Qualified ASEAN Banks (QABs), which will allow qualified banks to expand into
other ASEAN countries with greater ease. Freer flows of funds and closer financial ties within
the region, after all, will provide much-needed support for investment activities and business
dealings over the years to come.
D. Concluding remark
Ladies and Gentlemen,
I would like to conclude my talk today by restating my firm belief in the promising future of the
Thai economy, and stressing again the pressing need for the
country to move forward to the
long-term agenda of competitiveness and sustainable growth. In these days, once we get so
used to reacting to new information in the marketplace, it does not take long before we get so
involved in the battle scene that we might lose the long-term perspective. It also does not
take long before we forget that meaningful upgrading takes a careful, deliberate planning to
truly succeed and a considerable amount of time to unfold.
Given many challenges at home and abroad, moving Thailand forward is sure to be an
arduous task. As a non-crisis country this time, it is wise to stay vigilant since "good" time is
still the time when bad loans are made and imbalances accumulate. It is much wiser,
however, to also use this time to make a head start toward the brighter future. The world is
moving toward greater speed and greater interconnectedness every second, and to thrive in
such environment, a balanced mix of demand management and structural reforms is a
prerequisite. They are entrance tickets to a safe, undisrupted trip on the road to prosperity
over the years to come.
Without further delay, I now would like to officially open the Fitch Ratings Annual Conference
and wish everyone a fruitful discussion and exchange today. Thank you Fitch Ratings
(Thailand) again for organizing the conference, and thank you for your attention.