Prasarn Trairatvorakul: "Challenges and Opportunities"
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the German
Business Talks event, Bangkok, 28 February 2012.
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Good evening,
Ambassador Rolf Schulze,
Distinguished guests,
Ladies and Gentlemen,
I would like to thank the German Embassy for inviting me to give the key-note speech at the
German Business Talks event. Germany is by far the biggest trading partner of Thailand
within Europe, accounting for over 20 per cent of total trade volume between Europe and
Thailand. With the increasing presence of German multinational corporations in Thailand, I
hope that our businesses will become more integrated and continue to prosper together into
the future. In this session, I would like to focus on two key issues. The first concerns the
future challenges facing Thailand. The second issue is about the Bank of Thailand's (BOT)
role in meeting these challenges.
Let us begin with the challenges.
On the external front, the global economy is beset by substantial risks and
uncertainties. Major advanced economies are still grappling with fragile recoveries. In the
US, despite some recent positive news from the labor market, economic activity continues to
be weighed down by substantial debt over-hang. This inhibits a full recovery in the housing
sector and consumer spending, which together form the backbone of the US economy. In the
euro-area, everyone here is obviously keenly aware of the unfolding sovereign debt crisis.
Against the backdrop of fear and uncertainty, banks have tightened their lending and
consumers have become more cautious in their spending. This will act as a drag on the
euroarea economy going forward.
A key constraint for both the US and euro-area, as well as many other advanced
economies, is the limited policy space available to authorities. In these countries,
monetary policy and fiscal stimulus have been pushed to their limits. Limited capacity to
respond to new shocks thus represents a real risk for these economies, and for the global
economy, that we must be weary of. In this setting, and given the deep-seated nature of the
problems being faced, meaningful remedies rest just as much on political factors as on
economic ones. How governments respond and how their electorates receive these
responses will be an important source of uncertainty.
In contrast, the rising economies in Asia offer a more positive outlook. Despite the
slowdown in exports of many Asian countries, reflecting the softer global economic backdrop,
domestic demand remains robust. More fundamentally, the continued rise of China and the
formation of the ASEAN Economic Community (AEC) will generate enormous economic
opportunities for the region. As will be discussed later, the key challenge for Thailand will
be how to optimally position ourselves to reap the full benefits of this trend.
This brings me to the internal challenges. The overriding focus for Thailand this year is
ensuring domestic recovery and restoration after the devastating floods in 2011, as well as
putting in place short and long-term plans to prevent a repeat of these events. The damage
from the floods was severe, with widespread disruptions in the agriculture and manufacturing
industries in affected areas. As a result, economic activity contracted by 9 per cent
year-on-year in the last quarter of 2011 and the economy barely grew over the year as a
whole.
In the face of such dramatic numbers, it is important to remind ourselves of the nature of the
shock that Thailand faced. Floods, like other natural disasters, are temporary one-off
events. They hit you out of nowhere, but then disappear. This is very different from growth
slowdowns due to inherent weaknesses in the economy, such as financial crises. As we are
witnessing in many parts of the developed world, such retrenchment in economic activity
tend to be long-lasting as previous excesses have to be worked out from the system. The
aftermath of one-off shocks, on the other hand, is generally characterized by rapid
resumption of economic activity as things get back on track.
Thus there is no question that Thailand will recover quickly and strongly from the
floods. We project that economic growth will rebound to 4.9 percent in 2012, boosted by
private and public spending for post-flood restoration. In 2013, economic growth is projected
to gather momentum, expanding by 5.6 percent. This positive trajectory reflects a number of
key fundamental strengths in the Thai economy. First, our human capital remains intact and
strong. Thailand's flexible and skilled workforce will continue to provide a solid foundation for
businesses to flourish and expand. Second, the corporate sector boasts healthy balance
sheets from accumulated savings and profits, enabling them to rebuild and invest. Third, the
banking sector is strong and well-placed to provide the financing necessary to sustain the
investment cycle. Finally, Thailand is well positioned geographically to serve as a
supply-chain hub for many industries and to reap the benefits of an expanding as well as
more integrated Asian economic block.
As alluded to earlier, the process of regional integration will provide Thailand with
enormous opportunities to expand our role in the region through increased trade in
goods and services. Realizing these opportunities will not be easy, nor will they be
automatic. The key impetus falls on structural reforms that lift Thailand's international
competitiveness. Considerable adjustment and transformation of our economy will be
required. Factors of production will have to be reallocated to activities that offer the most
promising way forward. Government policies and laws will have to be updated and changed
to best facilitate such structural adjustments, all the while making sure that the burden of
adjustment on those who stand to lose is bearable. The pursuit of economic growth
should not be absolute, but inclusive.
As should be apparent, such challenges cannot possibly be completely met in the short-term,
let alone in 2012. I suppose it should not be a surprise that the challenges I have outlined
involve relatively long horizons. As a central banker, we are trained to focus always on the
medium to long run. After all, it is precisely such a focus that enables central banks to best
serve as pillars of economic stability over time.
Against this backdrop, let me now turn to the BOT's role in meeting these challenges.
Starting with monetary policy, the key focus at this juncture is to strike the right
balance between accommodating the domestic recovery while ensuring stability in the
long-term. In the context of the sharp slowdown in economic activity from the floods,
moderating inflationary risks, and pronounced headwinds from the global economy, the MPC
decided to ease policy during the last two meetings. These policy actions have helped to
shore up private sector confidence and accelerate the return of economic activity to normal
levels. The MPC is firmly committed to maintaining long-term price stability and interest rates
are currently at a level that is deemed to be consistent with that goal.
Moving further afield, it is clear from my earlier remarks that setting Thailand on a path to
long-run economic prosperity will entail lifting the competitiveness of our economy. What
contribution can the BOT make in this regard?
First and foremost, as well as most obviously, the BOT needs to deliver on its
mandate of macroeconomic stability. Ample evidence has demonstrated that a stable
macroeconomic environment is a key prerequisite for sustainable growth in the long run.
Such an environment will also make the process of adjustment and economic transformation
easier. In this respect, I believe that we have the right monetary framework to best
achieve this. The BOT's inflation targeting framework has served us very well since its
adoption over 10 years ago.
Apart from serving as an anchor for macroeconomic stability, the BOT can also undertake
steps, or act as a catalyst for the necessary changes, that will serve to enhance Thailand's
competitiveness and augment economic adaptability. Most directly, the BOT can strive to
enhance the effectiveness of the financial sector in serving as intermediaries of
capital. Our current strategy is to broadly deliver tangible improvements in four key
dimensions. First, encourage financial innovation and the expansion of available financial
instruments. Second, broaden the choice available to firms and households in terms of
financial services. Third, reduce the cost of these financial services. And finally, improve
access to them.
To this end, the BOT has embarked on a multi-pronged approach that involves a number of
strategic plans. Chief and foremost is the second Financial Master Plan. This plan, which
takes into account major global developments such as regional integration and global
regulatory reform, will further this vision of a modern and inclusive financial sector landscape.
At the same time, we are pursuing ways to improve financial system infrastructure,
including through upgrades to the payment systems to promote more efficient settlement of
private sector transactions.
Complementing these efforts is our development of the Capital Account Liberalization
Master Plan aimed at facilitating and encouraging more outward investment by Thai
residents in foreign assets. Apart from the sizeable diversification gains to be had, a more
streamlined capital account and foreign exchange regulatory regime will help to boost
financial market development and reduce costs for the private sector. Finally, in recognition
of the fact that the full benefits of improvements in financial services cannot be realized
without adequate readiness on the part of consumers, we have recently launched the
Financial Consumer Protection Center to provide financial education to the public.
In all this, it must be stressed that the BOT can only do so much. Effective upgrading of
Thailand's competitiveness and lifting our level of productivity requires strong commitment
from all segments of the economy. A common vision among all stakeholders is
necessary, especially when it comes to implementing tough structural reforms. The BOT
will strive to be an active participant in pushing forward the national agenda on
reforms, particularly on issues that involve the public sector, to upgrade the efficiency of our
economy.
Let me end by thanking the German business community for the substantial contribution that
you have made to our economy and I very much hope to see the mutually beneficial
relationship between our countries continue to blossom into the future. Thank you.