The first pillar: maintaining stability Distinguished guests, With an increasingly globalized economy and financial markets, the world is irreversibly and ever more interconnected. As a small member in the global community, we have no choice but to take this trend as given, and focus on fortifying the economy’s resilience against currents of uncertainties. The financial environment today continues to be shaped by the legacy of the global financial crisis. As the Federal Reserve continues to scale down its unconventional monetary policy and normalization of their policy rate looms, many emerging economies may experience sporadic fluctuations of capital flows and asset prices – be they in the bond, equity, or foreign exchange markets. So-called QE taper tantrum last year did  BIS central bankers’ speeches  1  prove disruptive for some members of the emerging markets club. That experience highlights the importance of maintaining sound macroeconomic fundamentals in order to foster the economy’s resilience against shocks of external kind. Despite higher global interconnectedness, investors do differentiate at the margin. Those countries with stronger macroeconomic stability both experienced less volatile capital outflows, and are less disrupted by them. This is not to say that financial market rationality can always be counted upon. Global fund flows may also be subject to fads, speculation, and short-termism. Left on its own, the resulting financial market volatility could prove damaging for overall macroeconomic stability. The policymakers have an important task of pre-empting such excessive and unjustified volatility. Thailand has had its fair share of volatile capital flow episodes in recent years.

In addition, a number of investment projects are extremely foreign exchange-intensive because of imports. The króna could depreciate as a result, with heavy outflows of foreign currency, even if there were ample opportunities for investment. This is the problem the liberalisation strategy is attempting to solve. Emphasis is placed on protecting the foreign exchange reserves by converting short-term claims against domestic entities to long-term investments to the extent possible. The Central Bank acts as an intermediary, and the auction format ensures that only a small portion of the foreign exchange reserves are in play at any given time. The auction format also ensures that transfers of banking system liquidity will not be large enough to jeopardise the system’s stability. The foreign exchange reserves are protected as well by the requirement that investors bring foreign currency into the country and exchange it for krónur in the domestic market. This will offset the foreign exchange outflows that often accompany new investment. Another important aim of the strategy is to ensure short-term Treasury financing. Even though significant progress has been made in controlling the fiscal deficit after the crash and halting the accumulation of unsustainable debt, it is important not to underestimate the current dependency of Treasury financing on the capital controls. More than half – and, in some instances, as much as ¾ – of the stock of short-term Treasury bonds is held by nonresidents.