Against the backdrop of these two external risks, Thailand, benefiting from ongoing adherence to policy discipline, is fortunate to have ample room for maneuvering a flexible policy mix going forward. Fiscal policy now aims at firming up growth and reviving confidence without worry on public debt sustainability. Concurrently, the monetary and exchange rate policies have room to safeguard economic stability and smooth out short-term fluctuations. On monetary policy, the Monetary Policy Committee has been holding the policy rate, in light of the fact that growth recovery has remained on track, while closely following inflation developments. As for the exchange rate management, the Bank of Thailand will maintain our principle under the managed float exchange rate system to let the exchange rate reflect the fundamentals of the economy. Indeed, to gain most from exchange rate flexibility, recognizing that US dollar is an invoice currency, we have consistently sought to limit the volatility of the Thai baht vsUS dollar exchange rate. In fact, the baht has been the least volatile currency in the region last year. Going forward, we will continue to take care of the short-term volatility when we deem it too disruptive to export or import price-quotation. Ladies and Gentlemen, In my talk with AMCHAM in Bangkok in September 2007, my key message was that Thailand’s future prosperity depends critically on capitalizing on and strengthening further the resiliency of our domestic economy. This is so that the economy can withstand volatility and safeguard against monetary and financial instability that may eventually disrupt real sector activities.

The establishment of the Deposit Protection Agency should reduce banks’ moral hazard and  4  BIS Review 54/2008  introduce more market discipline to the banking sector by putting pressure on banks to improve financial strengths if they want to attract and retain depositors. I now turn to the Bank of Thailand’s financial sector master plan (FSMP). You may recall that the implementation of the first master plan started in 2004 and was completed in March 2007, when the last commercial bank licensed under the plan started its operation. Key initiatives under the first plan involved 1) improving financial access, 2) increasing efficiency of the banking sector through removal of regulatory obstacles to market development and through consolidation of smaller financial institutions, and 3) strengthening market discipline through more stringent information disclosure and enhanced consumer protection mechanism. Through licensing reform and the so-called one-presence policy, there has been a significant consolidation and reduction in the number of financial institutions under the supervision of the Bank of Thailand. While evaluation of FSMP Phase I is currently being undertaken, there is evidence to suggest that the banking sector has shown improvement in both operating efficiency and resiliency. Turning to the second-phased financial sector master plan, the overarching objective is to improve efficiency, competitiveness, and resiliency of the financial sector. The goal is that financial institutions can more effectively perform their intermediary functions and meet the challenges of a rapidly changing environment.