m r pridiyathorn devakula : how the central bank sees monetary policy in the new world economic environment speech by mr m r pridiyathorn devakula, governor of the bank of thailand, made at the shangri - la hotel, bangkok, 29 november 2001. * * * your excellencies distinguished guests ladies and gentlemen, introduction i would like to thank the thailand board of investment, the department of export promotion and tourism, as well as the nation group for inviting me to speak at this conference. i believe that it is important in these times of increased global uncertainty for the bank of thailand to share with you and the public our assessment of the current economic situation and outlook, as well as our thinking on the future course of monetary policy. the opportunity to do so today is therefore timely and greatly appreciated. in short, today i would like to discuss what i see as the challenges facing thailand in the period ahead and what we, at the bank of thailand, are prepared to do to meet those challenges. in so doing, i will briefly review the progress of the past few months, and say a few words on the appropriate policy mix which needs to be implemented to help steer the thai economy through these difficult times. the new world environment let me begin by outlining two key aspects of the current world economic environment that i think are important. the first one is more fundamental and concerns the closer degree of financial and economic integration between countries. globalization of the world economy has been driven by a variety of forces including rising trade in goods, increased international capital flows, greater technological spillovers, and growing labor mobility. while these factors have brought about a more efficient allocation of resources across national borders and facilitated higher growth and development across countries, they have also created a world environment in which shocks have become more global in nature and where crisis in one country can easily affect others. the end product of greater international economic interdependencies, especially in financial markets, is therefore the enhancement of the underlying international business cycle linkages. which brings me to the second aspect of the world economic environment that i would like to touch on today. this aspect concerns the immediate state of the world economy. the globalization of information technology ( it ) production has meant that the correction of the unsustainable boom in it spending has had a particularly widespread impact on the world economy. all the major industrialized countries are experiencing a synchronized slowdown in their business cycles, adversely affecting countries in the asian

has become more stable, our real effective exchange rate continues to be competitive, the level of international reserves remains at a comfortable level, with reserves to short - term debt ratio as high as 140 %, and inflationary pressures are well contained - headline inflation for the third quarter stood at 1. 5 percent year on year, while core inflation remained well below target at 1. 6 percent. with a firmer position on macroeconomic stability, the economy is expected to grow by around 1. 3 - 1. 8 percent this year. however, the economic recovery process remains fragile and is now being undermined by the weakening global environment as well as declining consumer confidence. looking to the future : more to be done going forward, i believe we are faced with significant challenges. unfortunately the most pressing concern also happens to be one that we have the least control of, that is the external demand. with uncertainty regarding the timing of economic recovery in the united states, japan still having to undergo real and arduous reforms, and europe not yet stepping up as the locomotive engine for the resumption of world growth, prospects for an export led rebound remains clouded. with these regions together constituting over 52 percent of the market share for thai products, exports in 2001 are expected to fall in value by approximately 6 percent compared to last year. assuming an economic rebound in the us, japan, and europe by mid - 2002, exports should grow by around 3 - 5 percent in 2002. real gdp growth is projected to be between 1 - 3 percent in 2002. against the backdrop of increased uncertainty and weak external demand, safeguarding our economic recovery will require steady resolve, more reliance on domestic demand, and a supportive set of measures and reform. the main challenge for local authorities is to ensure proper coordination of fiscal and monetary policies as well as the acceleration of structural reforms efforts in the banking and corporate sector to facilitate a pickup in domestic demand, enhance confidence, and bolster foreign investment. mr. bosworth did mention yesterday that to resolve the crisis, bad loans must be placed in asset management companies and then amcs must get rid of them. this is one of the top priority policies of this government. almost all npls of government banks have been transferred to amcs, and all multi - creditor npls of private commercial banks have been transferred to the tamc. and we will speed up our effort to clear them out. however, please be informed that when similar financial crises occurred in the us in 1982,