bandid nijathaworn : financial developments and the thai banking sector keynote address by dr bandid nijathaworn, deputy governor of the bank of thailand, at the third euromoney thailand investment forum, bangkok, 10 june 2009. * * * thank you and good morning first let me thank euromoney for the invitation. it is an honour to be speaking to you today. for the last few years that i have been coming to this forum to speak, i find the session to be very useful as it provides an excellent opportunity for us at the bank of thailand to interact and share our views with investors on thailand ’ s current issues, including our policies. so, it is a pleasure to be here this morning. my topic today is about financial developments and the thai banking sector. given the limitations of time, i want to focus my remark today on two issues. the first is the short - term issue about the current economic and financial conditions, and the policy response that we have had in trying to strengthen the process of recovery. next, i will speak on the mediumterm issue of financial sector reform, beginning with how we see the new or the post - crisis financial landscape emerging and our plan to respond to these changes in the context of our financial sector master plan. first, the current conditions. latest economic data in thailand continues to show deterioration in economic activities as evidenced by the estimated decline of 7. 1 percent in this year ’ s first quarter gdp growth. however, most recently, while the overall domestic activities remain weak, more positive signs on the real sector are emerging, especially in the monthly april data that show greater stabilization in the pace of contraction on a month - on - month basis, of exports, manufacturing output, capacity utilization, and private consumption, as well as a narrowing of the trade surplus. on the financial front, recent rally in equity prices is also positive. the rally, which is largely liquidity driven, is indicative of two developments that are taking place in our financial markets at this time : first, the resurgence of capital inflows linked to the return of risk appetite globally ; and second, the search for yield by thai savers, on account of the low nominal deposit rates, which sees savings shifting away from bank deposits to other instruments. hence, the latest round of deposit rates increase by banks can be seen as a response to this development. on liquidity, at this time, liquidity in the thai banking system remains ample

##pable than it is in the realm of exchange rate and capital account regimes. there are strong and vocal constituencies that are averse to currency appreciation and part of them averse to variability in the exchange rate itself. not unlike today ’ s political economy in advanced countries, emerging market politics also risks being less favorable to openness, but more partial to protection of selected industries or protectionism in general. in emerging markets, the political economy and policy tension are even more complex because our markets and institutions are still developing. hence, the struggle between financial integration and financial stability requires from us a deft balancing act. as such, i hope you appreciate that, when it comes to policy, there is risk in change as well as in inertia. i hope that you also appreciate that if advanced countries pursue more protectionist stance, emerging markets would likely follow suit. one might ask : how then has the bank of thailand handled this tension and what is our strategy going forward? my answer to you is that we make every effort to get the economic fundamentals right and strengthening them. but as our financial and capital markets are small, thin, and still developing, we have adopted a balanced approach to managing capital flows under flexible exchange rate. this balanced approach seeks to optimize synergies between monetary policy, foreign exchange intervention, and capital account policy. allow me to elaborate. our monetary policy, under the current inflation targeting framework, can take care of exchange rate as long as there is no conflict with inflation. and, foreign exchange market intervention is conducted only to smooth excessive volatility in the market. as for the capital account policy, i firmly believe that key is the right pacing and sequencing of capital account liberalization, with a view to ensuring a more balanced structure of capital flows into and out of thailand. on the capital inflow side, we are still maintaining the urr or unremunerated reserve requirement for the time being. this capital control measure has proven a useful tool for reducing the chance of prolonged financial misalignment with economic fundamentals, especially on occasions when most market participants are offside in the same direction. as for the outflow side, we have further liberalized our capital account during the last two months. these measures included the relaxation of fx holdings by juristic persons and individuals. in fact, at the beginning of this year, we also expanded the limits of thai direct investment and portfolio investment abroad. even though we all agree that financial openness is