m r pridiyathorn devakula : maintaining stability with a nuanced approach speech by mr m r pridiyathorn devakula, governor of the bank of thailand, at the stock exchange of thailand, bangkok, 20 september 2004. * * * distinguished participants, ladies and gentlemen, let me begin by thanking the stock exchange of thailand for inviting me here to speak today. you have already heard from our minister of finance a comprehensive framework for sustainable growth in the next five years, with an integrated set of targets for various sectors and various dimensions of the economy. this is a welcome initiative and an important policy development. the bank of thailand ’ s role is to ensure economic and financial stability in order to support continued growth of the economy. from our experience, monetary policy alone is not enough to achieve desirable stability. we need to involve ourselves in two other areas, i. e. to guard against possible build - ups of financial imbalances and to further strengthen the financial sector. first of all, i will begin with our assessment of the current economic conditions to assure you that, in spite of the greater risks and challenges that have emerged this year, thailand ’ s growth momentum continues to remain firm, with economic and financial stability intact. key challenges have included increased external pressure from higher oil prices, rising global interest rates, and the potential impact of a slowdown of the chinese economy. we have also faced several challenges at home, which include two episodes of the avian flu and a decline in consumer and investor sentiment linked to the situation in the south. but despite these risks and challenges, the thai economy has managed quite well under the circumstances. the latest data showed real gdp to have grown by an impressive 6. 4 percent for the first half of this year, reflecting the resiliency of our economy, which is still growing at a respectable rate, in spite of many negative external developments. favourable conditions for the export of goods and services have allowed a continued surplus of our current account. this has been accompanied by corresponding reductions in external debt which fell from the peak of 112 billion us dollars in june 1997 to 50 billion us dollars in june of this year. meanwhile, international reserves of 44 billion us dollars in august also provide a level of protection that should help the economy comfortably absorb external shocks. it was mainly an account of the strength of this external position that thailand ’ s credit rating was upgraded by standard and poor ’ s last month. ladies and gentlemen, at this time,

percent, while we see an increase of over 30 percent in credit cards loans. therefore, as a precaution, the bank of thailand has implemented a number of prudential measures to curb possible build - up of imbalances in the credit card loans. in november 2002, we have raised the minimum income levels for credit card qualification. and later on in april 2004 we have raised the rate of minimum monthly payments from 5 percent to 10 percent. these proactive measures so far have yielded desirable and positive results. let me now move to the financial sector stability of thailand ’ s financial system, in particular the banking sector, has improved remarkably in the past few years. the 1997 crisis has weakened our financial system. commercial banks ’ returns on assets were persistently negative, and npls stood at a record high level. since 2001, the bank of thailand has tackled these problems in two steps. first, we aimed to make these financial institutions healthy and profitable so as they could resume their normal function of financial intermediaries. in 2001, the bank of thailand issued a few measures and guidelines to enhance banks ’ profitability ; for example, the reduction of provision requirement for a normal loan which is not npl to a more reasonable level and the classification of npls by account was introduced to replace npls by name. more important, banks were persuaded to change from the old practice of competing for deposits with higher interests which resulted in lowering the cost to support banks ’ profits. moreover, banks also have made substantial progress on productivity and risk management, with restructured work process that has significantly brought down operating costs. as a result, return on assets has improved from negative in 2001 to 0. 7 percent in 2003 and the annualized rate of 1. 5 percent for the first half of this year. at the same time, good progress has been made in npl reduction. the proportion of outstanding npls to total loans has reduced from 24. 5 percent in 2000 to 12. 4 percent at the end of 2003 due to various efforts put to restructure npls. now, with improved balance sheets and more stable financial standing of all banks, the bank of thailand has moved into the second step ; and that is to improve the quality of banks ’ businesses and management. the bank of thailand has recently tightened provisioning rules for npls. up to now, for npls outstanding more than 1 year, banks have been required to provide for 100 percent of the amount of loan net of collateral