bandid nijathaworn : economic volatility in the year of the rat speech by dr bandid nijathaworn, deputy governor of the bank of thailand, at a seminar on “ economic volatility in the year of the rat, fight or flight ”, organised by the foreign correspondents ’ club of thailand, bangkok, 6 march 2008. * * * thank you and good evening, let me begin first by thanking the fcct for the invitation. it must have been a long while since i last visited or spoke at a fcct event, so it is good to be back. tonight ’ s topic is economic volatility in the year of the rat. according to chinese astrology, rat is an auspicious animal, and the year of the rat is usually a year of plenty, bringing opportunity and good prospects. so, i think we have a good start. and judging from what has been happening, this year looks to be interesting and challenging both for the markets and policymakers. at this time, we are seeing widespread fears of recession in the us, a deepening of the credit problem, and stubbornly high oil prices. these developments are definitely a negative setting for the global economy and financial markets. tonight, my talk will focus on global economic volatility and possible implications for thailand. and i want to do this by offering a perspective on how we see things developing from a financial regulator ’ s point of view. first, the us economy. latest economic data from the us are not positive. there are more weak numbers than good ones, with signs of economic slowdown becoming increasingly visible. drawing on the information up to the end of february, the key elements of the latest data include continued correction in the housing market, further fall in consumer confidence, slowdown in consumer spending and private investment, and weaker employment numbers. the good news is that exports in the us are holding up well, and the financial conditions of companies, especially the non - financial companies, are intact. but going forward, the correction in the housing market is likely to continue, which will weigh on economic activities. on the financial market side, things also are not looking up. cdx spread continues to rise, indicating increased risk premium in the cdo market. and as confidence in the market for securitized credit is yet to return, more writedown can be expected. next, as economic activities in the us slow down, the quality of bank ’ s

other assets such as commercial real estate and consumer loans may come under greater pressure, affecting bank profitability. with profit declining, banks may become more risk averse to protect capital, putting more pressure on credit extension and the real economy. so, latest us data point to a weaker outlook ahead with more downside risks in the nearterm. the risks include further correction in the housing market, continued tightening of the credit conditions, and further decline in economic activities. outside the us, the economic picture looks less negative. while the adjustments in housing market are also ongoing in europe, and some european banks have reported losses in cdos, the impact on economic activities is expected to be more limited. for example, consensus forecasts in february, revised downward the euro zone ’ s gdp growth for 2008 by only 0. 3 percentage points from december compared with a 0. 5 percentage point downward revision for the us. for southeast asia, the impact is also forecasted to be limited. latest consensus forecasts for southeast asia ’ s gdp growth is 5. 7 percent for 2008, declining slightly from the forecast of 5. 9 percent in december last year. these forecasts, together with the latest data, suggest that, in the short - term, things will likely get worse before they get better, and the slowing of growth in the us will impact growth globally. the key question, at this time, is how deep can things get before we see a turnaround. this is definitely an important, but a difficult question to answer. market participants as usual will have a range of views, and i personally do not intend to offer another prediction. instead, i want to share with you my thoughts on the current developments and on what this will mean for thailand. to begin, one context that i think is useful in understanding the current turmoil is the unwinding of the global imbalance, triggered by corrections in the us housing market that began in 2006, and is now ongoing. such unwinding is a necessary process to clear excesses and reduce financial leverages that have been built up in the form of high level of the us ’ s current account deficits. economically speaking, to reduce the deficits, the value of the us dollar needs to fall and the levels of us long - term interest rates need to rise. exchange rate adjustment is very much ongoing. the us dollar has declined by about 8. 0 percent in nominal effective terms since 2006. and reflecting this, the us current account began