tarisa watanagase : enhancing thailand ’ s resiliency against economic turbulence address by dr tarisa watanagase, governor of the bank of thailand, at the 4th annual euromoney thailand investment forum : the economic perspective, bangkok, 6 july 2010. * * * prime minister, distinguished speakers and guests, ladies and gentlemen, first of all, i would like to thank euromoney for the invitation to speak to this gathering of prominent members of public and business sectors. i welcome this opportunity to share with you some thoughts on thailand ’ s economic and policy issues at this very challenging juncture. as we all know, the thai economy has been through one of the most turbulent periods due to the global impact from the us sub - prime crisis and the european debt crisis. despite the difficult external environment compounded by political problem and weak sentiments at home, it is clear that the thai economy has been able to cope with shocks quite well. thus far, what the economy experienced has been a mere cyclical downturn, in tandem with the contraction of global demand. the good news is that nothing about our economy amplified the impact of these external and domestic shocks and i call that economic resiliency. unfortunately, the less good news is that a small open economy like thailand will be prone to more shocks, especially through international trade and financial market linkages. so, we need to accept this fact and make ourselves as resilient as possible to ride the waves. against this background, my talk today will focus on three parts. first, i wish to discuss the progress of thailand ’ s economic recovery and the importance of starting policy normalization. second, i will highlight the four key strengths underlying our economic resiliency – the strengths which we can continue to improve. third, i will focus on the medium - term issues that we must work to enhance so that the economy will become more resilient to external developments and increasing volatility. this time last year, we were highly uncertain as to when the global economy would bottom out, and whether there was danger of a double dip in the recovery. today, we have already witnessed robust growth rates in thailand and other asian economies, starting the fourth quarter of 2009. this has been achieved notwithstanding the gradual recovery of the g3 economies, and financial market volatility following the european debt problem. looking back at the downturn, fiscal spending played a very important role in cushioning and boosting up the economy. while

aware of the risks associated with the interest rates that are kept too low for too long. the crisis in the united states was a clear demonstration of how this can lead to a build up of bubbles. and, once bubbles burst, the cost to the economy is devastating. central banks always face a tough decision, whether and when to take away the punch bowl before the party gets going. that said, we will put our best effort in considering the timing of interest rate increase carefully. on the fiscal policy, normalization is also important. as the economic recovery strengthens, actual revenue collection has already surpassed the target by as much as 2. 9 percent of gdp, and fiscal deficit has started to shrink. however, as several new spending plans to enhance social distribution and build new infrastructure appear to be in the pipeline, the fiscal policy challenge is how best to preserve adequate fiscal policy space for future cyclical and structural spending needs. the financial market turmoil due to weak confidence following the european debt problem is a costly lesson learnt on the importance of fiscal sustainability, an issue which will be closely watched by the investor. let me turn now to the second part of my talk. as economic turbulence would be more prevalent going forward, we need to maintain the strengths that have thus far helped make thailand ’ s economy resilient. these are prudent risk management by key sectors of the economy as well as prudent policies. first of all, the thai economy has an overall moderate risk exposure. our government and private sector were right not to build up too much risk exposure. this did not happen by chance but out of everyone ’ s recognition of risks associated with high debt burden. over time, private sector ’ s debt - to - equity ratio has come down significantly, now at 0. 7, from around 3 folds during the 1997 crisis. our banking sector, despite ample liquidity, was very cautious and had a minimal exposure to cdo - related assets at the onset of the us sub - prime crisis. the banks were wise not to follow the bandwagon in search for high yields abroad, which in turn helped protect their balance sheet strengths. second, the key economic sectors have sufficient insurance against risks. our household sector was not excessively leveraged while the corporate sector has always maintained healthy retained earnings, although in part reflecting unfavorable domestic investment climate. as for the banking system, we have built up sufficient bank capital, partly benefited from our prudent risk management. our supervision