“Amid the volatile global financial climate, Thailand’s strong external position will serve as a buffer against financial shocks”

Dr Veerathai Santiprabhob, Governor of the Bank of Thailand, contends that in a weak global financial environment, Thai financial markets have been relatively resilient compared to other emerging markets, primarily due to Thailand’s strong external position. In 2016, the economy is projected to grow at 3.1 per cent, compared to a growth rate of 2.8 per cent in 2015 and 0.9 per cent in 2014. However, the overall momentum of Thai economic recovery remains slow as of now.

Excerpts from Dr Veerathai Santiprabhob’s speech at the Foreign Correspondents’ Club of Thailand (FCCT), June 1, 2016, Bangkok…

On the financial side

This year has started with heightened volatility in global financial markets, mainly due to concerns over China’s economic slowdown, declining oil and commodity prices and monetary policy divergence among major central banks. Lately, global volatility has subsided as the Chinese government has shown a strong commitment to limiting the possibility of a hard landing with additional fiscal and credit stimulus, while restructuring the economy. Commodity prices have also begun to edge higher. Financial market participants expect monetary policies in major countries to remain highly accommodative, despite the increased possibility of another rate hike by the United States (US) Federal Reserve in the next few months.

While relative calm has returned to the global financial markets, the global financial environment remains fragile. Development on China’s economic restructuring and concerns over its corporate debt, the possibility of Brexit, and the policy divergence among major central banks are among the most significant factors that can trigger new bouts of volatility. Investors’ sensitivity to unexpected news and events could also amplify the volatility.

Amid a fragile global financial climate, Thai financial markets have been relatively resilient compared to those of other emerging markets, thanks to Thailand’s strong external position. The current account last year registered a surplus of 9 per cent of the gross domestic product (GDP), which is projected to remain at that level in 2016. Our international reserves have been at a healthy level, standing at around three times the short-term external debt and 1.3 times the total external debt. Foreign reserve holdings of the Thai government and the Bank of Thailand bonds outstanding are less than 9 per cent, compared with more than 30 per cent in some other emerging markets in the region. The external debt of the corporate sector has been relatively low, and mostly belongs to large companies, which manage their exchange rate risks reasonably well.

While Thailand’s financial strength serves as a buffer against external shocks, it is important that the private sector is not complacent and should continue to be prudent in  financial risk management. Global financial volatility can definitely trigger two-way movement of currencies and asset prices. As a small open economy, Thailand cannot escape the volatility, but has to find effective ways of dealing with it.

On the Bank of Thailand’s part, under the flexible exchange rate regime, currency movement serves as the first line of defence against unexpected external events. We continue to be prudent in using an appropriate mix of policy tools to help prevent excessive volatility of the currency and asset prices. In addition, to build market resilience in the longer run, we have sought to develop our financial markets, as deep and liquid markets can better absorb large swings in capital flows. We also plan to further relax capital flow regulations to allow more balanced flows in and out of the country to enhance stability against short-term speculative flows.

On the real side

This year, the Thai economy is projected to gradually recover, driven mainly by government spending and the tourism sector. Government spending, mainly through small investment projects, has lent support to the recent economic recovery. The contribution from large-scale infrastructure projects is expected to become more evident in the latter half of this year. Tourism has been an important growth driver, with broad-based improvement in the number of tourists from China and other regions. In 2016, we estimate that more than 32 million foreign tourists, improving from 30 million last year, will choose Thailand as one of their destinations.

In addition, the Thai economy has benefited from expansion of investment in certain sectors, notably those related to telecommunication and alternative energy. Exports of goods to Cambodia, Lao PDR, Myanmar and Vietnam (CLMV) countries, which now account for around 10 per cent of our total exports, has supported economic growth. Exports have potential to grow further, despite a decline in export volumes of oil in recent months due to temporary factors. Overall, the Monetary Policy Committee forecasts that the economy will grow at 3.1 per cent in 2016, picking up from a growth rate of 2.8 per cent in 2015 and 0.9 per cent in 2014.

However, the overall momentum of Thai economic recovery remains slow at this stage. Exports of goods, excluding gold, continue to contract, largely because of weak external demand, notably from China and Asian trading partners, as well as the structural constraints of Thai industry and changes in the global trade structure.

Weak exports have mainly weighed on private investment, which only saw a modest expansion. Private consumption, particularly of rural agricultural households, has been dragged down by high indebtedness, low income growth and severe drought. Amid gradual economic recovery, employment conditions remain stable. Flexibility in the labour market has allowed workers to move from the agricultural sector to other sectors. There have been no extensive layoffs, despite a reduced number of working hours.

Recognising the lower-than-potential growth and low inflationary pressure, the Monetary Policy Committee has maintained an accommodative policy stance to support economic recovery. At its latest meeting a few weeks ago, the committee decided to maintain the policy interest rate at 1.5 per cent. In the committee’s view, current monetary conditions have eased further as bond yields have remained low, and commercial bank lending rates have declined. Therefore, the policy interest rate should be kept on hold to preserve limited policy space, which can be deployed if unforeseen events emerge in the future. Moreover, maintaining the policy interest rate would not add risks to financial stability. Under a prolonged period of low interest rates, some tentative signs of search-for-yield behaviour, such as higher demand for riskier financial instruments, have emerged and warrant close monitoring.

Three development plans

As the Thai economy gradually recovers and inflationary pressure remains subdued, their monetary policy will ensure that monetary conditions are adequately supportive to growth. At the same time, we must not forget to chart a course towards the country’s long-term economic development. As the Thai economy needs to increase its growth potential and competitiveness, the Bank of Thailand will continue with a proactive financial sector development policy.

There are at least three ongoing development plans under implementation in this sphere, namely, the Financial Sector Master Plan, the Payment Systems Roadmap, and the Capital Account Liberalization Master Plan. Although the three plans have different objectives, they complement each other and together form a strong foundation for the country’s financial sector development. I will highlight a few key elements we hope to get out of these plans.

Financial Sector Master Plan, Phase III

Approved by the cabinet in March this year to set out strategic directions for the next five years (2016-20), FSMP III aims to promote a competitive Thai financial sector, to support more diverse needs at fair and undistorted prices, as well as promote regional trade and investments, with proper supervision to ensure macroeconomic and financial stability. In short, this plan’s motto is to promote a “competitive, inclusive, connected, and sustainable” financial system.

After five years, the Bank of Thailand expects to see growing financial innovation with a more diversified set of players, both bank and non-bank, especially those offering digital financial services. These services will allow a new segment of customers to gain access to financial services through new channels. SME entrepreneurs, for example, could pitch their ideas to a wider group of investors, through crowdfunding and peer-to-peer lending platforms. New ideas would have a higher chance of being translated into businesses, thus promoting an innovative spirit among Thai entrepreneurs. Financial innovation will also promote competition and drive higher efficiency in the banking sector.

At the same time, we expect most Thai individuals to have access to basic financial services at a fair price and have an appropriate level of financial literacy. Financially deserving enterprises should receive adequate funding, using proper financial instruments. We expect to improve financial literacy among households, leading to more prudent financial management and lowered household indebtedness. We encourage financial institutions to improve the level of consumer protection and the quality of financial professionals, and to incorporate more sustainability practices into their core business operations.

On the road to enhancing regional connectivity under the Association of Southeast Nations [ASEAN] Banking Integration Framework, we encourage banks to further extend their regional presence to support expanding economic activities, or use Thailand as a springboard to expand their business in countries in the region, leveraging on Thailand’s established legal framework, financing facility, infrastructure, logistics and IT capability. In addition, the use of local currency in regional trade and investment has been promoted to lower business transaction costs and mitigate the volatility associated with major currencies. We hope that policy to strengthen financial connectivity with our neighbours will facilitate closer economic integration for the shared benefits of the region.

Big Prospects, Big ChallengesThe plan aims to promote safe and efficient electronic payment services with new technologies and innovation, with a view to reducing transaction costs, improving governance standards, and being supportive of expanding economic activities. In particular, integrated payment channels, such as mobile phones, internet, debit/credit cards, and e-money along with a competitive fee structure, will support e-commerce/m-commerce and benefit both businesses and consumers alike. The Bank of Thailand will also continue to work with regional regulators to advance payment systems connectivity to support international trade, labour movement, and tourism.

Under this roadmap, the Bank of Thailand has worked closely with the government to advocate the idea of a digital economy by taking the lead in the National e-Payment Plan to promote Any ID infrastructure and debit card usage. Development of new payment infrastructure as “open architecture” to allow network interoperability among various types of players will lower payment fees and discourage the use of cash, thus resulting in much lower operating costs and higher efficiency for the corporate and banking sectors. As a fundamental part of infrastructure development, we adopt international best practices on the security and prudential standards to ensure confidence as the country moves from a cash-based economy towards a digital economy.

Capital Account Liberalization Master Plan, Phase II

The plan aims to deepen Thailand’s financial markets by allowing greater flexibility and diversification in products and services offered to residents and non-residents, and to support the growth and development of the Thai economy. So far, a number of regulations on foreign exchange management have been relaxed for greater flexibility and lower transaction costs.

This year, the Bank of Thailand plans to further relax foreign exchange regulations by allowing qualified investors to invest in securities abroad directly within a certain limit without the need to go through local intermediaries. We also plan to allow securities companies to buy and sell foreign currencies to their clients within the scope of their brokerage business. Lastly, foreign corporations located in neighbouring countries are to be permitted to borrow in Thai baht from domestic financial institutions to invest in the Greater Mekong Sub-region (GMS).

We have also started to see the results of the increased flexibility, which helps multinational companies to establish treasury centres and international headquarters in Thailand. As of now, there are 13 companies holding treasury centre licences, of which four have been granted in the past three months, with one more awaiting approval from the Ministry of Finance.

Conclusion

Amid the volatile global financial climate, Thailand’s strong external positions will serve as a buffer against financial shocks. The private sector’s prudent financial management and policymakers’ credible policy will allow us to successfully ride with the global tides.

In the real sector, the Thai economy is expected to maintain its gradual recovery path, driven mainly by government spending and tourism. Export of goods, on the other hand, is subject to a slowdown in trading partners’ economies and the structural constraints of Thai industry. Inflationary pressure remains subdued, but the headline inflation will gradually rise in line with the recent pick-up in oil prices. Against this backdrop, monetary policy stance will remain adequately accommodative to support economic activities, while safeguarding financial stability.

Over a longer horizon, the Bank of Thailand is committed to creating financial infrastructure and nurturing the financial ecosystem to help lift the growth potential of the Thai economy. We aim to promote financial innovation, financial inclusion and financial literacy as strong foundations for sustainable economic development. With regard to payment systems, new infrastructure is being built to support the transition towards a digital economy. Rules and regulations on exchange rate management will be relaxed further for greater flexibility to investors and multinational companies. We believe these policies will put Thailand on a strong foothold to serve as a regional connector to support closer economic integration. n