No easy answers to the
global economic downturn
Interview with BOT governor Dr. Tarisa Watanagase
By Jon Fernquest
There
are no "no easy
answers"
to Thailand's current economic troubles. There are only prudent guidelines that can balance conflicting interests and minimize damage to the economy.
The economic crisis is global in scope and Thailand's economic policy is only one piece in a global puzzle.
Government spending and fiscal stimulus have so far prevented a complete collapse of demand and the global economy.
Governments around the world have engaged in coordinated fiscal stimulus to keep their economies afloat.
Meanwhile, the opposition in Thailand has suddenly decided that limits to government spending and borrowing is the key issue to debate at this time.
Just use Thailand's accumulated foreign exchange reserves to pay for the fiscal stimulus. That will solve all the problems, others think.
Just keep the baht to US dollar exchange rate very low, that will do it, some feel.
This week's interview with the seasoned head of Thailand's central bank Dr. Tarisa Watanagase makes it clear that that there are no such "easy answers."
Economics
NO EASY ANSWERS
Just as banks must gauge risk in lending, central bank must look at relative costs of a weak or strong baht.By Parista Yuthamanop
22/06/2009
Governments across the globe, Thailand is no exception, have adopted similar strategies to survive the worst economic crisis in eight decades - cut interest rates and increase government spending.
Thailand's first stimulus package, worth 117 billion baht, was mostly aimed at easing the pain of the crisis on lower- and middle-income residents through utilities subsidies for the poor, a 2,000-baht cash handout to workers earning less than 15,000 baht per month, and free education for students.
A more ambitious stimulus plan commits 1.4 trillion baht to infrastructure investments through 2012, including programmes improving rail, irrigation, agriculture and logistics systems.
But monetary policy was the first line of defence against the global storm. The Bank of Thailand's Monetary Policy Committee slashed its one-day policy rate by an unprecedented full percentage point in December. Rates have fallen by 2.5 percentage points since late 2008 to the 1.25% now.
But while liquidity remains plentiful in the market, loan portfolios continue to shrink, as financial institutions tighten screening in light of economic uncertainties. Small and medium-sized companies have been particularly affected, despite support from state-controlled financial institutions.
gauge risk - measure risk
is no exception - follows the general rule
utilities subsidies - when the government pays part of the water and electricity bill for some people
ambitious - has a very high goal that is difficult to achieve
stimulus, fiscal stimulus - increased government spending or tax cuts to replace lost consumption during a recession and the get the economy moving and growing again
ambitious stimulus plan - government spending and tax cuts with a very high goal of getting the economy growing again
infrastructure investments - government investment in essential things that everyone uses like roads, electricity distribution, dams, etc....
logistics - transporting and storing goods between factory and store
first line of defence - in warfare, the first defenses to meet an attack, likely more defenses set up in case the first one fails
slashed its one-day policy rate - reduced the interest rate that central bank uses to control the supply of credit and money
unprecedented - has never happened before
screening - checking for problems before accepting
tighten screening in light of economic uncertainties - check more carefully if borrower can pay back loan, now that economy is bad
is no exception - follows the general rule
utilities subsidies - when the government pays part of the water and electricity bill for some people
ambitious - has a very high goal that is difficult to achieve
stimulus, fiscal stimulus - increased government spending or tax cuts to replace lost consumption during a recession and the get the economy moving and growing again
ambitious stimulus plan - government spending and tax cuts with a very high goal of getting the economy growing again
infrastructure investments - government investment in essential things that everyone uses like roads, electricity distribution, dams, etc....
logistics - transporting and storing goods between factory and store
first line of defence - in warfare, the first defenses to meet an attack, likely more defenses set up in case the first one fails
slashed its one-day policy rate - reduced the interest rate that central bank uses to control the supply of credit and money
unprecedented - has never happened before
screening - checking for problems before accepting
tighten screening in light of economic uncertainties - check more carefully if borrower can pay back loan, now that economy is bad
Dr. Tarisa on Thailand's Monetary Policy
Tarisa Watanagase, the governor of the Bank of Thailand, expressed sympathy for those frustrated by the parsimonious attitude of local banks.The central bank has sought to strike a balance between the need to ensure proper risk management in the banking system and the need to ensure that credit flows to the private sector.
"Can the central bank order banks to lend? I don't think so. What is happening is a typical reaction of banks to the downturn," Dr Tarisa told the Bangkok Post.
"It would be worse if banks reacted differently. Our job is to ask local banks to strike a suitable balance, where they do not oroverreact ignore the risks."
Thai banks have emerged from the crisis in generally solid shape, with none of the toxic assets on their balance sheets that have brought larger US and European peers to the verge of bankruptcy.
Asset quality and profitability remain solid, and most bankers expect loan growth to pick up going into the second half of the year as the overall economy recovers.
Eased monetary policy has led to a two-percentage-point decline in deposit rates and a 1.4-point fall in lending rates, Dr Tarisa said.
She noted that while banks' caution reflected in part fears of future non-performing loans, the decline in lending also stemmed from a fall in demand for credit as well as declines in inflation.
"It will not be too long before the impact of monetary policy plays out. The central bank cut interest rates by a full percentage point in December. This sent a strong signal to banks. We expect them to adjust [rates] more quickly than in the past," Dr Tarisa said.
Concern over the direction of the baht has also been building, with businesses asking the central bank to push the currency weaker to help support exports.
Dr Tarisa, however, maintains the long-held stance that intervention is only to smooth out volatility, not change the direction of the currency.
Most analysts agree the baht is set to appreciate this year, thanks to hefty current account surpluses and growing concern about the value of the dollar.
Intervention "no cure"
Dr Tarisa said intervention was no cure and exacted its own cost on the economy.The central bank intervenes in the currency markets by buying and selling dollars for baht. If it wishes to stall appreciation in the face of capital inflows, it can buy dollars for baht to affect market forces, pushing up foreign reserves. But such tactics must also be accompanied by bond issues in the local market to control the money supply. The bonds come at a cost in the form of interest payments.
The 1997 crisis, when the central bank was left all but bankrupt following a failed defence of the exchange rate, remains fresh in the memory of the bank.
"There is cost incurred from taking care of the exchange rate, assuming that we are successful. But the real question is can we really be successful? The real sector, capital flows and market expectations all will affect the trend of the baht," Dr Tarisa said.
US dollar exhange rate, not the only important measure
The strength or weakness of the currency should also not be judged by looking at a single cross-rate, but instead consider Thailand's overall competitiveness in the world market.Dr Tarisa said the central bank instead uses nominal effective exchange rates (NEER), a weighted average of a basket of currencies, in judging external competitiveness.
The baht, against currencies of 21 trading partners, had a NEER of 77.22 in May, only slightly changed from 77.23 in January, even as the baht appreciated by 1% against the dollar.
According to the central bank, a 1% decline in NEER will increase GDP growth by 0.1 to 0.2 percentage points, assuming the currency trend lasts two years. The net benefit to Thailand of a weak currency is relatively low, due to the and the country's high import content of exportslow efficiency in the use of oil and energy.
Pushing the baht in any direction essentially represents a transfer of wealth, from one side of the economy to the other.
"Is this counter-intuitive? No. While exporters earn more [from a weaker baht], importers will pay more," Dr Tarisa said. "And I believe it is an open question of whether the central bank should make this decision, even if it could. It's siding with one part of the economy at the expense of another."
Ultimately, the central bank wants the public to recognise that exchange rates move in unpredictable ways, based not only on economic performance and capital flows, but market expectations and fickle investor sentiment.
"Exporters and importers must understand these risks. We would like to see them manage [currency risk] themselves, rather than hope that the central bank will do so."
parsimonious - being
careful with your money, thrifty, frugal (so unwilling to
spend money)
strike a balance between X and Y - create a balance between X and Y
ignore the risks - see the risk but don't plan for it
in generally solid shape - mostly in good condition
peers - people or organisations at the same level and position but in a different place
the verge of bankruptcy - almost bankrupt
pick up - go faster
eased monetary policy - lower interest rates to expand credit (loans) and money supply
non-performing loans (NPLs) -
stemmed from - was caused by
the impact - the effect
plays out - how events unfold or happen, what happens in the future
the impact of monetary plays out - what happens in the economy after the central bank changes the policy interest rate
long-held stance - opinion they had for a long time
intervention - when the central bank buys and sells in foreign currency markets to influence the baht exchange rate
volatility - when prices move suddenly in unexpected ways
smooth out volatility - reduce sudden unexpected movements
appreciate, currency appreciates - when the currency of a country increases in value (relative to other currencies)
baht is set to appreciate this year - the baht get stronger and more valuable (versus the dollar) this year
hefty - very large
hefty current account surpluses - when exports are much greater than imports
central bank intervenes in the currency markets - when the central bank buys and sells baht and foreign currencies
left all but bankrupt - were almost bankrupt
cost incurred - money is spent to do something (it is not free)
cross-rate - exchange with other currencies besides the US dollar (people tend to focus only on dollar-baht exchange rate)
overall competitiveness in the world market - how competive (good money for low price) Thai exports are in all countries around the world (not just US)
effective exchange rate, trade weighted effective exchange rate - gives an average exchange rate for all the countries that a country does trade and invesment with, calculated with a weighted average big trade partners given greater weight in the average (Source: Princeton Encyclopedia of World Economy, p. 337, link)
nominal effective exchange rate (NEER) - effective exchange rate not adjusting for inflation (nominal)
high import content of exports - exports not completely built in Thailand (Thailand only one stage of production)
low efficiency in the use of oil and energy - could do more work with the oil and energy used
transfer of wealth - taking money from one group in the economy and giving it to another
counter-intuitive - not easy to understand (at first seems the opposite would be true)
open question - a question that no one has the answer to yet
siding with one part of the economy at the expense of another - working for the benefit of some groups in the economy and not others
unpredictable - not possible to guess what will happen next (sometimes lucky guess but not 100% of the time)
strike a balance between X and Y - create a balance between X and Y
ignore the risks - see the risk but don't plan for it
in generally solid shape - mostly in good condition
peers - people or organisations at the same level and position but in a different place
the verge of bankruptcy - almost bankrupt
pick up - go faster
eased monetary policy - lower interest rates to expand credit (loans) and money supply
non-performing loans (NPLs) -
stemmed from - was caused by
the impact - the effect
plays out - how events unfold or happen, what happens in the future
the impact of monetary plays out - what happens in the economy after the central bank changes the policy interest rate
long-held stance - opinion they had for a long time
intervention - when the central bank buys and sells in foreign currency markets to influence the baht exchange rate
volatility - when prices move suddenly in unexpected ways
smooth out volatility - reduce sudden unexpected movements
appreciate, currency appreciates - when the currency of a country increases in value (relative to other currencies)
baht is set to appreciate this year - the baht get stronger and more valuable (versus the dollar) this year
hefty - very large
hefty current account surpluses - when exports are much greater than imports
central bank intervenes in the currency markets - when the central bank buys and sells baht and foreign currencies
left all but bankrupt - were almost bankrupt
cost incurred - money is spent to do something (it is not free)
cross-rate - exchange with other currencies besides the US dollar (people tend to focus only on dollar-baht exchange rate)
overall competitiveness in the world market - how competive (good money for low price) Thai exports are in all countries around the world (not just US)
effective exchange rate, trade weighted effective exchange rate - gives an average exchange rate for all the countries that a country does trade and invesment with, calculated with a weighted average big trade partners given greater weight in the average (Source: Princeton Encyclopedia of World Economy, p. 337, link)
nominal effective exchange rate (NEER) - effective exchange rate not adjusting for inflation (nominal)
high import content of exports - exports not completely built in Thailand (Thailand only one stage of production)
low efficiency in the use of oil and energy - could do more work with the oil and energy used
transfer of wealth - taking money from one group in the economy and giving it to another
counter-intuitive - not easy to understand (at first seems the opposite would be true)
open question - a question that no one has the answer to yet
siding with one part of the economy at the expense of another - working for the benefit of some groups in the economy and not others
unpredictable - not possible to guess what will happen next (sometimes lucky guess but not 100% of the time)
(Source: Bangkok Post, business, NO EASY ANSWERS, Parista Yuthamanop, 22/06/2009, link)
