Bank of Thailand (BOT) Governor Sethaput Suthiwartnarueput has admitted that the country’s economic recovery was sluggish and the people were suffering.
He was in conversation with local media on July 4, answering frankly many questions related to monetary and fiscal policies, but no TV or video recording of the event was allowed.
Sethaput is under high pressure from the Srettha Thavisin administration to cut the policy rate, which the government considers essential to pull up the struggling economy.
No room for rate cut as of now
The BOT’s Monetary Policy Committee has left the rate unchanged at 2.50 per cent and assured repeatedly that the economy was on the road to recovery.
Critics have wondered how the central bank has remained blind to the economic hardships faced by millions of people suffering from high debt and lower income.
“We acknowledge that though the economy is recovering, it is not robust, and because of the slow pace of recovery a lot of people are suffering,” he said.
As inflation is well below the central bank’s target, the government and some independent critics believe there is room for a rate cut to ease the burden of millions of debtors.
The BOT, however, is firm on its stance that the interest rate in the current circumstances is appropriate.
“We have to take into account many factors, including economic output, we are outlook-dependent,” said Sethaput. “The BOT also has to guard financial stability as rate cuts in the past had led to higher borrowing by the people,” he pointed out.
Inflation had started to inch upward in recent months and it was expected to meet the central bank’s target range of 1-3 per cent next year, according to BOT assessment.
However, the latest data shows headline inflation in June was 0.62 per cent, up year on year but minus 0.31 per cent month on month, well below the target range.
Some economists are worried about the risk of deflationary pressure that would make the real interest rate relatively high.
Sethaput responded that it was not the case that Thai consumers continued to keep spending. Deflation occurs when consumers — as in Japan in the past — stop spending and wait for prices of goods to fall, which creates a vicious cycle of no private investment, dampening economic growth.
He acknowledged electric cars, especially Chinese brands, are sharply slashing prices, angering those who had paid higher prices, while also tempting potential buyers to sit on the sidelines, hoping for further price cuts.
Low inflation does not mean lower-priced goods and services, and the prices of many goods remain high, he said.
“Only a few sectors have cut the prices of their products. It is not the widespread price cuts like what had happened in Japan previously,” said Sethaput.
Competition from cheap Chinese goods
Local industries are worried about fierce competition from cheaper Chinese imports, such as construction steel, electric cars as well as consumer products that are flooding Thai markets.
International critics blame Beijing for causing deflation as China is dealing with production overcapacity by dumping goods in global markets.
Higher import tariffs and other barriers targeting Chinese products in the United States and European countries, have made China divert the goods to the Thai market.
“We are really concerned about high competition from China. And we have to solve structural issues affecting the competitiveness of local industries,” said Sethaput, who does not believe a rate cut would help the industrial sector compete with Chinese imports.
Baht erodes as safe haven asset
Critics blame BOT’s high interest rate policy and large accumulation of international reserves as responsible for the relative strength of the baht for a long period, which adversely impacted exporters as the strong currency made Thai products expensive compared with competitors.
A stronger baht has also made the Thai currency a safe haven asset, which international investors preferred to hold on to.
“The baht this year weakened 7 per cent against the US dollar and its status as a safe haven asset has been much eroded,’’ Sethaput argued.
The baht currently has been trading at close to 37 to the dollar.
The case for high international reserves
Since the Asian financial crisis of 1997-98, the BOT and other Asian central banks have laid emphasis on accumulating international reserves.
Currently the official reserve assets are worth over US$220 billion (over 8 trillion baht), one of the highest in the region.
“Higher reserves make the baht stronger, and it is time to set up a sovereign wealth fund in order to make use of excessive reserves,” says Supavud Saicheua, an advisor at Kiatnakin Phatra Financial Group.
In response, Sethaput said it was a very sensitive issue. Usually the countries having good governance are successful in managing sovereign wealth funds, but countries with poor governance often fail, he said.
“A large buffer offers greater flexibility in running policy,’’ he said, and pointed that out as the reason why large capital outflows from Thailand last year and this year did not trigger a panic in the market.
Capital outflows from the Thai stock market last year reached 143 billion baht and 117.9 billion baht from January 1 to July 5 this year.
Outflows from the bond market were 192.5 billion baht last year and 66 billion baht in the first half of this year due to higher interest rates in the US and better performance of US stocks and bond markets.
Lessons learned from 1997 crisis
In the run-up to the previous crisis, Thailand had faced a crisis of confidence in both Cabinet members and technocrats at the central bank. Former BOT executives were blamed for failing to prevent the crisis, which forced Thailand to seek rescue funds from the International Monetary Fund and other countries.
Regarding the current high household debt at 91 per cent of gross domestic product, Sethaput admitted it may be harder to tackle than the debt of large corporates and rich people during the 1997 financial crisis, as a large number of individuals have a small amount of debt each, therefore financial institutions have no incentive to undertake debt restructuring.
Latest hot potato
A recent United Nations report has painted an ugly picture of the Thai financial industry.
According to Tom Andrews, the UN Special Rapporteur for Human Rights in Myanmar, the Myanmar military regime uses the financial services of some Thai commercial banks to procure weapons and military supplies to fight the civil war against its citizens.
Sethaput conceded that the report had hurt the country’s reputation and the central bank was investigating the allegations. He assured that the banks who had failed to comply with regulations would be punished.
Governor not in favour of stimulus measures
Sethaput also commented on the government’s fiscal stimulus policies, especially the proposed controversial digital wallet cash handout scheme. “As the country has run up fiscal deficits for about 20 years, fiscal consolidation is needed,” he said. “Government spending on stimulus would be just a short-term boost, and in the long run the economy would reverse to a slower growth rate at about 3 per cent,” he said.
Higher growth could be achieved if the country has enough labor in an aged society and labor productivity goes up.
Thailand’s potential growth has slipped from the previous 4-5 per cent, according to Sethaput.
The economy can achieve higher growth only if there is a big jump in exports. But old industries such as petrochemicals, auto and electronics face high competition from China. The transition of global manufacturing to high technology chips and artificial intelligence curbs the prospects of high export growth, he cautioned.
By Thai PBS World’s Business Desk
