Oct 22, 2012

Thailand - How to prepare for eurozone crisis spillover

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No country is immune from adverse spillovers from crises originating elsewhere, writes Dr. Prasarn Trairatvorakul, Bank of Thailand governor

The concern about the ongoing European debt crisis is weighing heavily on the minds of policymakers around the world. For those of us in Asia with relatively open economies, we are fully aware of the potential downside risks of the European debt crisis to the region’s economic performance both in terms of lower exports and financial instability. Against this challenging backdrop, it is important that all countries - regardless of whether or not they contributed to the crisis - must be a part of the solution.

For Asia and Thailand alike, collaborated efforts have been carried out on many fronts. At the global level, Asian policymakers have fully engaged with various international organizations in a wide range of activities including sharing policy experiences, setting global regulatory policies, and contributing financial resources. In June of this year, for example, Thailand and other Asian counterparts have joined a group of 37 member countries in pledging additional contributions to ensure that the IMF has adequate resources to carry out its mandate to safeguard global financial stability.

At the regional level, concerted efforts have been committed towards promoting intra-regional trade and further improving the regional financial safety net. In particular, ASEAN+3 has recently agreed to strengthen the Chiang Mai Initiative Multilateralisation (CMIM) by doubling its total fund size to $240 billion, increasing the IMF de-linked portion, and introducing a crisis prevention function.
In addition, Thailand has entered into bilateral cross-border collateral arrangements with Japan, Malaysia, and Singapore to facilitate reciprocal operational arrangements. This collaboration is aimed at enhancing liquidity facilities to financial institutions in Thailand and those countries, thus supporting central banks and monetary authorities in preserving regional financial stability.

These efforts are a testament to the spirit of commitment and cooperation that we, as members of the global community, must adhere to if we hope to steer the global economy away from the economic turmoil we are currently facing.


Over the past couple of years, Thailand has been adversely affected not only by external shocks from the global financial crisis and earthquake in Japan, but also by various internal shocks including the devastating flood in the fourth quarter of 2011. Each time the economy has shown its resiliency and managed to bounce back strongly. This robustness to shocks underscores our strong economic fundamentals. Among Thailand’s key strengths are healthy corporate balance sheets as well as companies’ ability to adapt to changing economic conditions, enabling them to manage exogenous shocks well and rebuild quickly.

The sound financial position of the private sector has also enabled policy stimulus to be more effective in boosting domestic demand in times of economic slowdown. The strong capital base of the banking sector allows financial institutions to provide necessary funding to the real sector despite an uncertain macroeconomic outlook. Thailand’s robust foreign reserves position instills investor confidence amid volatile capital flows. Lastly, minimal direct exposure to troubled assets in Europe, together with a highly diversified export sector - both in term of markets and products - lessens the adverse impacts from the G3 slowdown.

The resiliency of the Thai economy also reflects the fruits of ongoing reforms that started as a result of the 1997 crisis. The upgrade of risk management capabilities both in the financial and corporate sectors together with efficient risk-based supervision have prevented any major buildup of imbalances in key sectors. Macroeconomic policy discipline under the inflation-targeting and fiscal sustainability frameworks have served Thailand well in promoting long-term stability objectives as well as reserving policy tools for future use.

Moreover, the new Bank of Thailand Act (2008) improved the transparency and effectiveness of monetary policy conduct by safeguarding the operational independence of the central bank while providing clear mechanisms for policy coordination with the Ministry of Finance.

Moving forward against the backdrop of an uncertain global environment, it is vital that we must continue to focus on reaching the right balance between providing the necessary stimulus for domestic demand to cushion the impact from a slowdown in exports while promoting longer-term stability. It also means that we need to enhance our capabilities in detecting systemic risks and employing an appropriate policy mix that includes macro prudential measures to address any major risk buildups that may arise.


Notwithstanding the apparent robustness of the Thai economy in weathering various shocks, we still face the critical long-term challenge of creating a new economic paradigm for sustainable growth to replace the legacy economic platform of export-based growth to G3 markets. According to the 11th National Economic and Social Development Plan (2012-2016), two key growth strategies have been particularly highlighted, as a means to drive new growth platforms: economic restructuring and regional connectivity.

Regarding economic restructuring, Thailand’s past success relied on two main factors, namely FDI and low cost competition. As we now face greater foreign competition and rising wages, it is imperative that we restructure our economy to leverage our unique strengths by upgrading from a labour cost based economy to one that is based on creativity and innovation. The challenge is to avoid falling into a middle income trap and to propel the economy up the global value chain.

To achieve this goal, the government has formulated strategic plans to raise expenditures on R&D to 2% within 10 years as well as forge a closer collaboration between research universities and industries both in terms of promoting joint research efforts and human resource development. We also aim to utilize innovation to leverage our competitiveness and create added value in key industries including agri-business, high tech manufacturing, and tourism.

The severe impact from last year’s flood underscores the necessity of infrastructure upgrades, particularly in water management. The government has therefore established an integrated command unit (Single Command Authority) as well as approved plans for the constructions of various water management projects and flood prevention infrastructure covering Bangkok and key economic and industrial estates.

Additionally, over the next five years the government plans to step up investment in several infrastructure mega-projects, including roads, railways, air and water transportation, energy facilities, and communications systems. To alleviate the burdens on the budget and public debt, a number of alternative financing vehicles such as infrastructure funds and public-private partnership (PPP) schemes will also be employed. Such planned investment of high quality infrastructure and logistic systems will not only provide a domestic demand cushion in the face of the global slowdown, but also encourage private investment and strengthen our long-term economic competitiveness.

The 2015 ASEAN Economic Community (AEC), creating a single market and production base with a free flow of goods, services, investment, capital, and skilled labors, will change business in multiple dimensions, including market expansion and higher business complexities in terms of supply chain management and cultural diversity. Strategically advantaged in terms of geography and an open culture, Thailand is therefore in an enviable position to serve as a regional hub for transportation and logistics for key selected sectors that will result in shared benefits to the region.


To achieve this vision, the Thai government is planning the expansion of an efficient transport and logistics infrastructure, connecting to all neighboring countries. Priorities include development of the East-West Economic Corridor as well as the Dawei industrial zone and deep seaport in Myanmar which will be connected to Thailand’s Eastern Seaboard.

In addition to the linkage of physical infrastructure, there are also coordinated efforts to further integrate regional financial services to better serve the growing intra-regional economic activities. Restrictions on capital flows have been steadily reduced, while payments in regional and local currencies have been encouraged as alternatives to major currencies to reduce transaction costs and currency risks. For example, a number of ASEAN central banks, including the Bank of Thailand, have in recent years signed bilateral swap agreements with the People’s Bank of China to facilitate the use of yuan and their local currencies for trade settlement.

On banking services, discussion is ongoing on the criteria for Qualified ASEAN Banks (QAB) which would, by 2014, permit the entry of ASEAN banks into other member countries. Meanwhile, regional stock exchanges are working towards promoting ASEAN equities as an asset class and establishing an ASEAN linkage that permit the trading of regional securities on a common platform. This will likely result in higher inbound fund flows and trading volumes for regional capital markets.

In the global environment of increased interdependence, no country can be immune from the possible adverse spillovers from crises originating elsewhere. Asia and Thailand are no exception. To prepare for this vulnerability, the strategy is therefore for each country to adhere to policy disciplines, to forge ahead with economic reforms to sustain their competitiveness, and to collectively contribute to global and regional sustainable growth dynamics.

Prasarn Trairatvorakul

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